FRANKLIN
PARTNERS
FUNDS(REGISTERED TRADEMARK)
Franklin Tax-Advantaged
U.S. Government Securities Fund
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
PROSPECTUS MAY 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin Partners Funds(Registered Trademark) (collectively or
separately, the "Funds" or "Fund") consists of three separate and
distinct funds: Franklin Tax-Advantaged U.S. Government Securities
Fund (the "Government Fund"), Franklin Tax-Advantaged High Yield
Securities Fund (the "High Yield Fund"), and Franklin Tax-
Advantaged International Bond Fund (the "International Bond Fund"),
each a California limited partnership.
Each Fund is designed to earn income for qualifying non-United
States ("U.S.") investors that is not subject to U.S. federal
income tax or U.S. tax withholding requirements (including "Non-
Resident Alien" tax withholding).
The primary investment objective of the Government Fund is current
income through investment in obligations of the U.S. government,
its agencies or instrumentalities. The assets of this Fund will be
primarily invested in obligations of the Government National
Mortgage Association ("GNMA"), an agency of the U.S. government.
The primary investment objective of the High Yield Fund is to earn
a high level of current income, with capital appreciation as a
secondary objective. The assets of this Fund will generally be
invested in various classes of fixed-income debt securities of U.S.
issuers, which may include high risk securities, although
securities of non-U.S. issuers also may be acquired.
The primary investment objective of the International Bond Fund is
to seek current income by investing in debt securities of non-U.S.
issuers and foreign currency denominated debt securities of U.S.
issuers.
The High Yield Fund and the International Bond Fund may invest in
domestic and foreign securities as described under "Investment
Objectives and Policies of Each Fund."
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-
INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS," WHICH
ENTAIL DEFAULT AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH
HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THE HIGH YIELD FUND IN LIGHT
OF THE SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK
CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus is intended to set forth in a clear and concise
manner information about each Fund that a prospective investor
should know before investing. After reading the Prospectus, it
should be retained for future reference; it contains information
about the purchase and sale of shares and other items which a
prospective investor will find useful to have.
A Statement of Additional Information concerning the Funds ("SAI"),
dated May 1, 1995, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has been
filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. A copy is available without
charge from the Funds or the Funds' principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address or telephone number shown above (in U.S. only).
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED
FROM THE UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Franklin Partners Funds
Investment Objective and
Policies of Each Fund
Risk Considerations
Management of the Funds
Distributions to Shareholders
Taxation of the Funds
and Their Shareholders
How to Invest in a Fund
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Funds
Telephone Transactions
Valuation of Fund Shares
How to Get Information
Regarding an Investment in the Funds
Performance
General Information
Account Registrations
Summary of Partnership Agreements
Portfolio Operations
Appendix
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder will bear
directly or indirectly in connection with an investment in each
Fund. These figures are based on restated operating expenses of
each Fund for the fiscal year ended December 31, 1994.
GOVERNMENT HIGH YIELD INTERNATIONAL
FUND FUND BOND FUND
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price) 4.25% 4.25% 4.25%
Deferred Sales Charge None* None* None*
Exchange Fee (per
transaction) $5.00** $5.00** $5.00**
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees 0.49% 0.63% 0.63%***
Rule 12b-1 Fees 0.07%+ 0.08%+ 0.07%+
Other Expenses 0.08% 0.14% 0.39%
Total Fund Operating
Expenses 0.64% 0.85% 1.09%***
*Investments of $1 million or more are not subject to front-end
sales charge; however, a contingent deferred sales charge of 1% is
imposed on certain redemptions within 12 months of the calendar
month following such investments. See "How to Sell Shares of the
Funds - Contingent Deferred Sales Charge."
**$5.00 fee imposed only on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a
fee.
***Represents the amount that would have been payable to the
investment manager, absent a fee reduction by the investment
manager. The investment manager, however, agreed in advance to
waive its management fees and to assume responsibility for making
payments to offset a portion of the operating expenses otherwise
payable by the International Bond Fund. With this reduction, the
International Bond Fund paid no management fees and paid total
operating expenses of 0.32% of the average net assets of the
International Bond Fund. This arrangement may be discontinued by
the investment manager at any time.
+Annualized. Actual 12b-1 fees incurred by the Government Fund,
High Yield Fund and International Bond Fund for the period July 1,
1994 through December 31, 1994 were .04%, .04% and .04%,
respectively. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-
end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the
maximum front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to
reflect in precise detail the fees and expenses associated with an
individual's own investment in a Fund. Rather the table has been
provided only to assist investors in gaining a more complete
understanding of fees, charges and expenses. For a more detailed
discussion of these matters, investors should refer to the
appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates
the expenses, including the initial sales charge, that apply to a
$1,000 investment in a Fund over various time periods assuming (1)
a 5% annual rate of return and (2) redemption at the end of each
time period. As noted in the table above, none of the Funds charge
a redemption fee:
GOVERNMENT HIGH YIELD INTERNATIONAL
FUND FUND BOND FUND
1 Year $ 49 $ 51 $ 53
3 Years 62 68 76
5 Years 77 88 100
10 Years 119 143 170
THIS EXAMPLE IS BASED ON AGGREGATE ANNUAL OPERATING EXPENSES OF
EACH FUND, BEFORE FEE WAIVERS OR EXPENSE REDUCTIONS, SHOWN ABOVE,
AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating
expenses are borne by each Fund and only indirectly by shareholders
as a result of their investment in such Fund. See "Management of
the Fund" for a description of each Fund's expenses. In addition,
federal regulations require the example to assume an annual return
of 5%, but a Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for
a share of each Fund from its inception (i.e. effective date of the
registration statement for each Fund) throughout the fiscal years
ended December 31. Except for the International Bond Fund for the
periods ending prior to January 1, 1990, the figures for the years
ending subsequent to December 31, 1988 are covered by the report of
Coopers & Lybrand L.L.P., independent auditors, whose audit report
appears in the financial statements in the Funds' Annual Report to
Shareholders dated December 31, 1994. The figures for the
International Bond Fund for the periods ending prior to January 1,
1990 were audited by Tait, Weller & Baker, the Fund's independent
auditors for those periods. The remaining figures, which are also
audited, are not covered by the auditors' current report. See the
discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
YEAR NET ASSET NET REALIZED DIVIDENDS NET ASSET NET ASSETS RATIO OF RATIO OF
ENDED VALUE NET & UNREALIZED TOTAL FROM FROM NET VALUE AT END EXPENSES NET INCOME PORTFOLIO
DECEM- BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT AT END TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
BER 31 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME OF YEAR RETURN++ (IN 000's) NET ASSETS NET ASSETS RATE
- ------ --------- ---------- ------------- ---------- ---------- ------- -------- ---------- ---------- ---------- --------
FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $10.00 $0.620 $1.420 $2.040 $(0.360) $11.68 - % $13,688 1.67% 7.49% 120.00%
1988 11.68 0.790 (0.590) 0.200 (0.800) 11.08 (2.85) 9,485 1.62 7.13 47.00
1989 11.08 0.820 0.160 0.980 (0.860) 11.20 9.15 4,709 1.72 7.64 12.00
1990(2) 11.20 1.133 0.819 1.952 (1.202) 11.95 15.46* 4,236 0.95(4) 9.75 18.40
1991 11.95 1.018 0.112 1.130 (1.030) 12.05 9.86 5,060 - (4) 9.05 60.77
1992 12.05 1.012 (1.110) (0.098) (1.102) 10.85 (1.43) 12,662 0.13(4) 9.71 15.26
1993 10.85 0.808 0.505 1.313 (0.823) 11.34 12.13 19,606 0.25(4) 7.31 6.80
1994 11.34 0.794 (0.560) 0.234 (0.794) 10.78 2.06 22,725 0.29(4) 7.69 6.46
<CAPTION>
FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987(1) $10.00 $0.603 $ 0.070 $ 0.673 $(0.603) $10.07 6.64% $ 9,401 - % 10.46%+ 31.53%
1988 10.07 0.986 (0.180) 0.806 (0.986) 9.89 7.80 42,703 0.26(3) 9.62 6.80
1989 9.89 0.965 0.280 1.245 (0.965) 10.17 12.75 67,864 0.46(3) 9.55 7.07
1990 10.17 0.922 0.060 0.982 (0.922) 10.23 9.82 86,967 0.60(3) 9.16 9.36
1991 10.23 0.865 0.570 1.435 (0.865) 10.80 14.31 127,637 0.80 8.13 12.42
1992 10.80 0.785 (0.050) 0.735 (0.785) 10.75 6.80 312,645 0.67 7.22 15.26
1993 10.75 0.733 0.160 0.893 (0.733) 10.91 8.19 574,007 0.59 6.63 14.63
1994 10.91 0.704 (1.150) (.446) (0.704) 9.76 (4.26) 456,421 0.61 6.92 10.20
<CAPTION>
FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987(1) 10.00 0.516 (0.760) (0.244) (0.516) 9.24 (2.60) 2,923 - 12.67+ -
1988 9.24 1.076 0.020 1.096 (1.076) 9.26 11.79 21,346 0.18(3) 10.88 2.64
1989 9.26 1.173 (0.740) 0.433 (1.173) 8.52 4.10 34,722 0.25(3) 13.08 4.95
1990 8.52 1.132 (2.430) (1.298) (1.132) 6.09 (16.89) 27,155 0.55(3) 15.51 13.29
1991 6.09 0.982 1.890 2.872 (0.982) 7.98 49.19 57,469 0.87 12.96 38.35
1992 7.98 0.922 0.420 1.342 (0.922) 8.40 16.96 39,131 0.76 11.00 29.79
1993 8.40 0.815 0.570 1.385 (0.815) 8.97 16.72 69,545 0.76 9.17 32.27
1994 8.97 0.770 (0.990) (0.220) (0.760) 7.99 (2.58) 81,151 0.81 9.36 18.39
* For the period June 9, 1990 (transfer of management) to December 31, 1990.
(1) For the period May 4, 1987 (effective date) to December 31, 1987.
(2) On June 9, 1990, the investment manager changed from Pilgrim
Management Corporation to Franklin Advisers, Inc.
(3) Without a fee reduction by the investment manager, the ratio of
operating expenses to average net assets for the fiscal years ended
December 31, 1988, 1989 and 1990 would have been: .87%, .76% and .76%,
respectively, for the U.S. Government Securities Fund; and .98%, .78%
and .79%, respectively, for the High Yield Securities Fund.
(4) Without a fee reduction by the investment manager, the ratio of operating
expenses to average net assets for the fiscal years ended December 31, 1990,
1991, 1992, 1993 and 1994 would have been 1.42%, .89%, .92%, .97%, and 1.06%,
respectively.
+ Annualized
++ Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the offering price and capital gains, if any, at
net asset value. Effective July 1, 1994, with the implementation of the 12b-1
distribution plans, as discussed in this Prospectus, the existing
sales charge on reinvested dividends has been eliminated.
ABOUT THE FRANKLIN PARTNERS FUNDS
Each Fund is an open-end, diversified management investment
company, registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act"), and organized as a limited partnership in
the state of California. The form of organization was adopted to
preserve, for qualifying non-U.S. investors, the current exemptions
from U.S. federal income tax and U.S. federal withholding tax,
including U.S. "Non-Resident Alien" tax withholding (principally,
the "portfolio interest" exemption for distributions from the
Government Fund and the High Yield Fund and the exemption from U.S.
income taxation of foreign source income for distributions from the
International Bond Fund) that would be available to direct owners
of the types of securities in which each Fund invests. Because the
Funds are limited partnerships, distributions made by the Funds
retain their original character so that qualifying income is not
subject to U.S. federal income taxation when received by the Funds'
qualifying non-U.S. investors. Each Fund issues only one class of
shares in the form of limited partnership interests, and purchasers
of shares of a Fund (referred to herein as "shareholders" or
"limited partners") are required to become limited partners of that
Fund. Shares of a Fund may be purchased (minimum investment $2,500
initially and $100 thereafter) at the current public offering
price, which is equal to such Fund's net asset value (see
"Valuation of Fund Shares") plus a sales charge not exceeding 4.25%
of the offering price. See "How to Invest in a Fund.
ELIGIBLE INVESTORS
Each Fund is designed primarily for investors who are not
considered to be U.S. citizens, residents, corporations,
partnerships, trusts or estates, or who are not non-U.S. persons
engaged in a U.S. trade or business under the Internal Revenue Code
of 1986, as amended (the "Code"). Investment by non-U.S. persons
through U.S. trusts or estates is permitted. Investment by U.S.
investors into the High Yield and International Bond Funds is not
permitted. The Government Fund is available to U.S. investors.
Since the Government Fund expects to be invested primarily in GNMA
Certificates, the income from such investments would generally be
subject to federal, state or local taxation for most U.S.
investors. (See the discussion subcaptioned "U.S. Tax Treatment of
U.S. Investors" under "Taxation of the Funds and Their
Shareholders.")
All prospective investors must furnish the Funds with account
registration information and information on their tax status as
required by the Investment Application and Subscription Agreement
("Application") included with this Prospectus, and either a
Certificate of Foreign Status on Form W-8 (or substitute) or the
Payer's Request for Taxpayer Identification Number on Form W-9, as
applicable. By purchasing shares, each investor will be deemed to
have provided the Special Power of Attorney included in the
Application and each non-U.S. investor is consenting to disclosure
of the information contained in the Certificate of Foreign Status
(which includes each investor's name and permanent address) to the
Funds and, to the extent required by the Code, to the U.S. Internal
Revenue Service ("IRS") and to issuers of debt obligations in which
the Funds invest.
CERTAIN TAX CONSIDERATIONS
Due to the structure of each Fund as a limited partnership based in
the U.S. and the primary reliance on the portfolio interest
exemption and the exemption of foreign source interest from U.S.
income taxation under the Code to eliminate U.S. tax and tax
withholding on distributions made to shareholders, certain factors
should be considered by prospective investors, which are discussed
more fully under "Taxation of the Funds and Their Shareholders" in
this Prospectus and under "Additional Information on Distributions
and Taxation" in the SAI.
1. Qualifying income generated by each Fund will not be subject to
U.S. federal income tax and U.S. tax withholding requirements for
qualifying non-U.S. shareholders, provided that the Fund is not
deemed to be engaged in a trade or business in the U.S. Each Fund
has obtained an opinion of its counsel, Thelen, Marrin, Johnson &
Bridges, to the effect that it should not be deemed to be engaged
in a trade or business in the U.S. if the Fund follows certain
policies and guidelines concerning its investment activities. This
opinion is based on counsel's interpretation of applicable court
decisions and other authorities and not on any specific U.S.
Treasury regulations because no such regulations have been
promulgated. Although each Fund and its counsel believe that their
position is fully supported by applicable law, there can be no
assurance that the IRS or a court of law would not take a contrary
position.
2. A shareholder with an address outside the U.S. must furnish the
Fund in which it invests with a Certificate of Foreign Status on
IRS Form W-8 to avoid U.S. tax withholding at the rate of 30%. If
the Fund does not have such a Certificate on file, the Fund must
withhold the tax from any distributions (including redemption
distributions) to the shareholder to the extent that such
distributions include income from U.S. sources. In addition, in the
absence of a Certificate, to the extent that a Fund has not
distributed all of the U.S. source income allocable to the
shareholder during the year, the Fund will be required to apply
withholding (by liquidating shares at the end of the year) to the
undistributed U.S. source income allocated to the shareholder for
the year.
3. As a partnership, each Fund will be required to file an annual
return with the IRS and the California Franchise Tax Board which
identifies each shareholder's allocated share of the Fund's net
income and gains for the taxable year, whether or not such income
and gains have been distributed. Each Fund will also file an annual
form with the IRS with respect to each non-U.S. shareholder (which
includes, as an attachment, the Form W-8 [or substitute] furnished
by the shareholder) indicating, if applicable, that no amount was
withheld with respect to income allocated to such shareholder that
qualified for the portfolio interest exemption or any other
applicable exemption under the Code.
4. The value of Fund shares directly owned by a non-U.S. individual
upon the death of such individual may be subject to U.S. estate
taxes (and possibly state inheritance taxes), subject to certain
exemptions and to the terms of any applicable treaty between the
U.S. and the individual's country of residence.
INVESTMENT OBJECTIVE
AND POLICIES OF EACH FUND
The objective of each Fund is a fundamental policy and may not be
changed without shareholder approval.
FRANKLIN TAX-ADVANTAGED
U.S. GOVERNMENT SECURITIES FUND
The investment objective of this Fund is current income through
investment in a portfolio limited to securities which are
obligations of the U.S. government, its agencies or
instrumentalities. At least 65% of the assets of this Fund will be
invested in such securities. The assets of this Fund are expected
to be invested primarily in obligations of the Government National
Mortgage Association, popularly called GNMAs or Ginnie Maes.
Obligations of the U.S. government, its agencies and
instrumentalities may also include, U.S. Treasury bonds, notes and
bills, Treasury Certificates of Indebtedness and securities issued
by agencies and instrumentalities of the U.S. government, including
those issued or guaranteed by the Department of Housing and Urban
Development, the Farmers Home Administration, the Small Business
Administration, the Export-Import Bank, Banks for Cooperatives, the
Commodity Credit Corporation, the Federal Deposit Insurance
Corporation, Federal Farm Credit Banks, the Federal Financing Bank,
Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal
Land Banks and the Federal Land Bank Association, the Federal
Savings and Loan Insurance Corporation, the General Insurance Fund,
Government Services Administration, the Product Credit Association,
the Student Loan Marketing Association, the Tennessee Valley
Authority, and the U.S. Postal Service.
To produce income that is not subject to U.S. federal income tax or
U.S. withholding tax for its non-U.S. investors, the Fund limits
its investments to U.S. government obligations issued after July
18, 1984 in registered form. In the case of GNMAs, the Fund limits
itself to GNMA Certificates representing interests in underlying
mortgages which were also issued after July 18, 1984 or which meet
certain other qualifying conditions under the Code, all of the
interest on which will qualify for the "portfolio interest"
exemption under the Code.
INFORMATION ABOUT GNMAS
GNMAs are mortgage-backed securities representing part ownership of
a pool of mortgage loans. GNMA Certificates differ from bonds in
that principal is scheduled to be paid back by the borrower over
the length of the loan rather than returned in a lump sum at
maturity. The Government Fund purchases GNMA Certificates for which
principal and interest are guaranteed. This Fund also purchases
"variable rate" GNMA Certificates and may purchase other types
which may be issued with GNMA's guarantee.
THE GNMA GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMA
CERTIFICATES IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED
STATES GOVERNMENT. GNMA MAY BORROW U.S. TREASURY FUNDS TO THE
EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS GUARANTEE.
GNMA Certificates are created by an "issuer," which is a Federal
Housing Administration ("FHA") approved lender, such as mortgage
bankers, commercial banks and savings and loan associations, which
also meet criteria imposed by GNMA. The issuer assembles a specific
pool of mortgages insured by either the FHA or the Farmers Home
Administration or guaranteed by the Veterans Administration. Upon
application by the issuer, and after approval by GNMA of the pool,
GNMA provides its commitment to guarantee payment of principal and
interest on the GNMA Certificates secured by the mortgages included
in the pool. The GNMA Certificates, endorsed by GNMA, are then sold
by the issuer through securities dealers.
When mortgages in the pool underlying a GNMA Certificate are
prepaid by mortgagees or as a result of foreclosure, such principal
payments are passed through to the Certificate holders (such as the
Fund). Accordingly, the life of the GNMA Certificate is likely to
be substantially shorter than the stated maturity of the mortgages
in the underlying pool. Because of such variation in prepayment
rates, it is not possible to accurately predict the life of a
particular GNMA Certificate.
GNMA Certificates bear a stated "coupon rate" which represents the
effect of FHA-Veterans Administration mortgage rates for the
underlying pool of mortgages, less 0.5% which constitutes the GNMA
and issuer's fees.
Payments to holders of GNMA Certificates consist of the monthly
distributions of interest and principal less the GNMA and issuer's
fees. The portion of the monthly payment which represents a return
of principal will be reinvested by the Government Fund in then-
available GNMA obligations which may bear interest at a rate higher
or lower than the obligation from which the payment was received.
The actual yield to be earned by the holder of a GNMA Certificate
is calculated by dividing such payments by the purchase price paid
for the GNMA Certificate (which may be at a premium or a discount
from the face value of the Certificate).
The effect of interest rates and unpredictable prepayments of
principal can greatly change realized yields. In a period of
declining interest rates it is more likely that mortgages contained
in GNMA pools will be prepaid, thus reducing the effective yield.
This potential for prepayment during periods of declining interest
rates may reduce the general upward price increase of GNMA
Certificates experienced by other noncallable debt securities.
Moreover, any premium paid on the purchase of a GNMA Certificate
will be lost if the obligation is prepaid. As with most bonds, in a
period of rising interest rates, the value of a GNMA Certificate
will generally decline.
The Government Fund's investments are continually monitored and
changes are made as market conditions warrant. However, the Fund
does not engage in trading of securities for the purpose of
realizing short-term profits.
ALTHOUGH THE SECURITIES IN THE GOVERNMENT FUND'S PORTFOLIO ARE
GUARANTEED AS TO PAYMENT OF PRINCIPAL AND INTEREST BY THE U.S.
GOVERNMENT OR ITS INSTRUMENTALITIES, THE MARKET VALUE OF THESE
SECURITIES, UPON WHICH DAILY NET ASSET VALUE IS BASED, WILL
FLUCTUATE BASED UPON FACTORS SUCH AS CHANGING INTEREST RATES. AS A
RESULT, THE PRICE PER SHARE THE SHAREHOLDER RECEIVES ON REDEMPTION
MAY BE MORE OR LESS THAN THE PRICE PAID FOR THE SHARES. THE
DISTRIBUTIONS PER SHARE PAID BY THE FUND MAY ALSO VARY.
FRANKLIN TAX-ADVANTAGED
HIGH YIELD SECURITIES FUND
The principal investment objective of this Fund is to earn a high
level of current income. As a secondary objective, the High Yield
Fund seeks capital appreciation to the maximum extent possible,
consistent with its principal objective.
TYPES OF SECURITIES WHICH THE
HIGH YIELD FUND MAY PURCHASE
Current yield is the primary standard used by this Fund in
selecting its securities, although potential for capital
appreciation may also be considered. The Fund will invest in fixed-
income debt securities of U.S. and non-U.S. issuers (including
corporate and municipal bonds, short-term paper and secured
obligations) which are offering the highest yield available without
excessive risk at the time of purchase. The Fund's investment
manager will attempt to avoid excessive risk by performing an
independent credit analysis of the issuer, as described below, and
by diversifying the Fund's investments among different issuers. To
produce income that is not subject to U.S. federal income tax or
U.S. withholding tax for non-U.S. investors, the Fund limits its
investments in securities of U.S. issuers to debt securities issued
after July 18, 1984 in registered form.
Depending upon prevailing market and economic conditions, when
purchasing fixed-income debt securities, the High Yield Fund will
invest at least 65% of its total assets in investment grade or
lower grade securities (those having a rating below the three
highest grades assigned by Moody's Investors Service ["Moody's"] or
Standard & Poor's Corporation ["S&P"], two nationally recognized
statistical rating organizations ["NRSROs"]). Such lower rated
securities are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. (See the
discussion under "Risk Considerations - Asset Composition Table"
for the ratings assigned by Moody's for the securities held by the
portfolio of the High Yield Fund as of the end of the fiscal year.)
The Fund may also, for defensive purposes, temporarily invest its
assets in U.S. government securities, commercial paper (short-term
debt securities of large corporations), various bank debt
instruments or other money market instruments. The income from
certain types of such short-term investments may not qualify as
"portfolio interest" income or income otherwise exempt under the
Code and, therefore, would generally be subject to U.S. tax and
withholding requirements.
Various investment services publish ratings of some of the types of
securities in which the High Yield Fund may invest. Higher yields
are ordinarily available from securities in the lower rated
categories of the NRSROs (that is, securities rated Baa or lower by
Moody's or BBB or lower by S&P - see the Appendix to this
Prospectus) or from unrated securities of comparable quality. These
ratings, which represent the opinions of the NRSROs with respect to
the issuer's ability to pay interest and repay principal, do not
purport to reflect the risk of fluctuations in market value, are
not absolute credit standards, and will be considered in connection
with the investment of the High Yield Fund's assets, but will not
be a determining or limiting factor. The High Yield Fund may invest
in securities regardless of their rating (including securities in
the lowest rating categories) or in securities which are not rated.
The High Yield Fund, however, does not intend to invest in
securities that are rated below Ca by Moody's or CC by S&P, or
which, if unrated, are not at least of comparable quality as
determined by the investment manager. Securities in these rating
categories are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The High
Yield Fund will not purchase issues that are in default. As noted
above, the High Yield Fund will not invest in securities which are
felt by management to involve excessive risk. In the event the
rating on an issue held in the High Yield Fund's portfolio is
changed by the ratings service or the security goes into default,
such event will be considered by the High Yield Fund in its
evaluation of the overall investment merits of that security but
will not necessarily result in an automatic sale of the security.
Rather than relying principally on the ratings assigned by rating
services, the investment analysis of securities being considered
for the High Yield Fund includes, among other things, consideration
of relative values, based on such factors as: anticipated cash
flow; interest coverage; asset coverage; earnings prospects; the
experience and managerial strength of the issuer; responsiveness to
changes in interest rates and business conditions; debt maturity
schedules and borrowing requirements; and the issuer's changing
financial condition and public recognition thereof. Because the
High Yield Fund's portfolio will consist of debt securities,
changes in the level of interest rates, among other things, will
likely affect the value of the Fund's holdings and thus the value
of a shareholder's investment.
Certain of the high yield, fixed-income securities in which this
Fund may invest may be purchased at a discount. The High Yield Fund
does not intend to purchase securities for the purpose of achieving
capital gains, but generally will hold them as long as current
yields on such securities remain attractive. Capital losses may be
realized when securities purchased at a premium are held to
maturity or are called or redeemed at a price lower than their
purchase price. Capital gains or losses also may be realized upon
the sale of securities.
Although the High Yield Fund is not limited with respect to the
maturity of its portfolio securities, generally the majority of
that Fund's investments will be intermediate to long-term
investments that mature in ten years or more.
Because of the High Yield Fund's policy of seeking high current
yield and its ability to invest in lower grade debt securities, a
higher degree of risk (including the risk of bankruptcy or default
by the issuer of a high yield, lower rated security) may accompany
an investment in this Fund than would be the case in a more
conservative income-type investment company. In addition, this Fund
will be more dependent on the investment manager's judgment,
analysis and experience in achieving its investment objective than
is the case for funds that invest in higher quality bonds. As in
any other investment, there is no assurance that the Fund's
objectives will be obtained.
On December 31, 1994, fiscal year end, the High Yield Fund held no
defaulted securities.
FOR ADDITIONAL RISK FACTORS, SEE THE SECTION CAPTINED "RISK
CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES."
FRANKLIN TAX-ADVANTAGED
INTERNATIONAL BOND FUND
The primary investment objective of the International Bond Fund is
to seek current income by investing in readily marketable bonds and
debentures of non-U.S. issuers and foreign currency denominated
bonds and debentures of U.S. issuers. Under normal conditions, this
Fund attempts to invest 100%, and will invest at least 65%, of its
total assets in these securities, and the domiciles of the issuers
or the currency denominations will include at least three different
countries. The International Bond Fund intends to limit its
investments to issuers domiciled in, and instruments denominated in
the currencies of, developed countries. To produce income that is
not subject to U.S. tax or withholding, this Fund limits its
investments generally to either debt securities issued after July
18, 1984 in registered form which, if giving rise to U.S. source
interest, will generate "qualifying portfolio interest" income, or
debt securities of foreign issuers not engaged in a U.S. trade or
business, which will generate "non-U.S. source" income.
To protect against losses resulting from changes in foreign
currency exchange rates, the International Bond Fund may engage in
various strategies to hedge its portfolio against these risks.
These strategies include use of foreign currency options, foreign
currency futures, options on such futures and forward foreign
exchange contracts. Transactions in options and futures are
generally considered "derivative securities." While the
International Bond Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of its shares, this
Fund's net asset value will still fluctuate and there can be no
assurance that such hedging transactions will be effective.
The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and
movements in the price of the securities and currencies which are
the subject of the hedge, as well as imperfect correlation due to
the difference in maturities of the hedged position. These
strategies also involve the risk that the International Bond Fund
may not be able to close an options or futures position, or that
this Fund could lose its margin deposit or collateral in the event
of bankruptcy of the broker with whom it has an open position.
The International Bond Fund may also, for hedging purposes,
purchase foreign currencies in the form of bank deposits as well as
other foreign money market instruments, including but not limited
to banker's acceptances, certificates of deposits, commercial
paper, short-term government and corporate obligations and
repurchase agreements, subject to certain tax restrictions. In
addition, this Fund may invest the cash balances which it may be
required (for operational purposes) to hold outside of the U.S. in
foreign currency-denominated instruments (generally bank accounts).
Under current tax laws, certain foreign exchange gains realized by
the International Bond Fund from its hedging activities may be
subject to U.S. federal income tax and withholding requirements.
See "The Investment Objectives and Policies of the Funds" in the
SAI for a more detailed discussion of the International Bond Fund's
authorized hedging activities. In addition to the risks resulting
from fluctuations in currency exchange rates and the attendant
risks involved in using hedging techniques, there are certain risks
involved in a U.S. investment company's investment in the
securities of non-U.S. issuers. These risks include devaluation of
currencies, imposition of non-U.S. withholding taxes on Fund
income, reduced availability in the U.S. of public information
concerning non-U.S. issuers, future political and economic
developments and the imposition of currency exchange regulations or
other foreign governmental laws or restrictions, and the fact that
non-U.S. companies are not generally subject to the same type of
accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are applicable to U.S.
domestic companies. Moreover, securities of many non-U.S. issuers
may be less liquid than the securities of comparable U.S. issuers
and their prices more volatile, and the International Bond Fund
will incur transaction costs in converting assets from one currency
to another. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or the nationalization of
issuers of securities held by the International Bond Fund,
confiscatory taxation and limitations on the use or removal of
monies (e.g., currency blockages) or other Fund assets. Although
the International Bond Fund is not limited with respect to the
maturity of its portfolio securities, it is anticipated that the
majority of the Fund's investments will be intermediate to long-
term investments that mature in ten years or more.
Although certain risks are involved in forward foreign exchange
contracts, foreign currency options, foreign currency futures and
related options on such futures (as discussed above and in the
SAI), the investment manager believes that, because the
International Bond Fund will only engage in these transactions for
hedging purposes, the use of these strategies will not subject the
Fund to the risks frequently associated with the speculative use of
forward contracts, options and futures transactions. In addition,
the International Bond Fund will not invest funds in foreign
currency positions, the principal amount of which taken through
options on foreign currencies, foreign currency futures contracts,
forward foreign currency contracts and options on foreign currency
futures contracts with respect to any particular foreign currency
would exceed the sum of the principal amount of securities
denominated in such foreign currency owned or committed to be
purchased by the Fund. Tax requirements may further limit the
International Bond Fund's ability to engage in these hedging
transactions and strategies.
There were no securities in the portfolio of the International Bond
Fund which were in default on their contractual provisions at
fiscal year end.
In order to comply with guidelines concerning each Fund's
investment activities and to strengthen its position that it is not
engaged in a U.S. trade or business, a Fund may have to refrain
from the sale or purchase of particular securities under
circumstances in which such securities would otherwise have been
sold or purchased. Conversely, in order to protect the value of its
investments, a Fund may have to take actions which are not
consistent with the guidelines and may weaken its tax position. The
effect of the guidelines is more pronounced for the High Yield Fund
and the International Bond Fund because of the nature of their
investments. See the tax section of this Prospectus for further
information.
FURTHER RISK DISCUSSION IS INCLUDED UNDER THE CAPTION "RISK
CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES."
SOME OF THE FUNDS' OTHER INVESTMENT POLICIES
LONG-TERM INVESTMENTS. It is not the policy of any Fund to purchase
or sell securities for trading purposes as such activity may cause
the Fund to be deemed to be engaged in a trade or business in the
U.S. for U.S. federal income tax purposes. Rather, it is the policy
of each Fund to purchase securities for long-term investment to
generate income. To the extent consistent with guidelines each Fund
follows in order not to be deemed to be engaged in a trade or
business in the U.S., however, each Fund may make changes in its
investments in accordance with management's appraisal of the
factors affecting the market and the national economy in order to
protect the Fund from losses in the value of its investments.
REPURCHASE AGREEMENTS. Each Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed-upon
price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an
initial market value, including accrued interest, equal to at least
102% of the dollar amount invested by the Fund in each agreement,
with the value of the underlying security marked to market daily to
maintain coverage of at least 100%. A default by the seller might
cause such Fund to experience a loss or delay in the liquidation of
the collateral securing the repurchase agreement. Each Fund might
also incur disposition costs in liquidating the collateral. Each
Fund, however, intends to enter into repurchase agreements only
with financial institutions such as broker-dealers and banks which
are deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be a loan by a Fund under the
1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of a Fund by a custodian
approved by such Fund's Board and will be held pursuant to a
written agreement.
ILLIQUID INVESTMENTS. It is the policy of each Fund that illiquid
securities (securities that cannot be disposed of within seven days
in the normal course of business at approximately the amount at
which such Fund has valued the securities) may not constitute, at
the time of purchase, more than 10% of the value of the total net
assets of the Fund.
BORROWING. The Funds do not borrow money or mortgage or pledge any
of their assets except that the Funds may borrow for temporary or
emergency purposes, and pledge their assets therefor, in an amount
up to 5% of total asset value of each Fund, and subject to certain
tax requirements.
SECURITIES OF NON-U.S. ISSUERS. Securities of non-U.S. issuers
cannot be purchased by the Government Fund. There are no
restrictions on investment of assets of the High Yield Fund or the
International Bond Fund in non-U.S. securities, provided such
investments are consistent with the investment objectives and
policies of such Funds. The High Yield Fund, however, presently has
no intention of investing more than 10% of its net assets in
securities of non-U.S. issuers not publicly traded in the U.S.
Interest income from non-U.S. securities will generally be exempt
from U.S. federal income tax and U.S. tax withholding.
There are certain risks involved in a U.S. investment company's
investment in the securities of non-U.S. issuers. These risks
include: fluctuations in currency exchange rates, devaluation of
currencies, imposition of withholding taxes on Fund income, reduced
availability in the U.S. of public information concerning non-U.S.
issuers, future political and economic developments and the
imposition of currency exchange regulations or other governmental
laws or restrictions, and the fact that non-U.S. companies are not
generally subject to the same type of accounting, auditing and
financial reporting standards or other regulatory practices and
requirements that are applicable to U.S. companies. Moreover,
securities of many non-U.S. issuers may be less liquid than the
securities of comparable U.S. issuers and their prices more
volatile, and the Fund will incur transaction costs in converting
assets from one currency to another. Brokerage commissions and
custody fees for non-U.S. securities are also generally higher than
those in the U.S. In addition, with respect to certain countries,
there is the possibility of expropriation or the nationalization of
issuers of securities held by a Fund, confiscatory taxation, and
limitations on the use or removal of monies (e.g., currency
blockages) or other Fund assets.
The High Yield Fund will ordinarily purchase securities of non-U.S.
issuers which are traded in the U.S. or purchase American
Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a non-U.S.
issuer deposited with that bank or a correspondent bank. ADRs
purchased by the High Yield Fund will be "sponsored," that is,
establishment of the issuing facility is brought about by the
participation of the issuer and the depository institution pursuant
to a deposit agreement which sets out the rights and
responsibilities of the issuer, the depositary and the ADR holder.
The Fund may purchase the securities of non-U.S. issuers, located
in developed countries only, directly in non-U.S. markets.
Investments in non-U.S. securities, where delivery takes place
outside the U.S., will have to be made in compliance with any
applicable currency restrictions and other tax laws and laws
limiting the amount and types of such investments.
Securities which are acquired by the High Yield Fund or the
International Bond Fund outside the U.S. and which are publicly
traded in the U.S. or on a recognized non-U.S. securities exchange
or securities market are not considered by the Fund to be illiquid
assets so long as (i) the securities, if resold, may be sold in one
or more such trading markets, (ii) the Fund reasonably believes it
can readily dispose of the securities for cash in one or more of
such markets, and (iii) current market quotations are readily
available.
Consistent with each Fund's intention to produce income that is not
subject to U.S. federal income tax or U.S. withholding tax for
qualifying non-U.S. investors, each Fund will generally invest in
debt securities of U.S. issuers that are issued after July 18, 1984
in registered form or in debt securities of non-U.S. issuers that
are not engaged in U.S. trade or business so that the income
generated by such investments may be treated as "portfolio
interest" or "non-U.S. source" income, respectively. (See "Taxation
of the Funds and Their Shareholders.")
The Funds are subject to a number of additional investment
restrictions, some of which may be changed only with the approval
of shareholders, which further limit their activities to some
extent. A list of these restrictions and more information
concerning the policies discussed herein are included in the SAI.
Each Fund's total return, as calculated pursuant to the formula
prescribed by the SEC, for the one- and five-year periods ended on
December 31, 1994 and since inception was as follows:
ONE-YEAR FIVE-YEAR FROM
PERIOD PERIOD INCEPTION
Government
Fund -8.17% 6.16% 7.70%*
High Yield
Fund -6.58% 10.03% 8.36%*
International
Bond Fund -2.12% n/a 7.47**
*Inception May 4, 1987
**From change of investment manager on June 9, 1990
Further information regarding performance is contained in the
"Performance" section of this Prospectus.
RISK CONSIDERATIONS
HIGH YIELDING, FIXED-INCOME SECURITIES
Corporate debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk
than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment
manager will consider both credit risk and market risk in making
investment decisions as to corporate debt obligations for the High
Yield Fund.
Bonds rated BB or below by S&P or Baa or below by Moody's (or
comparable unrated securities) are considered by S&P and Moody's,
on balance, to be speculative and questionable as to payment of
principal and interest thereon. They will generally involve more
credit risk than securities in the higher rating categories. The
market values of such securities tend to reflect individual
corporate developments to a greater extent than do values of higher
rated securities, which react primarily to fluctuations in the
general level of interest rates. Such lower rated securities also
tend to be more sensitive to economic conditions than higher rated
securities. Even securities rated BBB by S&P or Baa by Moody's,
ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue high yielding, fixed-income securities are
often highly leveraged and may not have more traditional methods of
financing available to them. Therefore, the risk associated with
acquiring the securities of such issuers is generally greater than
is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have
sufficient cash flow to meet their interest payment obligations.
The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to
default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally
unsecured and are often subordinated to other creditors of the
issuer. To date the International Bond Fund has not held any
securities which have defaulted. As of December 31, 1994, none of
the High Yield Fund's portfolio was in default. No issues held by
the High Yield Fund defaulted in the past fiscal year and a total
of one issue defaulted over the prior three years. In general,
securities which default lose much of their value in the time
period prior to the actual default so that a Fund's net assets are
impacted prior to the default. The High Yield and International
Bond Funds may retain an issue which has defaulted because such
issue may present an opportunity for subsequent price recovery. The
high yield bond market is relatively new and much of its growth
prior to 1990 paralleled a long economic expansion. The recent
recession disrupted the market for high yield bonds and adversely
affected the value of outstanding bonds and the ability of issuers
of such bonds to repay principal and interest. Those adverse
effects may continue even as the economy recovers.
High yielding, fixed-income securities frequently have call or buy-
back features which would permit an issuer to call or repurchase
the securities from a Fund. Although such securities are typically
not callable for a period from three to five years after their
issuance, when calls are exercised by the issuer during periods of
declining interest rates, a Fund must replace such called
securities with lower yielding securities, decreasing the net
investment income to such Fund and thus distributions to
shareholders. The premature disposition of a high yielding security
due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more
difficult for a Fund to manage the timing of its receipt of income,
which may have tax implications. A Fund's investment in deferred
interest bonds or bonds that provide for payment of interest-in-
kind, if any, may cause the Fund to recognize and allocate income
to shareholders prior to the receipt of cash payments. The Fund may
also be required under the Code and Treasury regulations to accrue
income for income tax purposes on defaulted obligations and
allocate such income to the Fund's shareholders even though the
Fund is not currently receiving interest or principal payments on
such obligations.
The High Yield and International Bond Funds may have difficulty
disposing of certain high yielding securities because there may be
a thin trading market for a particular security at any given time.
The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the
case for securities which trade in a broader secondary retail
market. Generally, purchasers of these securities are predominantly
dealers and other institutional buyers, rather than individuals. To
the extent the secondary trading market for a particular high
yielding, fixed-income security does exist, it is generally not as
liquid as the secondary market for higher-rated securities. Reduced
liquidity in the secondary market may have an adverse impact on
market price and such Fund's ability to dispose of particular
issues, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in
the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more
difficult for the Funds to obtain market quotations based on actual
trades for purposes of valuing each Fund's portfolio. Current
values for these high yield issues are obtained from pricing
services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "Valuation of Fund Shares.")
The High Yield Fund and the International Bond Fund may acquire
such securities that are sold without registration under the
federal securities laws and therefore carry restrictions on resale.
While many recent high yielding securities have been sold with
registration rights, covenants and penalty provisions for delayed
registration, if a Fund were required to sell such restricted
securities before the securities have been registered, it may be
deemed an underwriter of such securities as defined in the
Securities Act of 1933, which entails special responsibilities and
liabilities. The Funds may incur special costs in disposing of such
securities; however, the Funds will generally incur no costs when
the issuer is responsible for registering the securities.
The High Yield and International Bond Funds may acquire such
securities during an initial underwriting. Such securities involve
special risks because they are new issues. The Funds have no
arrangement with their underwriters or any other person concerning
the acquisition of such securities, and the investment manager will
carefully review the credit and other characteristics pertinent to
such new issues.
Factors adversely impacting the market value of high yielding
securities will adversely impact the net asset value of the High
Yield Fund and the International Bond Fund. For example, adverse
publicity regarding lower rated bonds, which appeared during 1989
and 1990, along with highly publicized defaults of some high yield
issuers, and concerns regarding a sluggish economy which continued
in 1993, depressed the prices for many such securities. In
addition, each Fund may incur additional expenses to the extent it
is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The Funds will
rely on the investment manager's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this
evaluation, the investment manager will take into consideration,
among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory
matters.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon, deferred interest and pay-in-kind
bonds. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Funds
will realize no cash until the cash payment date and, if the issuer
defaults, the Funds may obtain no return at all on their
investment. Zero coupon, deferred interest and pay-in-kind bonds
involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations
which do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and
therefore are generally issued and traded at a discount from their
face amounts or par value. The discount varies depending on the
time remaining until maturity or the cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit
quality of the issuer. The discount, in the absence of financial
difficulties of the issuer, typically decreases as the final
maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater
degree than do non-zero coupon or deferred interest securities
having similar maturities and credit quality.
Pay-in-kind bonds are securities which pay interest through the
issuance of additional bonds. The Funds will be deemed to receive
interest over the life of such bonds and income will be allocated
to the shareholders as if interest were paid on a current basis,
although no cash interest payments are received by the Funds until
the cash payment date or until the bonds mature.
For tax imposed restrictions on trading, see "U.S. Tax Treatment of
Non-U.S. Investors" under "Taxation of the Funds and Their
Shareholders."
Because of the High Yield Fund's policy of investing in higher
yielding, higher risk securities, an investment in the High Yield
Fund is accompanied by a higher degree of risk than is present with
an investment in higher rated, lower yielding securities.
Accordingly, an investment in the High Yield Fund should not be
considered a complete investment program, and should be carefully
evaluated for its appropriateness in light of the investor's
overall investment needs and goals. Persons on fixed incomes, such
as retired persons, should also consider the increased risk of loss
to principal which is present with an investment in higher risk
securities such as those in which the High Yield Fund invests. The
International Bond Fund may also invest a portion of its assets in
comparable securities, although the International Bond Fund
currently does not intend to invest more than 5% of its assets in
such securities.
ASSET COMPOSITION TABLE
During the fiscal year ended December 31, 1994, the High Yield
Fund had an average of 92.69% of its assets invested in bonds
rated below investment grade (Ba or lower by Moody's) and no
investment in bonds which have not been rated by Moody's. A
total of 93.78% of the High Yield Fund's assets were invested
in bonds. A credit rating by an NRSRO evaluates only the
safety of principal and interest of the bond, and does not
consider the market value risk associated with an investment
in such a bond. As stated earlier, ratings published by
ratings services, such as Moody's, will be considered in
connection with the investment of the assets of the High Yield
Fund, although such ratings will not be determinative. The
table below shows the percentage invested in each of the
specific Moody's rating categories and those investments that
are not rated. The information was prepared based on a dollar
weighted average of the Fund's portfolio based on month-end
assets for each of the 12 months in the fiscal year ended
December 31, 1994. A description of each Moody's rating
category is included in the Appendix.
HIGH YIELD
FUND
Aaa
Aa
A
Baa 1.09%
Ba 20.03%
B 70.34%
Caa 2.15%
Ca 0.17%
Unrated 0%
Each Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100% but this rate should not be
construed as a limiting factor in the operation of a Fund's
portfolio.
HOW SHAREHOLDERS PARTICIPATE
IN THE RESULTS OF THE FUNDS' ACTIVITIES
The assets of each Fund are invested in portfolio securities. If
the securities owned by such Fund increase in value, the value of
the shares which the shareholder owns will increase. If the
securities owned by such Fund decrease in value, the value of the
shareholder's shares will also decline. In this way, shareholders
participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual
securities, as described in the preceding sections, a shareholder
may anticipate that the value of a Fund's shares will fluctuate
with movements in the broader equity and bond markets, as well. In
particular, changes in interest rates, including changes in the
prevailing rates of interest in any of the countries in which the
International Bond and High Yield Funds invest, will affect the
value of a Fund's portfolio and thus its share price. Increased
rates of interest which frequently accompany inflation and/or a
growing economy are likely to have a negative effect on the value
of Fund shares. In addition, with respect to the High Yield and
International Bond Funds, changes in currency valuations will
impact the price of Fund shares. History reflects both increases
and decreases in interest rates in individual countries and
throughout the world, and in currency valuations, and these may
reoccur unpredictably in the future.
MANAGEMENT OF THE FUNDS
Each Fund, as a limited partnership, is managed by its Managing
General Partners, who establish the Fund's policies and supervise
and review the operations and management of the Fund pursuant to an
Agreement of Limited Partnership (the "Partnership Agreement"). The
provisions of each Partnership Agreement are summarized herein
under the heading "Summary of Partnership Agreements," and a copy
of each Fund's Partnership Agreement is reproduced in its entirety
in the SAI. The Managing General Partners of each Fund have been
elected for an indefinite term. The day-to-day operations of each
Fund are administered by officers appointed by such Fund's Managing
General Partners.
Each Fund has a corporate Non-Managing General Partner who does not
participate in the management of the Fund, but who is obligated to
maintain (together with the Managing General Partners) a minimum 1%
investment in each Fund. Franklin Partners, Inc., a California
corporation, is the Non-Managing General Partner for each Fund. All
of the outstanding stock of Franklin Partners, Inc. is owned by
Franklin Resources, Inc. ("Resources"), a publicly owned holding
company, the principal shareholders of which are Charles B. Johnson
and Rupert H. Johnson, Jr., who own approximately 20% and 16%,
respectively, of Resources' outstanding shares.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each
Fund's investment manager. Advisers is a wholly-owned subsidiary of
Resources. Resources is engaged in various aspects of the financial
services industry through its various subsidiaries (the "Franklin
Templeton Group"). Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111
separate series) with aggregate assets of over $74 billion.
Pursuant to a management agreement with each Fund, the Manager
supervises and implements each Fund's investment activities and
provides certain administrative services and facilities which are
necessary to conduct each Fund's business.
During the fiscal year ended December 31, 1994, fees totaling 0.63%
of the average monthly net assets of the International Bond Fund
would have accrued to Advisers. Total operating expenses, including
management fees, would have represented 1.09% of the average
monthly net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the International Bond Fund paid no
management fees and paid operating expenses totaling 0.32% of the
average monthly net assets of the Fund.
During the fiscal year ended December 31, 1994, fees totaling 0.64%
and 0.85% of the average monthly net assets of the Government Fund
and the High Yield Fund, respectively, were paid to Advisers.
Among the responsibilities of the Manager under each management
agreement is the selection of brokers and dealers through whom
transactions in each Fund's portfolio securities will be effected.
The Manager tries to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to
provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research,
statistical and other data for the Manager and its affiliates, as
well as the sale of shares of each Fund, as factors in selecting a
broker. Further information is included under "The Funds' Policies
Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for each
Fund are performed by Franklin/Templeton Investor Services, Inc.
("Investor Services" or "Shareholder Services Agent") in its
capacity as transfer agent and dividend-paying agent. Investor
Services is a wholly-owned subsidiary of Resources.
During the fiscal year ended December 31, 1994, expenses borne by
the Funds, including fees paid to Advisers and to Investor
Services, totaled 0.64%, 0.85%, and 0.32% of the average monthly
net assets of the Government Fund, High Yield Fund, and
International Bond Fund, respectively.
SUBADVISORY AGREEMENT
Pursuant to a subadvisory agreement between Advisers and Templeton
Investment Counsel, Inc. ("TICI"), a Florida corporation with
offices at Broward Financial Centre, Suite 2100, Fort Lauderdale,
Florida 33394-3091, an indirect wholly-owned subsidiary of
Resources, TICI provides certain investment services with respect
to the assets of the International Bond Fund. TICI is registered as
an investment adviser under the Investment Advisers Act of 1940.
TICI and its Templeton affiliates currently manage approximately
$42.5 billion for U.S. registered management investment companies.
Under the subadvisory agreement, TICI will provide, subject to the
Manager's discretion, a portion of the investment advisory services
for which the Manager is responsible pursuant to its management
agreement relating to the International Bond Fund. For its
services, TICI will receive from Advisers a monthly fee based on
the value of the International Bond Fund's net assets as of the
close of business on the last business day of each month: 1/2 of
5/96 of 1% of the average daily net assets of the Fund up to and
including $100 million; 1/2 of 1/24 of 1% of the average daily net
assets over $100 million up to and including $250 million; and 1/2
of 9/240 of 1% of average daily net assets in excess of $250
million. This will not be a separate expense of the Fund but will
be paid from the investment advisory fees received by Advisers.
PLANS OF DISTRIBUTION
Each Fund has adopted a distribution plan (the "Plan" or "Plans")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plans, each
Fund may reimburse Distributors or others for all expenses incurred
by Distributors or others in the promotion and distribution of the
Fund's shares. Such expenses may include, but are not limited to,
the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares, as well as any
distribution or service fees paid to securities dealers or their
firms or others who have executed a servicing agreement with a
Fund, Distributors or its affiliates. The maximum amount which each
Fund may pay to Distributors or others for such distribution
expenses is 0.15% per annum of the average daily net assets of the
Fund, payable on a quarterly basis. All expenses of distribution
and marketing in excess of 0.15% per annum will be borne by
Distributors, or others who have incurred them, without
reimbursement from the Fund. The Plan for each Fund also covers any
payments to or by the Fund, Advisers, Distributors, or other
parties on behalf of the Fund, Advisers or Distributors, to the
extent such payments are deemed to be for the financing of any
activity primarily intended to result in the sale of shares issued
by the Fund within the context of Rule 12b-1. The payments under
the Plans are included in the maximum operating expenses which may
be borne by each Fund. For more information, including a discussion
of the Boards' policies with regard to the amount of Plan fees,
please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
A proportionate share of each Fund's net investment income is
allocated to shareholders daily and distributed monthly on or about
the last business day of that month. The amount of such
distributions may vary from month to month and is not guaranteed in
any way. Daily allocations of net investment income will commence
on the day following receipt of an investor's money or settlement
of a wire order trade.
Increases and decreases in the value of a Fund's portfolio
securities are reflected in the value of a shareholder's shares in
the Fund without regard to whether the increases or decreases have
been realized through a sale or other disposition of the
securities. Net capital gains (or losses) realized by each Fund on
transactions in their respective portfolio securities are allocated
among the shareholders for tax purposes in accordance with the tax
allocation methods described below and any net capital gains (or
losses) are allocated as described below.
Net capital gains and losses realized by a Fund on transactions in
its investment portfolio are allocated among the shareholders of a
Fund under a formula designed generally to allocate realized gains
to shareholders to whom net unrealized gains have been credited
previously and to allocate realized losses to shareholders to whom
net unrealized losses have been debited previously. Realized gains
or losses in excess of the amounts allocated under the formula are
allocated among all shareholders in proportion to the number of
shares owned on the day the gain or loss is realized. Since
Treasury regulations do not specify a particular method of
allocating gains and losses for tax purposes in these
circumstances, it is possible that the IRS could challenge the
Funds' method of allocating capital gains and losses.
After each calendar year, each Fund is required to send
shareholders (regardless of whether they are or are not U.S.
taxpayers) a U.S. Federal and State of California tax form (Form K-
1) which identifies their share of net income, gains and losses for
the taxable year and (for non-U.S. taxpayers) a U.S. Federal Form
1042S. Copies of these forms will be filed with the IRS and the
California Franchise Tax Board.
REINVESTMENT OF DISTRIBUTIONS
Unless requested otherwise, distributions of income will be
automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value
(without sales charge) on the reinvestment date. Shareholders have
the right to change their election with respect to the receipt of
distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the reinvestment date
is seven or more business days after the Fund has been notified.
All distributions are authorized by the Managing General Partners
who, at any time, have the right to modify the amount of the
distributions to reflect each Fund's financial situation. See the
SAI for more information.
Many of the Funds' shareholders receive their distributions in the
form of additional shares. This is a convenient way to accumulate
additional shares and maintain or increase the shareholder's
earnings base. Of course, any shares so acquired remain at market
risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive distributions of income in cash.
By completing the "Special Payment Instructions for Distributions"
section of the Application, included with this Prospectus, a
shareholder may direct the selected distributions to another fund
in the Franklin Group of Funds(Registered Trademark) or the
Templeton Funds, to another person, or directly to a checking
account. If the bank at which the account is maintained is a member
of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for
initial processing. Distributions which may be paid in the interim
will be sent to the address of record. Additional information
regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department. Income distributions are eligible
for investment in another fund in the Franklin Group of Funds or
the Templeton Funds at net asset value. See "Purchases at Net Asset
Value" under "How to Invest in a Fund."
TAXATION OF THE FUNDS
AND THEIR SHAREHOLDERS
The following summary of U.S. federal income tax law applicable to
the Funds and their shareholders is based on statutes, regulations,
rulings, case law and other authorities in effect as of the date of
this Prospectus. Additional information on tax matters relating to
the Funds and their shareholders is included in the section
entitled, "Additional Information on Distributions and Taxation" in
the SAI.
U.S. Tax Status of the Funds. Each Fund has obtained a ruling from
the IRS to the effect that the Fund will be classified as a
partnership and that its general and limited partners will be
treated as partners for tax purposes. The rulings are conditioned
on maintenance by the general partners at all times of a minimum 1%
aggregate investment in each item of partnership income, gain,
loss, deduction or credit. The general partners intend to comply
with this requirement, which is contained in each Fund's
Partnership Agreement.
As limited partnerships, the Funds are not subject to U.S. federal
income tax or, as a general rule, to state income tax. Although
federal tax legislation enacted in 1987 will cause publicly traded
partnerships, including partnerships such as the Funds, to be taxed
as corporations, this legislation will not apply to the Funds until
after 1997, provided that the Funds do not add a "substantial new
line of business" prior to that time. The Managing General Partners
of the Funds intend to avoid changes in Fund activities which might
constitute the addition of a "substantial new line of business" and
will determine at the appropriate time whether the Funds may be
continued in the same or modified form after 1997. Prior to the
change in tax treatment, the Managing General Partners will
recommend to shareholders steps which will allow non-U.S. investors
to receive income free of U.S. taxation. All shareholders will be
advised of the recommendation of the Managing General Partners,
will be provided with information concerning the choices available,
and will have an opportunity to make suitable investment choices at
that time. Among the alternatives presently under consideration by
the Managing General Partners is a proposal which, subject to
compliance with applicable laws, would permit each non-U.S.
investor to transfer that investor's assets to selected funds in
the Templeton Global Strategy Funds organized under the laws of
Luxembourg to form a SICAV (Societe d'Investissements a Capital
Variable). Non-U.S. investors in a SICAV are not subject to U.S.
taxation.
In a limited partnership, the character of any income earned or
capital gains realized by each Fund flows through directly to its
shareholders and is taxed at that level. Shareholders generally are
liable for payment of taxes on their allocated share of Fund income
and realized capital gains. To the extent, however, that a Fund
earns income or realizes capital gains in a form that is exempt
from U.S. federal income tax for non-U.S. investors (as discussed
below), qualifying non-U.S. shareholders are likewise not subject
to the payment of U.S. federal income tax or U.S. withholding tax
on their allocated share of these types of income from the Funds,
subject to the conditions stated below. U.S. withholding tax refers
to the withholding requirements under Sections 1441 and 1442 of the
Code (which impose withholding at the rate of 30%, subject to
reductions pursuant to tax treaties) and, if applicable, Section
3406 of the Code (which imposes back-up withholding at the rate of
31%).
To the extent the High Yield Fund and the International Bond Fund
generate income or capital gains from debt obligations purchased or
issued outside of the U.S., such Funds may be required to pay taxes
in foreign countries on such income or gains. Non-U.S. investors in
those Funds may be able to obtain a credit or other relief from
such taxes under the tax laws of their own countries or under
treaties between their countries and the countries imposing such
taxes on the Funds.
U.S. Tax Treatment of Non-U.S. Investors. A non-U.S. investor
(i.e., an investor other than a U.S. citizen or resident or a U.S.
corporation, partnership, estate or trust as defined in the Code)
investing in a Fund who was deemed to be engaged in a trade or
business in the U.S. would be subject to U.S. federal income tax on
any ordinary income and capital gains realized by the Fund to the
extent such income and gains were deemed to be effectively
connected with the conduct of such trade or business. (U.S.
taxation of such income and gains would not be avoided under the
terms of an applicable U.S. income tax treaty because such investor
would be deemed to have a permanent establishment in the U.S.)
Each Fund, however, has obtained an opinion of its counsel to the
effect that neither the Funds, nor their shareholders solely by
virtue of their investment in the Funds, should be deemed to be
engaged in a trade or business in the U.S. if the Funds adhere to
their stated investment objectives, policies and restrictions and
to certain guidelines concerning their investment activities. Each
Fund intends to comply with these restrictions and guidelines.
Assuming that the Funds comply with the guidelines, any non-U.S.
investor of a Fund should not be deemed to be engaged in a trade or
business in the U.S. solely by virtue of an investment in the Fund.
Investors should also note that their investments in other funds in
the Franklin Group of Funds(Registered Trademark) or in other U.S.
investments generally would not, by themselves, cause them to be
deemed to be engaged in a trade or business in the U.S.; however,
it is possible that an investor could be deemed to be engaged in a
trade or business in the U.S. if the investor engages in frequent
trading (as opposed to investment) activity and generally does not
hold U.S. investments for any substantial period of time.
If a Fund were deemed to be engaged in a U.S. trade or business by
the IRS or a court of law, then its non-U.S. shareholders would be
subject to U.S. federal income tax and the Fund would be obligated
to withhold tax at the highest rate applicable to a particular
class of shareholders on effectively connected taxable income
allocable to each non-U.S. shareholder within that class (see the
SAI).
Assuming that a non-U.S. investor is not engaged in a trade or
business in the U.S., ordinary income realized by each Fund will
not be subject to U.S. federal income tax (including "Non-Resident
Alien" withholding taxes), if (i) the ordinary income consists of
interest income which qualifies for the "portfolio interest"
exemption under Sections 871(h) and 881(c) of the Code (or is
otherwise exempt from U.S. tax withholding), (ii) the investor has
furnished a valid and effective original or certified copy of an
original Form W-8 (or substitute) to the Funds and has renewed the
Form W-8 as required, (iii) the Funds have no actual knowledge that
the investor is in fact a U.S. person and (iv) the investor is not
(a) a "10-percent shareholder," as defined in Section 871(h)(3) of
the Code, of the issuer of a security held by the Fund which
generates the portfolio interest income, (b) a controlled foreign
corporation related to such issuer, or (c) a bank deemed to be
receiving such interest (other than interest on an obligation of
the U.S.) on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or
business. The Funds have been advised that interest income will
qualify for the "portfolio interest" exemption if it is paid with
respect to a debt obligation issued after July 18, 1984 in
registered form with respect to which the U.S. person who would
otherwise be required to withhold U.S. federal income tax from such
interest under Section 1441 or 1442 of the Code (i.e., the Fund)
has received a valid and effective statement (such as that
contained in the Application) that the beneficial owner of the
obligation (i.e., the shareholder) is not a U.S. person.
A Fund's investments in zero coupon or deferred interest securities
or in pay-in-kind bonds are subject to special tax rules concerning
the amount, timing and character of the income allocations made to
shareholders by causing the Fund to recognize income prior to the
receipt of cash payments. This income will qualify for the
"portfolio interest" exemption, provided that the other
requirements relating to the exemption are satisfied. Certain
foreign exchange gains and losses realized by the High Yield Fund
and the International Bond Fund may be treated as ordinary income
and losses rather than capital gains and losses. Such ordinary
income does not appear to be subject to U.S. federal income tax
(including withholding taxes) for a non-U.S. investor who is not
engaged in a trade or business in the U.S.
With respect to the High Yield Fund and the International Bond
Fund, a non-U.S. investor who is not engaged in a trade or business
in the U.S. will also not be subject to U.S. federal income tax
(including withholding taxes) on ordinary income realized by the
Fund which constitutes "non-U.S. source" income. The Fund has been
advised that interest income will be deemed to be "non-U.S. source"
income if it is received with respect to securities issued by
governments other than the U.S. or by a non-U.S. corporation unless
the corporation is engaged in a trade or business in the U.S.
Interest on securities of all non-U.S. corporations engaged in a
trade or business in the U.S. is generally treated at least in part
as U.S. source income, although such interest may be exempt from
U.S. withholding taxes by virtue of qualifying for the portfolio
interest exemption.
A non-U.S. investor who is not engaged in a U.S. trade or business
will generally not be subject to U.S. federal income tax (including
withholding taxes) on the allocated share of net short-term or long-
term capital gains realized by a Fund or on proceeds from the
redemption of Fund shares, provided that the investor is not
treated as a U.S. resident under the Code. In the case of an
individual, a non-U.S. investor is one who has been physically
present in the U.S. for less than 31 days during the current
calendar year. An individual who is physically present in the U.S.
for at least 31 but less than 183 days during the current calendar
year will still be treated as a non-U.S. investor, provided that
the total number of days physically present in the current calendar
year and the two preceding calendar years does not exceed 183 days
(counting all of the days in the current calendar year, only one-
third of the days in the first preceding calendar year and only one-
sixth of the days in the second preceding calendar year). An
individual who is physically present in the U.S. for 183 days or
more during the current calendar year is generally not treated as a
non-U.S. investor. In addition, lawful permanent residents or green
card holders may not be treated as non-U.S. investors. Investors
should contact their tax advisors for more specific information
regarding the determination of U.S. residency status for tax
purposes.
Redemption proceeds will also not be subject to U.S. tax if they
constitute non-U.S. source income by virtue of the investor's non-
U.S. status. Even if proceeds of redemptions are not subject to
U.S. tax under the rules just described, the Funds may still be
required to withhold on the portion of such proceeds which
represents the investor's allocable share of income or gains of the
Funds which would otherwise be subject to withholding.
Non-U.S. investors who do not furnish a valid and effective Form W-
8 (or substitute) may be subject to U.S. withholding taxes on their
allocated shares of income and gains realized by the Funds and on
proceeds from redemptions of their shares. Regardless of whether a
valid and effective Form W-8 (or substitute) is furnished, non-U.S.
investors will be subject to U.S. withholding taxes on their
allocated shares of income realized by the Funds from sources other
than (i) "portfolio interest," (ii) "U.S. source" income otherwise
exempt from withholding, (iii) "non-U.S. source" income, and (iv)
net realized capital gains, unless such withholding taxes are
reduced or eliminated under the terms of an applicable U.S. income
tax treaty and the investor complies with all procedures for
claiming the benefits of such a treaty. It is the intention of each
Fund to withhold amounts required by the Code with respect to non-
qualifying income and/or non-qualifying investors either at the
time of distribution or by subsequent redemption of shares in the
investor's account.
Investors may also be subject to taxation on income and gain earned
from their investment in the Fund imposed by state and local
jurisdictions or by their country of residence for tax purposes. In
addition, the value of shares owned by a U.S. or non-U.S.
shareholder may be subject to U.S. federal estate tax (and state
inheritance tax) upon the death of the shareholder.
The foregoing discussion is only a summary and does not address
potential tax liability under the tax laws of any country other
than the U.S. A complete discussion will depend on the jurisdiction
in which the investor resides for tax purposes. The foregoing
discussion also assumes the investor is generally not subject to
U.S. tax or withholding with respect to other income or activities
unrelated to an investment in the Funds or to U.S. state tax or
withholding. Should an investor become subject to U.S. or state tax
or withholding, the tax consequences of owning, exchanging, or
redeeming shares of the Funds will be significantly different and
an investor in this circumstance should consult a tax adviser.
U.S. Tax Treatment of U.S. Investors. Each shareholder of a Fund
who is treated under the Code as a U.S. citizen or resident or a
U.S. corporation, partnership, estate or trust will be subject to
U.S. federal income tax on such shareholder's distributive share of
each item of income, deduction, credit, gain or loss realized by
the Fund, notwithstanding the fact that such income may not have
been distributed and that a portion of such income may consist of
"portfolio interest" or other income which would be exempt from
U.S. tax if allocated to a non-U.S. person. Fund shareholders may
not use Fund losses to offset "passive activity income" from other
investments or "passive activity losses" from other investments to
offset Fund income.
State Tax Considerations. As a general rule, partnerships are not
considered to be separate taxable entities under state law. Title
31 of the U.S. Code exempts U.S. government obligations and the
interest they pay from taxation under state, municipal or local
authority. To the extent the Government Fund earns interest income
on obligations of the U.S., its agencies or instrumentalities
(other than GNMAs and other indirect obligations of the U.S.), such
income is generally exempt from state and local income tax. Income
generated from investment in GNMAs, however, is subject to state
and local income tax in most states.
It is possible that certain states such as California could take
the position that nonresident shareholders of the Funds (including
shareholders who are not subject to U.S. federal income taxation)
are subject to tax in such states on their shares of Fund income
derived from sources within the respective states as a result of
Fund activities conducted in the state. The Funds intend to file a
partnership tax return and Forms K-1 in the state of California,
but to take the position with respect to other states that they are
under no obligation to file any other tax or information returns in
such states because their activities in any such state would not be
extensive enough to support the exercise of taxing jurisdiction by
such state.
The Funds believe that shareholders who are not residents of
California should not be subject to income tax in California
because the activities of the Funds would not rise to the level of
conduct of a trade or business in California. If a Fund were
determined to be conducting a trade or business (rather than merely
investing), however, the Fund would be required to withhold
California income tax at the rate of 11% of the income amounts
allocable to non-U.S. shareholders and 7% of income amounts
allocable to U.S. shareholders who reside outside California.
Prospective investors in the Funds may wish to consult their own
tax advisers about the risks of taxation of their distributive
shares of Fund income and gains in states other than their states
or countries of residence and the availability of tax credits in
their own states or countries for taxes paid to such states.
In the event non-U.S. investors in the Funds are subject to state
taxation of their distributive shares of Fund income and gains,
such income may be exempt from state taxation to the extent it
consists of interest on direct obligations of the U.S. See the SAI
for more information concerning taxation of shareholders.
HOW TO INVEST IN A FUND
Partnership interests (referred to herein as "shares") of the Funds
are continuously offered through securities dealers which execute
an agreement with Distributors, the principal underwriter of the
shares of the Funds. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with each Fund. Such reference,
however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $2,500
and subsequent investments must be $100 or more. These minimums may
be waived when the shares are purchased through plans established
by the Franklin Templeton Group. The Funds and Distributors reserve
the right to refuse any order for the purchase of shares, and all
orders must be paid for in U.S. dollars.
PURCHASE PRICE OF FUND SHARES
Shares of each Fund are offered at the public offering price which
is the net asset value per share, plus a sales charge, next
computed (1) after the shareholder's securities dealer receives the
order which is promptly transmitted to the Fund, or (2) after
receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Application accompanied by
a negotiable check in U.S. funds). The sales charge is a variable
percentage of the offering price depending upon the amount of the
sale. The offering price will be calculated to two decimal places
using standard rounding criteria. A description of the method of
calculating net asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting
commissions and dealer concessions.
TOTAL SALES CHARGE
DEALER
CONCESSION
AS A
AS A AS A PERCENTAGE
PERCENTAGE OF PERCENTAGE OF OF
SIZE OF TRANSACTION OFFERING NET AMOUNT OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*,***
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less
than $250,000 3.50% 3.63% 3.25%
$250,000 but less
than $500,000 2.75% 2.83% 2.50%
$500,000 but less
than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see
below)**
*Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of
its own resources, to securities dealers who initiate and are
responsible for purchases of $1 million or more: 0.75% on sales of
$1 million but less than $2 million, plus 0.60% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or
more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at
times be allowed to the securities dealer. If 90% or more of the
sales commission is allowed, such securities dealer may be deemed
to be an underwriter as that term is defined in the Securities Act
of 1933, as amended.
No front-end sales charge applies on investments of $1 million or
more, but a contingent deferred sales charge of 1% is imposed on
certain redemptions of all or a portion of an investment of $1
million or more within 12 months of the calendar month following
such investment ("contingency period"). See "How to Sell Shares of
the Funds - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales
charge on the purchase of Fund shares is determined by adding the
amount of the shareholder's current purchase plus the cost or
current value (whichever is higher) of a shareholder's existing
investment in one or more of the funds in the Franklin Group of
Funds (Registered Trademark) and the Templeton Group of Funds.
Included for these aggregation purposes are (a) the mutual funds in
the Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"), (b)
other investment products underwritten by Distributors or its
affiliates (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
and (c) the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to as
the "Franklin Templeton Funds."). Sales charge reductions based
upon aggregate holdings of (a), (b) and (c)above ("Franklin
Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, out of its own resources,
may also provide additional compensation to securities dealers in
connection with sales of shares of the Franklin Templeton Funds.
Compensation may include financial assistance to securities dealers
in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales
campaigns and/or shareholder services and programs regarding one or
more of the Franklin Templeton Funds, and other dealer-sponsored
programs or events. In some instances, this compensation may be
made available only to certain securities dealers whose
representatives have sold or are expected to sell significant
amounts of shares of the Franklin Templeton Funds. Compensation may
include payment for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the
United States for meetings or seminars of a business nature.
Dealers may not use sales of the Funds' shares to qualify for this
compensation to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Funds or their
shareholders.
Certain officers and Managing General Partners of the Funds are
also affiliated with Distributors. A detailed description is
included in the SAI.
All investors should complete the Application included with this
Prospectus and submit a signed (or duly certified copy thereof)
Form W-8 (or substitute) or W-9, as applicable. For joint accounts,
each joint owner must furnish a separate Form W-8 (or substitute).
BY PURCHASING FUND SHARES, THE INVESTOR AGREES TO BE BOUND BY THE
TERMS AND CONDITIONS OF THE PARTNERSHIP AGREEMENT AND SPECIAL POWER
OF ATTORNEY AND ACCEPTS ALL THE TERMS, REPRESENTATIONS AND
WARRANTIES CONTAINED IN THE APPLICATION.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for
a reduced sales charge. To be certain to obtain the reduction of
the sales charge, the investor or the dealer should notify
Distributors at the time of each purchase of shares which qualifies
for the reduction. In determining whether a purchase qualifies for
any of the discounts, investments in any of the Franklin Templeton
Investments may be combined with those of the investor's spouse and
children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an account
under exclusive investment authority) may be considered in
determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account.
In addition, an investment in the Funds may qualify for a reduction
in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is
higher) of existing investments in the Franklin Templeton
Investments may be combined with the amount of the current purchase
in determining the sales charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for a
reduced sales charge on a purchase of shares of a Fund by
completing the Letter of Intent section of the Application (the
"Letter of Intent" or "Letter"). By completing the Letter, the
investor expresses an intention to invest during the next 13 months
a specified amount which if made at one time would qualify for a
reduced sales charge and grants to Distributors a security interest
in the reserved shares and irrevocably appoints Distributors as
attorney-in-fact with full power of substitution to surrender for
redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter will
conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each time a
purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE
LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES")
ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five
percent (5%) of the amount of the total intended purchase will be
reserved in shares of the Fund in which you invest, registered in
the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as
reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by
the investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more information,
see "Additional Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Funds at the reduced sales charge applicable
to the group as a whole. The sales charge is based upon the
aggregate dollar value of shares previously purchased and still
owned by the group, plus the amount of the current purchase. For
example, if members of the group had previously invested and still
held $80,000 of a Fund's shares and now were investing $25,000, the
sales charge would be 3.50%. Information concerning the current
sales charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence for more
than six months; (ii) has a purpose other than acquiring shares of
the Funds at a discount; and (iii) satisfies uniform criteria which
enable Distributors to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10
members, be available to arrange for group meetings between
representatives of the Funds or Distributors and the members, agree
to include sales and other materials related to the Funds in its
publications and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or other
bulk transmission of investments to the Funds.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such time as
the investor notifies the Funds and the investor's employer to
discontinue further investments. Due to the varying procedures used
to prepare, process and forward the payroll deduction information
to a Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches such Fund. The investment
in the Fund will be made at the offering price per share determined
on the day that both the check and payroll deduction data are
received in required form by such Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Funds may be purchased without the imposition of
either a front-end sales charge ("net asset value") or a contingent
deferred sales charge by (1) officers, trustees, directors,
managing general partners and full-time employees of the Funds, any
of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members, including
subsequent payments made to such parties after cessation of
employment; and (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer; and (3)
insurance company separate accounts for pension plan contracts; (4)
accounts managed by the Franklin Templeton Group; (5) shareholders
of Templeton Institutional Funds, Inc. reinvesting redemption
proceeds from that fund under an employee benefit plan qualified
under Section 401 of the Internal Revenue Code of 1986, as amended,
in shares of a Fund; (6) certain unit investment trusts and unit
holders of such trusts reinvesting their distributions from the
trusts in the Fund; (7) registered securities dealers and their
affiliates, for their investment account only, and (8) registered
personnel and employees of securities dealers and by their spouses
and family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Funds may be purchased at net asset value by persons
who have redeemed, within the previous 120 days, their shares of a
Fund or another fund of the Franklin Templeton Funds which were
purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares
redeemed and subsequently repurchased, a new contingency period
will begin. Shares of the Funds redeemed in connection with an
exchange into another fund (see "Exchange Privilege") are not
considered "redeemed" for this privilege. In order to exercise this
privilege, a written order for the purchase of shares of the Fund
must be received by such Fund or the Fund's Shareholder Services
Agent within 120 days after the redemption. The 120 days, however,
do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until
the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service.
The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on
the redemption, the loss may be disallowed if a reinvestment in the
same fund is made within a 30-day period. Information regarding the
possible tax consequences of such a reinvestment is included in the
tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may
also be used to purchase shares of the Fund or another of the
Franklin Templeton Funds at net asset value and without the
imposition of a contingent deferred sales charge within 120 days of
the payment date of such distribution. To exercise this privilege,
a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash"
under "Distributions to Shareholders."
Shares of the Funds may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by investors
who have, within the past 60 days, redeemed an investment in a
mutual fund which is not part of the Franklin Templeton Funds and
which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of
the respective Fund.
Shares of the Funds may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by broker-
dealers who have entered into a supplemental agreement with
Distributors, or by registered investment advisers affiliated with
such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a
wrap fee program).
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Funds may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by trust
companies and bank trust departments for funds over which they
exercise exclusive discretionary investment authority and which are
held in a fiduciary, agency, advisory, custodial or similar
capacity for qualifying investors. (In such case, the beneficial
owner, if a non-U.S. person, may still be required to submit an
executed Form W-8 [or substitute]) Such purchases are subject to
minimum requirements with respect to amount of purchase, which may
be established by Distributors. Currently, those criteria require
that the amount invested or to be invested during the subsequent 13-
month period in these Funds or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from
the bank or trust company, with payment by federal funds received
by the close of business on the next business day following such
order.
Refer to the SAI for further information regarding net asset value
purchases.
GENERAL
Securities laws of states in which the Funds' shares are offered
for sale may differ from the interpretations of federal law, and
banks and financial institutions selling Fund shares may be
required to register as dealers pursuant to state law.
If the purchase or sale of shares of a Fund with the assistance of
certain banks, as described herein, were deemed to be an
impermissible activity for such bank(s) under the Glass-Steagall
Act, or other federal laws, such activities would be discontinued
by such bank(s). Investors utilizing such bank assistance would
then be able to seek other avenues to invest in the Fund shares,
such as broker-dealers registered with the SEC.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION
MAY NOT BE AVAILABLE DIRECTLY FROM THE FUNDS TO SHAREHOLDERS WHOSE
SHARES ARE HELD, OF RECORD, BY A FINANCIAL INSTITUTION OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION
("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS
PROSPECTUS).
SHARES EVIDENCING PARTNERSHIP
INTEREST IN THE FUNDS
The Funds do not issue certificates of partnership interest. Shares
for an initial investment as well as subsequent investments,
including the reinvestment of income, are generally credited to an
account in the name of an investor on the books of the Funds and
are reflected in periodic confirmation statements. Maintaining
shares in uncertificated form (also known as "plan balance")
minimizes the risk of loss or theft of a share certificate.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly
to reflect the distributions reinvested during that period and
after each other transaction which affects the account. This
statement will also show the total number of a Fund's shares owned
by the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of shares automatically on a
monthly basis by electronic funds transfer from a checking account,
if the bank which maintains the account is a member of the
Automated Clearing House, or by preauthorized checks drawn on the
shareholder's bank account. A shareholder may, of course, terminate
the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable
to this program. In addition, shareholders may obtain more
information concerning this program from their securities dealers
or from Distributors.
The market value of each Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor
should keep in mind that such a program does not assure a profit or
protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account provided that
the net asset value of the shares held by the shareholder is at
least $5,000. There are no service charges for establishing or
maintaining a Systematic Withdrawal Plan. The minimum amount which
the shareholder may withdraw is $50 per withdrawal transaction,
although this is merely the minimum amount allowed under the plan
and should not be mistaken for a recommended amount. The plan may
be established on a monthly, quarterly, semi-annual or annual
basis. Income distributions to the shareholder's account are
received in additional shares at net asset value. Payments will
then be made from the liquidation of shares at net asset value on
the day of the transaction (which is generally the first business
day of the month in which the payment is scheduled) with payment
generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Application included
with this Prospectus, a shareholder may direct the selected
withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House,
the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should
allow at least 15 days for initial processing. Payments which may
be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in
the shareholder's account, to the extent withdrawals exceed shares
earned through income distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance will
be sent to the shareholder. As with other redemptions, if the
investor is subject to U.S. tax, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return of the
shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Funds would be
disadvantageous because of the sales charge on the additional
purchases. The shareholder should ordinarily not make additional
investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in
effect. A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Funds, and it will terminate
automatically if all shares are liquidated or withdrawn from the
account, or upon the Funds' receipt of notification of the death or
incapacity of the shareholder. Shareholders may change the amount
(but not below the specified minimum) and schedule of withdrawal
payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of
the month preceding a scheduled payment.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Funds available to institutional accounts.
For further information, contact Franklin's Institutional Services
Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
NON-U.S. INVESTORS SHOULD NOTE THAT INCOME FROM OTHER FUNDS IN THE
FRANKLIN GROUP OF FUNDS(REGISTERED TRADEMARK) OR THE TEMPLETON
GROUP MAY BE SUBJECT TO U.S. TAX AND WITHHOLDING REQUIREMENTS AND
THAT FREQUENT USE OF THIS EXCHANGE PROCEDURE, TOGETHER WITH OTHER
TRADING ACTIVITIES, COULD CAUSE THEM TO BE DEEMED TO BE ENGAGED IN
A U.S. TRADE OR BUSINESS AND THEREFORE SUBJECT TO U.S. TAXATION.
The Franklin Templeton Funds consist of a number of mutual funds
with various investment objectives or policies. The shares of most
of these mutual funds are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the
securities markets changes, shares of a Fund may be exchanged for
shares of the other Franklin Partners Funds, Franklin Templeton
Funds which are eligible for sale in the shareholder's state, or
country, of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should
review the prospectuses of the fund they wish to exchange from and
the fund they wish to exchange into for all specific requirements
or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject to a
contingent deferred sales charge in the original fund purchased,
and shares are subsequently redeemed within the contingency period,
a contingent deferred sales charge will be imposed. The contingency
period will be tolled (or stopped) for the period such shares are
exchanged into and held in a Franklin or Templeton money market
fund. See also "How to Sell Shares of the Funds - Contingent
Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the
funds involved, except as set forth below. Exchanges of shares of a
Fund which were purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the
fund being purchased, unless the investment on which no sales
charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of a Fund which
were purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless the
shares were held in the Fund for at least six months prior to
executing the exchange. When an investor requests the exchange of
the total value of a Fund account, accrued but unpaid income
distributions will be reinvested in such Fund at net asset value on
the date of the exchange, and then the entire share balance will be
exchanged into the new fund in accordance with the procedures set
forth above. Because the exchange is considered a redemption and
purchase of shares, shareholders who are otherwise subject to U.S.
tax may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and in
the SAI.
NON-U.S. INVESTORS MAY BE SUBJECT TO WITHHOLDING ON EXCHANGES
UNLESS A FORM W-8 (OR SUBSTITUTE) IS ON FILE.
There are differences among the funds in the Franklin Templeton
Funds. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder
wishes to transfer. Exchanges will be effected upon receipt of
written instructions signed by all account owners.
If a substantial portion of a Fund's shareholders should, within a
short period, elect to redeem their shares of such Fund pursuant to
the exchange privilege, the Fund might have to liquidate portfolio
securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of
the exchange privilege may result in periodic large inflows of
money. If this should occur, it is the general policy of the Fund
to initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with such Fund's investment
objectives exist immediately. Subsequently, this money will be
withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be discontinued or modified by the Funds
at any time upon 60 days' written notice to shareholders.
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing
services to purchase or redeem shares based on predetermined market
indicators ("Timing Accounts") will be charged a $5.00
administrative service fee per each such exchange. All other
exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations than
those below on exchanges by Timing Accounts.
Each Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific purchase
order for any Timing Account or any person whose transactions seem
to follow a timing pattern who: (i) makes an exchange request out
of the Fund within two weeks of an earlier exchange request out of
the Fund, or (ii) makes more than two exchanges out of the Fund per
calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1% of the Fund's net assets.
Accounts under common ownership or control, including accounts
administered so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for purposes of
the exchange limits.
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the
Manager's judgment, the Fund would be unable to invest effectively
in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected. A shareholder's
purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be
disruptive to the Fund and therefore may be refused.
Each Fund and Distributors also, as indicated in "How to Invest in
a Fund," reserve the right to refuse any order for the purchase of
shares.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of each Fund's
shares, Investor Services will accept exchange orders from
securities dealers who execute a dealer or similar agreement with
Distributors. A securities dealer may charge a fee for handling an
exchange.
Use of the exchange privilege in conjunction with market timing
services offered through numerous securities dealers has become
increasingly popular as a means of capital management. In the event
that a substantial portion of a Fund's shareholders should, within
a short period, elect to redeem their shares of the Fund pursuant
to the exchange privilege, the Fund might have to liquidate
portfolio securities it might otherwise hold and incur the
additional costs related to such transactions. On the other hand,
increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general
policy of the Funds to initially invest this money in short-term,
interest-bearing money market instruments, unless it is felt that
attractive investment opportunities consistent with a Fund's
investment objective exist immediately. Subsequently, this money
will be withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
HOW TO SELL SHARES OF THE FUNDS
A shareholder may at any time liquidate shares owned and receive
from that Fund the value of the shares. Shares may be redeemed in
any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services at the address shown on the back cover of this
Prospectus. The shareholder will then receive from the Fund the
value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by
Investor Services. Redemption requests received after the time at
which the net asset value is calculated (generally 1:00 p.m.
Pacific time) each day that the New York Stock Exchange (the
"Exchange") is open for business, will receive the price calculated
on the following business day. Shareholders are requested to
provide a telephone number(s) where they may be reached during
business hours, or in the evening if preferred. Investor Services'
ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF
THE REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other
than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address
other than the shareholder's address of record, preauthorized
bank account or brokerage firm account;
(4) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on the
transfer instructions, including, for example, when (a) the
current address of one or more joint owners of an account
cannot be confirmed, (b) multiple owners have a dispute or
give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions
received by the Fund are given by an agent, not the actual
registered owner, (e) the Fund determines that joint owners
who are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or
other entity has not been established to the satisfaction of
the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the Securities
Exchange Act of 1934. Generally, eligible guarantor institutions
include (1) national or state banks, savings associations, savings
and loan associations, trust companies, savings banks, industrial
loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing
agencies; (3) securities dealers which are members of a national
securities exchange or a clearing agency or which have minimum net
capital of $100,000; or (4) institutions that participate in the
Securities Transfer Agent Medallion Program ("STAMP") or other
recognized signature guarantee medallion program. A notarized
signature will not be sufficient for the request to be in proper
form.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court jurisdiction
require the following documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from
the authorized officer(s) of the corporation and (2) a corporate
resolution.
Partnership - (1) Signature guaranteed letter of instruction from a
general partner and (2) pertinent pages from the partnership
agreement identifying the general partners or a certification for a
partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the
trustee(s), and (2) a copy of the pertinent pages of the trust
document listing the trustee(s) or a Certification for Trust if the
trustee(s) are not listed on the account registration.
Custodial (other than a retirement account) - Signature guaranteed
letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the
applicable law of the state or country of residence since these
accounts have varying requirements, depending upon the state or
country of residence.
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services Department or
the securities dealer may call Franklin's Dealer Services
Department.
Payment for redeemed shares will be sent to the shareholder within
seven days after receipt of the request in proper form, except that
a Fund may delay the mailing of the redemption check, or a portion
thereof, until clearance of the check used to purchase Fund shares,
which may take up to 15 days or more. Although the use of a
certified or cashier's check will generally reduce this delay,
shares purchased with these checks will also be held pending
clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be
suspended or the date of payment postponed if the Exchange is
closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency
exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Funds.
Payments by the Funds will be made only in U.S. dollars.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"), included with
this Prospectus, may redeem shares of the Funds by telephone.
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR
SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-
2301. THE FUNDS AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE
GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN
CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."
For shareholder accounts with the completed Agreement on file,
redemptions of shares may be made for up to $50,000 per day per
Fund account. Telephone redemption requests received before the
close of the Exchange (generally 1:00 p.m. Pacific time) on any
business day will be processed that same day. The redemption check
will be sent within seven days, made payable to all the registered
owners on the account, and will be sent only to the address of
record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that
case, a shareholder should follow the other redemption procedures
set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, and government entities which
qualify to purchase shares at net asset value pursuant to the terms
of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges
Agreement which is available from Franklin's Institutional Services
Department by telephoning 1/800/321-8563.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on
qualified investments of $1 million or more, a contingent deferred
sales charge of 1% applies to redemptions of those investments
within the contingency period of 12 months of the calendar month
following their purchase. The charge is 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested
distributions) or the total cost of such shares, and is retained by
Distributors. In determining if a charge applies, shares not
subject to a contingent deferred sales charge are deemed to be
redeemed first, in the following order: (i) Shares representing
amounts attributable to capital appreciation of those shares held
less than 12 months; (ii) shares purchased with reinvested
distributions; and (iii) other shares held longer than 12 months;
and followed by any shares held less than 12 months, on a "first
in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; any
account fees; redemptions through a Systematic Withdrawal Plan set
up prior to February 1, 1995 and, for Systematic Withdrawal Plans
set up thereafter, redemptions of up to 1% monthly of an account's
net asset value (3% quarterly, 6% semiannually or 12% annually);
and redemptions initiated by a Fund due to a shareholder's account
falling below the minimum specified account size; and redemptions
following the death of the shareholder or the beneficial owner.
Requests for redemptions for a specified dollar amount, will result
in additional shares being redeemed to cover any applicable
contingent deferred sales charge while requests for redemption of a
specific number of shares will result in the applicable contingent
deferred sales charge being deducted from the total dollar amount
redeemed, unless otherwise specified by the shareholder.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Funds will accept redemption orders from securities dealers who
have entered into a dealer or similar agreement with Distributors.
This is known as a repurchase. The only difference between a normal
redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net asset
value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the
day the Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding section, are
required even if the shareholder's securities dealer has placed the
repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction
and all other documents set forth above. A shareholder's letter
should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details
of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the
proceeds of the shareholder's redemption will be sent will begin
when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds
will not earn distributions or interest during the time between
receipt of the dealer's repurchase order and the date the
redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the
Fund as soon as possible. The shareholder's securities dealer may
charge a fee for handling the order. The SAI contains more
information on the redemption of shares.
TELEPHONE TRANSACTIONS
Shareholders of each Fund and their investment representative of
record, if any, will be able to execute various transactions by
calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in address,
(ii) change a distribution option and (iii) transfer Fund shares in
one account to another identically registered account in the Fund.
In addition, shareholders who complete and file an Agreement as
described under "How to Sell Shares of the Funds - Redemptions by
Telephone" will be able to redeem shares of a Fund.
VERIFICATION PROCEDURES
Each Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine.
These will include: recording all telephone calls requesting
account activity by telephone, requiring that the caller provide
certain personal and/or account information requested by the
telephone service agent at the time of the call for the purpose of
establishing the caller's identification, and by sending a
confirmation statement on redemptions to the address of record each
time account activity is initiated by telephone. So long as the
Funds and Investor Services follow instructions communicated by
telephone which were reasonably believed to be genuine at the time
of their receipt, neither they nor their affiliates will be liable
for any loss to the shareholder caused by an unauthorized
transaction. A Fund and Investor Services may be liable for any
losses due to unauthorized or fraudulent instructions in the event
such reasonable procedures are not followed. Shareholders are, of
course, under no obligation to apply for or accept telephone
transaction privileges. In any instance where a Fund or Investor
Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be
executed, and neither a Fund nor Investor Services will be liable
for any losses which may occur because of a delay in implementing a
transaction.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In such
situations, shareholders may wish to contact their investment
representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Funds nor Investor Services will be liable for any
losses resulting from the inability of a shareholder to execute a
telephone transaction.
The telephone transaction privilege may be modified or discontinued
by the Funds at any time upon 60 days' written notice to
shareholders.
VALUATION OF FUND SHARES
The net asset value per share of each Fund is determined separately
as of the scheduled close of the Exchange (generally 1:00 p.m.
Pacific time) each day that the Exchange is open for trading. Many
newspapers carry daily quotations of the prior trading day's
closing "bid" (net asset value) and "ask" (offering price, which
includes the maximum front-end sales charge of the Fund).
The net asset value per share of each Fund is determined in the
following manner: The aggregate of all liabilities, is deducted
from the aggregate gross value of all assets, and the difference is
divided by the number of shares of the Fund outstanding. As
discussed under "How to Invest in a Fund," the offering price is
the net asset value plus a sales charge, which varies with the
amount of money being invested. To determine the aggregate net
assets of a Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued. Portfolio
securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or,
if there is no such reported sale, within the range of the most
recent quoted bid and ask prices. Trading in securities on European
and Far Eastern securities exchanges and over-the-counter markets
is normally completed well before the close of business of the
Exchange on each day on which the Exchange is open. Trading in
European or Far Eastern securities generally, or in a particular
country or countries, may not take place on every Exchange business
day. Furthermore, trading takes place in various foreign markets on
days which are not business days for the Exchange and on which the
Fund's net asset value is not calculated. The International Bond
Fund calculates net asset value per share, and therefore effects
sales and redemptions of its shares, as of the close of the
Exchange each day on which the Exchange is open. Such calculation
does not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation
and, if events occur which materially affect the value of these
foreign securities, they will be valued at fair market value as
determined by the management and approved in good faith by the
Board of Managing General Partners. Over-the-counter portfolio
securities for which market quotations are readily available are
valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in the over-
the-counter market and on a stock exchange are valued according to
the broadest and most representative market as determined by the
Manager. Other securities for which market quotations are readily
available are valued at the current market price, which may be
obtained from a pricing service, based on a variety of factors,
including recent trades, institutional size trading in similar
types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other
assets for which market prices are not readily available are valued
at fair value as determined following procedures approved by the
Board of Managing General Partners of each Fund. With the approval
of the Managing General Partners, a Fund may utilize a pricing
service, bank or securities dealer to perform any of the above
described functions.
HOW TO GET INFORMATION REGARDING
AN INVESTMENT IN THE FUNDS
Any questions or communications regarding a shareholder's account
should be directed to Investor Services at the address shown on the
back cover of this Prospectus.
From a touch-tone phone, shareholders may access the automated
Franklin TeleFACTS(Registered Trademark) system (day or night) at 1-
800/247-1753 (in the U.S. only) to obtain current price, yield or
other performance information specific to a fund in the Franklin
Funds, request duplicate confirmation or year-end statements, money
fund checks, if applicable, and deposit slips. Current prices for
the Templeton Funds are also available through TeleFACTS. The Fund
code which will be needed to access system information, is 154 for
the International Bond Fund, 155 for the Government Fund or 156 for
the High Yield Fund followed by the # sign. The system's automated
operator will prompt the caller with easy to follow step-by-step
instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak
directly with a representative, the following is a list of the
various Franklin departments, telephone numbers and hours of
operation to call. The same numbers may be used when calling from a
rotary phone:
HOURS OF OPERATION
(PACIFIC TIME)
(MONDAY THROUGH
DEPARTMENT NAME TELEPHONE NO. FRIDAY)
Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing
impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin's service departments may be accessed, recorded and
monitored. These calls can be determined by the presence of a
regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to shareholders
may contain various measures of a Fund's performance, including
current yield, various expressions of total return and current
distribution rate. They may occasionally cite statistics to reflect
its volatility or risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of $1,000
invested at the maximum public offering price (offering price
includes sales charge) for one-, five- and ten-year periods, or
portion thereof, to the extent applicable, through the end of the
most recent calendar quarter, assuming reinvestment of all
distributions. The Funds may also furnish total return quotations
for other periods, or based on investments at various sales charge
levels or at net asset value. For such purposes total return equals
the total of all distributions paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change in
the value of the original investment, expressed as a percentage of
the purchase price.
Current yield reflects the income per share earned by each Fund's
portfolio investments; it is calculated by dividing each Fund's net
investment income per share during a recent 30-day period by the
maximum public offering price on the last day of that period and
annualizing the result.
Yield, which is calculated according to a formula prescribed by the
SEC (see the SAI), is not indicative of the distributions which
were or will be paid to the Funds' shareholders. Distributions paid
to shareholders are reflected in the current distribution rate
which may be quoted to shareholders. The current distribution rate
is computed by dividing the total amount of income per share paid
by each Fund during the past 12 months by the current maximum
offering price. Under certain circumstances, such as when there has
been a change in the amount of distribution payout or a fundamental
change in investment policies, it might be appropriate to annualize
the distributions paid during the period such policies were in
effect, rather than using the distributions during the past 12
months. The current distribution rate differs from the current
yield computation because it may include distributions to
shareholders from sources other than interest, such as short-term
capital gains, and is calculated over a different period of time.
In each case, performance figures are based upon past performance
and will reflect all recurring charges against the Funds' income
and will assume the payment of the maximum sales charge on the
purchase of shares. When there has been a change in the sales
charge structure, the historical performance figures will be
restated to reflect the new rate. The investment results of the
Funds, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Funds' yield, distribution rate or total return may be in any
future period.
GENERAL INFORMATION
The Funds' fiscal years end on December 31. Annual Reports
containing audited financial statements of the Funds, including the
auditors' report, and Semi-Annual Reports containing unaudited
financial statements are automatically sent to shareholders. Copies
may be obtained by investors or shareholders, without charge, upon
request to the Trust at the telephone number or address set forth
on the cover page of this Prospectus.
Additional information on Fund performance is included in the
Funds' Annual Report to Shareholders and the SAI.
The Funds reserve the right to redeem, at net asset value, shares
of any shareholder whose account has been in existence for at least
12 months and has a value of less than $2,000, but only where the
value of such account has been reduced by the shareholder's prior
voluntary redemption of shares and has been inactive (except for
the reinvestment of distributions) for a period of at least six
months, provided advance notice is given to the shareholder. More
information is included in the SAI. Although each Fund is offering
only its own shares, it is possible that one Fund might become
liable for any misstatements in this Prospectus about one of the
other Funds. The Managing General Partners of each Fund have
considered this factor in approving the use of a single, combined
Prospectus.
Prior to June 9, 1990, the International Bond Fund was managed by
Pilgrim Management Corporation ("PMC") and was one of the three
mutual funds constituting the Pilgrim Foreign Investors Funds. At a
special meeting of shareholders held on June 7, 1990, shareholders
of the International Bond Fund voted to approve a change in
management which resulted in the appointment of Advisers as
investment manager of such Fund, which then changed its name from
Pilgrim International Bond Fund.
Distribution or redemption checks sent to shareholders do not earn
interest or any other income during the time such checks remain
uncashed and neither the Funds nor their affiliates will be liable
for any loss to the shareholder caused by the shareholder's failure
to cash such check(s).
"Cash" payments to or from a Fund may be made by check, draft or
wire. The Funds have no facility to receive, or pay out, cash in
the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as
to ownership. Where there are two co-owners on the account, the
account will be registered as "Owner 1" and "Owner 2"; the "or"
designation is not used except for money market fund accounts. If
co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be
used.
Accounts should not be registered in the name of a minor either as
sole or co-owner of the account. Transfer or redemption for such an
account may require court action to obtain release of the funds
until the minor reaches the legal age of majority. The account
should be registered in the name of one "Adult" as custodian for
the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only
be used if the account is being established pursuant to a legal,
valid trust document. Use of such a designation in the absence of a
legal trust document may cause difficulties and require court
action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint
tenants or "Jt Ten" shall mean "as joint tenants with rights of
survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account in one
of the Funds carried in "nominee" name by the shareholder's
securities dealer to a comparably registered Fund account
maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements
on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not
process the transfer and will so inform the shareholder's
delivering securities dealer. To effect the transfer, a shareholder
should instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required by the
securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives
authorization in proper form from the shareholder's delivering
securities dealer. In the future it may be possible to effect such
transfers electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the
owner's nominee listed in publicly available nominee lists,
regardless of whether the account was initially registered in the
name of or by the owner, the nominee, or both. If a securities
dealer or other representative is of record on an investor's
account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without
limitation, those initiated through the services of the NSCC, to
have adopted as instruction and signature any such electronic
instructions received by the Funds and the Shareholder Services
Agent, and to have authorized them to execute the instructions
without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the
near future, include the "NSCC's Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered
by the securities dealer handling the investment, or by calling
Franklin's Fund Information Department.
SUMMARY OF PARTNERSHIP AGREEMENTS
Each Fund is a California limited partnership. The Government Fund
and the High Yield Fund were organized on January 27, 1987 and the
International Bond Fund was organized on September 4, 1986. As
limited partnerships, the Funds are not required to hold annual
meetings and do not intend to do so. Each Fund, however, will hold
meetings of partners for such purposes as electing new or
additional general partners, changing fundamental investment
policies, approving an investment management agreement or a
distribution plan and, at the request of shareholders owning 10% or
more of the shares of a Fund, replacing its general partners. All
shares of each Fund are of one class, have one vote and, when
issued, are fully paid, nonassessable and redeemable. All shares of
each Fund have equal voting, distribution and liquidation rights
but have no subscription, preemptive or conversion rights. There is
no cumulative voting.
The full text of the Partnership Agreement of each Fund is set
forth in the SAI. The following statements summarize and explain
certain provisions of each Partnership Agreement and are qualified
in their entirety by the terms of each Fund's respective
Partnership Agreement.
VOTING RIGHTS OF PARTNERS. Each Fund's shareholders, or limited
partners, have the voting, approval, consent or similar rights
required under the 1940 Act for voting security holders.
Shareholders of each Fund have the exclusive right to vote on
matters affecting that Fund as set forth in the Partnership
Agreement.
A meeting of the shareholders may be called by the Managing General
Partners or by limited partners holding 10% or more of the
outstanding shares. Shareholders on the record date of a meeting
will be entitled to vote at that meeting if they are admitted as
limited partners prior to the meeting date.
General Partners. The general partners of each Fund consist of a
number of individuals, referred to as Managing General Partners,
and one corporate general partner, referred to as the Non-Managing
General Partner (together, the "General Partners"). The Managing
General Partners have complete and exclusive control over the
management, conduct and operation of each Fund.
The General Partners have been elected for an indefinite term by
the shareholders of each Fund. If at any time the number of
Managing General Partners is reduced to less than three, the
remaining Managing General Partners shall, within 120 days, call a
meeting for the purpose of electing an additional Managing General
Partner(s) so as to restore their number to at least three. Each
Partnership Agreement provides that the General Partners are not
personally liable to any shareholder of the Fund for the repayment
of any amounts standing in the account of any shareholder, and that
any such payment shall be solely from the assets of each respective
Fund, except liability incurred by reason of the General Partners'
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office.
Each Partnership Agreement also provides that the General Partners
will not be liable to any shareholder by reason of any failure to
withhold income tax or any change in any federal or state tax laws
applicable to the Fund or its shareholders as long as the General
Partners have acted in good faith and in a manner reasonably
believed to be in the best interests of the shareholders. A General
Partner is generally entitled to indemnification from each Fund
against liabilities and expenses to which the General Partner may
become subject in the capacity of a General Partner of that Fund,
including any liability resulting from failure to withhold income
tax or any change in applicable income tax laws, provided the
General Partner has acted in good faith and for a purpose which
such partner reasonably believed to be in the best interests of the
Fund or its shareholders. Such indemnification is limited to the
assets of that respective Fund.
LIABILITY OF LIMITED PARTNERS. Generally, limited partners are not
personally liable for obligations of the partnership of which they
are shareholders unless they participate in the control of the
partnership's activities. Under the terms of each Partnership
Agreement, each Fund's limited partners do not have the right to
participate in the control of the Fund's activities, but they may
exercise the right to vote on matters affecting the basic structure
of the Fund, including matters requiring shareholder approval under
the 1940 Act.
Under California law, the liability of each limited partner (in the
capacity of a limited partner) for the losses, debts and
obligations of the Fund is generally limited to the partner's
capital contribution (which is the price of such partner's shares
net of all sales charges) and the partner's share of any
undistributed income or assets of the Fund. A limited partner may,
however, under certain circumstances, be required to return amounts
previously distributed for the benefit of the Fund's creditors.
Each Fund intends to include in its contracts a provision limiting
the claims of creditors to the Fund's assets and may carry
insurance in such amounts as the Managing General Partners, in
their judgment, consider reasonable to cover potential liabilities
of the Fund. In addition, the Partnership Agreement for each Fund
provides for indemnification out of the Fund's property for any
shareholder held personally liable for any obligation of the Fund.
Each Partnership Agreement also provides that the Fund shall, upon
request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of liability as a limited partner is
limited to circumstances in which the Fund itself would be unable
to meet its obligations. The Manager believes that, in view of the
above and in view of the character of the operations of each Fund
as an investment company, the risk of personal liability to
shareholders is extremely remote.
ADMISSION OF LIMITED PARTNERS. In order to be admitted as a limited
partner, a purchaser of shares is either required to complete a
partnership subscription agreement, including a special power of
attorney, in the form set forth in the Application, or to take
action indicating acceptance thereof. Admission of a purchaser as a
limited partner also requires the consent of the Managing General
Partners and the addition of the purchaser to the Partnership List
of the Fund. The Partnership List is a current list of all
shareholders who are partners, their addresses and the amount of
their contributions and current share ownership. The Managing
General Partners of each Fund, while recognizing that they have the
right to withhold their consent, have stated that they intend to
give such consent as a matter of course to eligible investors and
the Partnership List will be updated daily on each business day.
PROHIBITION OF ASSIGNMENT OF SHARES. A limited partner of any Fund
does not have the right to voluntarily transfer or assign shares to
any other person other than to secure a loan. In the event that any
person who is holding shares as collateral becomes the owner of
such shares due to foreclosure or otherwise, such person shall not
have the right to be substituted as a limited partner but shall
have the right (upon presentation of satisfactory evidence to the
Managing General Partners of the right to succeed to the interests
of the Limited Partner): (1) to redeem the shares and (2) to
receive distributions with respect to such shares. Under limited
circumstances, a successor in interest of a limited partner shall
have the right to be substituted as a limited partner.
TERM OF EXISTENCE - DISSOLUTION. The Government Fund and the High
Yield Fund will continue until December 31, 2050, and the
International Bond Fund will continue until December 31, 2036 but
shall be dissolved before such date if and when: (1) the
shareholders of a Fund approve the prior dissolution of the Fund;
(2) a Fund disposes of all of its assets; (3) a General Partner
withdraws and the remaining General Partners do not elect to
continue the operations of the Partnership; or (4) there are no
remaining General Partners (unless the shareholders agree by
unanimous vote to continue the Fund in circumstances where the last
remaining General Partner was not removed by them, and new General
Partners are promptly elected by the shareholders). Except by
requiring a Fund to redeem outstanding shares as described under
"How to Sell Shares of a Fund," limited partners have no right to
the return of any part of their contributions to any Fund until
dissolution of the Fund. Distributions by each Fund, whether upon
redemption, dissolution or otherwise, will be in proportion to the
number of outstanding shares held without regard to the dollar
amount contributed to the Fund or the amount of any profits of the
Fund received.
OTHER PROVISIONS. Each Partnership Agreement also provides
procedures for the pricing, purchase and redemption of shares of
each Fund as described in this Prospectus, as well as procedures
relating to the giving of notices, the calling of meetings and the
solicitation of shareholder consents. In addition, each Partnership
Agreement contains provisions relating to the maintenance of books
and records by each Fund, the allocation for U.S. tax purposes of
items of income, gain, loss, deduction and credit, and the
procedures by which amendments to a Partnership Agreement may be
effected. Limited partners have the right to obtain current copies
of the Partnership List, the Partnership Agreement and certain
other records of each Fund of which they are shareholders for their
personal use only. The Partnership List and other records of each
Fund, although available to other limited partners upon request and
to certain other persons in connection with Fund matters, are not
matters of public record.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-day
management of the Funds' portfolios:
GOVERNMENT FUND
Jack Lemein
Roger Bayston
Anthony Coffey
HIGH YIELD FUND
Chris Molumphy
Betsy Hofman-Schwab
Martin Wiskemann
INTERNATIONAL BOND FUND
Neil S. Devlin
Thomas J. Dickson
Edward B. Jamieson
Serena Perin
BIOGRAPHICAL INFORMATION
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Master of
Business Administration degree from the University of California at
Los Angeles. He earned his Bachelor of Science degree from the
University of Virginia. Prior to joining Franklin, Mr. Bayston was
an Assistant Treasurer for Bankers Trust Company. Following
completion of the Masters degree program, Mr. Bayston joined
Franklin in 1991. Mr. Bayston has managed the Government Fund since
1991.
Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey holds a Master of Business Administration degree from
the University of California at Los Angeles. He earned his Bachelor
of Arts degree from Harvard University. Prior to joining Franklin
in 1989, Mr. Coffey was an associate with the Analysis Group. He is
a member of several securities industry committees and has managed
the Government Fund since 1989.
Neil S. Devlin
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Devlin holds a Bachelor of Arts degree in economics and
philosophy from Brandeis University. He is currently a level II
CVA candidate. Prior to joining Templeton in 1987, Mr. Devlin was a
portfolio manager and a bond analyst with Constitutional Capital
Management of Boston and a bond trader ad research analyst for the
Bank of New England. He has managed the International Bond Fund
since January 1995.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in managerial
economics from the University of California at Davis. Mr. Dickson
joined Franklin in 1992 and moved to Templeton in 1994. He started
managing the International Bond Fund since January 1995.
Betsy Hofman-Schwab
Portfolio Manager
Franklin Advisers, Inc.
Ms. Hofman-Schwab holds a Master of Business Administration degree
from the College of Notre Dame in California. She earned her
Bachelor of Science degree in finance at the College of Notre Dame
in California. She has been with Franklin since 1981 and has
managed the High Yield Fund since its inception.
Edward B. Jamieson
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell
University and a Master's degree in accounting and finance from the
University of Chicago Graduate School of Business. Mr. Jamieson has
been with Advisers since 1987 and for the year prior thereto, he
was treasurer of Beatrice Consumer Products, Inc. From 1981 to 1985
he was an executive with Pepsico, Inc.'s Corporate Treasury where
he served as Director of International Treasury. He has managed the
International Bond Fund since 1990.
Jack Lemein
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the
University of Illinois. Mr. Lemein has been in the securities
industry since 1967. He is a member of several securities industry-
related committees and associations. Mr. Lemein joined Franklin in
1984 and has managed the Government Fund since its inception.
Chris Molumphy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of
Business Administration degree in finance from the University of
Chicago. He earned his Bachelor of Arts degree in economics from
Stanford University. Mr. Molumphy is a member of several securities
industry associations. He has managed the High Yield Fund since
joining Franklin in 1988.
Serena Perin
Portfolio Manager
Templeton Investment Counsel, Inc.
Ms. Perin holds a Bachelor of Arts degree in business economics
from Brown University. She served as a research assistant to a
member of Parliament in London, England. Ms. Perin is a member of
several securities industry associations. She has managed the
International Bond Fund since joining Franklin in November 1991.
Ms. Perin moved to Templeton in 1994.
R. Martin Wiskemann
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Wiskemann holds a degree in business administration from the
Handelsschule of the State of Zurich, Switzerland. He has been in
the securities business for more than 30 years, managing mutual
fund equity and fixed-income portfolios, and private investment
accounts. He is a member of several securities industry
associations. He joined Franklin in 1972 and has managed the High
Yield Fund since its inception.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have predominantly
speculative elements and their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
S&P
AAA: Bonds rated AAA are the highest grade debt obligations. This
rating indicates an extremely strong capacity to pay principal and
interest.
AA: Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small
degree.
A: Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in
the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligations. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
*Ratings are generally given to securities at the time of issuance.
While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so.
FRANKLIN
PARTNERS
FUNDS(REGISTERED TRADEMARK)
FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND
FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND
FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
About the Funds (See also the Prospectus
"About the Franklin Partners Funds" )
The Investment Objectives and Policies
of the Funds (See also the Prospectus
"Investment Objective and Policies of Each Fund")
Additional Information on
Distributions and Taxation
Officers and Managing General Partners
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Funds")
The Funds' Policies Regarding Brokers
Used on Portfolio Transactions
Additional Information Regarding Fund
Shares (See also the Prospectus "How to
Invest in a Fund," "How to Sell Shares of
a Fund," "Valuation of Fund Shares")
The Funds' Underwriter
General Information
Financial Statements
Appendix A
Appendix B
Appendix C
The Franklin Partners Funds(Registered Trademark) (collectively,
the "Funds" or separately, the "Fund") consist of three separate
and distinct funds: Franklin Tax-Advantaged U.S. Government
Securities Fund (the "Government Fund"), Franklin Tax-Advantaged
High Yield Securities Fund (the "High Yield Fund"), and Franklin
Tax-Advantaged International Bond Fund (the "International Bond
Fund"), each a California limited partnership.
A Prospectus for the Funds dated May 1, 1995, as may be amended
from time to time, which provides the basic information a
prospective investor should know before investing in the Funds, may
be obtained without charge from the Funds or from the Funds'
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A
PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO
PROVIDE INVESTORS WITH ADDITIONAL INFORMATION REGARDING THE
ACTIVITIES AND OPERATIONS OF THE FUNDS, AND SHOULD BE READ IN
CONJUNCTION WITH THE FUNDS' PROSPECTUS.
ABOUT THE FUNDS
Each Fund is a separate and distinct management investment company,
registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). Each
Fund issues only one class of shares, in the form of partnership
interests, and purchasers of shares of a Fund are required to
become limited partners of such Fund.
THE INVESTMENT OBJECTIVES
AND POLICIES OF THE FUNDS
As noted in the Prospectus, each Fund has its own investment
objective, which is a fundamental policy, and follows policies
designed to achieve that objective. In addition, unless otherwise
noted, the following restrictions have been adopted as fundamental
policies for the Funds, which means that they may not be changed
without the approval of a majority of the shares of the applicable
Fund.
THE GOVERNMENT FUND AND THE HIGH YIELD FUND
MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the
Fund, except that the Funds may borrow from banks for temporary or
emergency purposes in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of
publicly distributed bonds, debentures, notes or other debt
securities and except that both Funds may enter into repurchase
agreements.
4. Act as underwriter of securities issued by other persons except
insofar as a Fund may be technically deemed an underwriter under
the federal securities laws in connection with the disposition of
portfolio securities.
5. Invest more than 5% of the value of its gross assets in the
securities of any one issuer, except that this limitation does not
apply to investments in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
6. Purchase the securities of any issuer, if, as a result, a Fund
would own more than 10% of any class of the outstanding voting
securities of such issuer.
7. Purchase from or sell to its officers and general partner, or
any firm of which any officer or general partners is a member, as
principal, any securities, except that a Fund may deal with such
persons or firms as brokers and pay a customary brokerage
commission; retain securities of any issuer, if to the knowledge of
a Fund, one or more of its officers, general partners or investment
adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and general
partners together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not
been in continuous operation for three years, but such period may
include the operation of a predecessor. This is not a fundamental
policy and may be changed by a Fund's Managing General Partners
without shareholder approval.
9. Acquire, lease or hold real estate (except such as may be
necessary or advisable for the maintenance of its offices) or
interests in oil, gas or other mineral exploration or development
programs (does not preclude investment in marketable securities of
companies engaged in such activities, provided that such securities
do not constitute "United States ("U.S.") real property interests"
for U.S. federal income tax purposes).
10. Invest in commodities and commodity contracts, puts, calls,
straddles, spreads or any combination thereof. (Does not preclude
authorized transactions in foreign currencies.)
11. Invest in companies for the purpose of exercising control or
management.
12. Concentrate more than 25% of the market value of its assets in
the securities of companies engaged in any one industry (does not
apply to investment in the securities of the U.S. government, its
agencies or instrumentalities).
13. Issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit a Fund from
(a) making any permitted borrowing, mortgages or pledges, or (b)
entering into repurchase transactions. This is not a fundamental
policy of the Funds and may be changed by the Funds' Managing
General Partners without shareholder approval.
THE INTERNATIONAL BOND FUND MAY NOT:
1. With respect to at least 75% of its total assets, invest in the
securities of any one issuer (other than the U.S. government and
its agencies and instrumentalities), if immediately after and as a
result of such investment (a) more than 5% of the total assets of
the Fund would be invested in such issuer or (b) more than 10% of
the outstanding voting securities of such issuer would be owned by
the Fund.
2. Make loans to others, except through the purchase of debt
securities in accordance with its investment objectives and
policies or to the extent the entry into a repurchase agreement is
deemed to be a loan.
3. (a) Borrow money, except temporarily for extraordinary or
emergency purposes from a bank and then not in excess of
25% of its total assets (at the lower of cost or fair
market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at
least 300% of all borrowings, and no additional
investments may be made while any such borrowings are in
excess of 5% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
4. Purchase securities on margin, sell securities short,
participate on a joint or joint and several basis in any securities
trading account, or underwrite securities. (Does not preclude the
Fund from obtaining such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities. Does
not preclude permissible foreign currency hedging transactions.)
5. Buy or sell interests in oil, gas or mineral exploration or
development programs, or real estate. (Does not preclude
investments in marketable securities of companies engaged in such
activities to the extent such securities do not constitute U.S.
real property interests for U.S. federal income tax purposes.)
6. Purchase or hold securities of any issuer, if, at the time of
purchase or thereafter, any of the Managing General Partners or
officers of the Fund or its investment adviser own beneficially
more than 1/2 of 1%, and such Managing General Partners or officers
holding more than 1/2 of 1% together own beneficially more than 5%
of the issuer's securities.
7. Invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record, together with
predecessors, of at least three years of continuous operation. This
is not a fundamental policy and may be changed by the Fund's
Managing General Partners without prior shareholder approval.
8. Purchase or sell commodities or commodity contracts or invest
in put, call, straddle or spread options. (Does not preclude
transactions in foreign exchange for hedging purposes, including
forward foreign exchange transactions, the purchase or sale of
foreign currency options, foreign currency futures transactions and
the purchase or sale of options on foreign currency futures, or
transactions in foreign exchange in connection with the investment
of cash balances held outside of the U.S.)
9. Invest more than 10% of its assets in securities with legal or
contractual restrictions on resale, securities which are not
readily marketable, and repurchase agreements with more than seven
days to maturity.
10. Invest in any issuer for purposes of exercising control or
management.
11. Concentrate more than 25% of the market value of its assets in
the securities of companies engaged in any one industry. (Does not
apply to investment in the securities of the U.S. government, its
agencies or instrumentalities.)
12. Issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit the Fund from
(a) making any permitted borrowings, mortgages or pledges, or (b)
entering into repurchase transactions.
In order to change any of the foregoing fundamental restrictions,
approval must be obtained by the applicable Fund's shareholders.
Such approval requires the affirmative vote of the lesser of (i)
67% or more of voting securities present at a meeting if the
holders of more than 50% of voting securities are represented at
that meeting or (ii) holders of more than 50% of the outstanding
voting securities.
RISK FACTORS PERTAINING TO THE HIGH YIELD FUND AND THE
INTERNATIONAL BOND FUND
SECURITIES OF NON-U.S. ISSUERS. The Government Fund will not
acquire the securities of non-U.S. issuers under any circumstances.
The High Yield Fund and the International Bond Fund will not
acquire outside of the U.S. the securities of non-U.S. issuers
under circumstances where, at the time of acquisition, such Funds
have reason to believe that they could not resell the securities in
a public market. (Investors should recognize, however, that
securities of non-U.S. issuers are often bought or sold with less
frequency and volume, and therefore may have greater price
volatility than is the case with many U.S. securities.)
Notwithstanding the fact that such Funds intend to acquire the
securities of non-U.S. issuers only where there are public markets,
investments by the Funds in the securities of such issuers may be
considered as tending to increase the risks with respect to the
liquidity of the Funds' portfolios and their ability to meet a
large number of shareholder's redemption requests should there be
economic or political turmoil in a country in which such Funds had
a substantial portion of their assets invested or should relations
between the United States and other countries deteriorate markedly.
The interest payable on the securities of non-U.S. issuers held by
the High Yield Fund and the International Bond Fund may be subject
to withholding taxes in countries other than the U.S. and, while
individual investors may be able to claim some credit or deduction
for such taxes with respect to their allocated shares of such tax
payments, the general effect of these taxes will be to reduce the
Funds' income. In addition the expense ratio of the High Yield Fund
and the International Bond Fund may also be slightly higher than
the expenses of the Government Fund due to special costs associated
with maintaining custody of foreign securities, the higher
commission rates charged on many foreign exchanges, and other
factors.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN EXCHANGE. The value in
U.S. dollars of the assets of the High Yield Fund and the
International Bond Fund that are invested in securities of non-U.S.
issuers may be affected favorably or unfavorably by changes in
currency exchange rates and exchange control regulations, and each
Fund may incur costs in connection with conversions between various
currencies. The Funds may conduct their currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in a particular currency exchange market or through
forward foreign currency exchange contracts and currency futures
contracts entered into for hedging purposes as explained below.
HEDGING AND FOREIGN CURRENCY TRANSACTIONS. The High Yield Fund and
the International Bond Fund may engage in the following strategies
to hedge their portfolios against risk associated with currency
fluctuations. Use of these strategies may be limited by
requirements of the Funds to purchase and hold their securities for
long-term investment and to meet other tax requirements imposed by
the Internal Revenue Code and U.S. Treasury regulations. These
strategies include the use of currency options, currency futures,
options on such futures and forward foreign currency exchange
contracts. Transactions in forward contracts, options and futures
are generally considered "derivative securities." While such
strategies' intention would be to reduce the volatility of the net
asset value of the Funds' shares, the Funds' net asset value would
still fluctuate and no assurance could be given of the
effectiveness of such transactions. Hedging against currency
fluctuations does not eliminate price fluctuations in the hedged
securities that are attributable to interest rate changes and other
factors.
The use of futures transactions involves the risk of imperfect
correlation between movements in the price of futures contracts and
movements in the price of the currencies which are the subject of
the hedge. These strategies also involve the risk that a Fund may
not be able to close an option or futures position, or that a Fund
could lose its margin deposit or collateral in the event of
bankruptcy of the broker with whom the Fund has an open position.
Although certain risks are involved in forward foreign currency
exchange contracts, currency options, currency futures and options
on such futures, the Funds' investment manager believes that,
because the Funds will only engage in these transactions for
hedging purposes, the use of these strategies will not subject the
Funds to the risks frequently associated with the speculative use
of forward contracts, options and futures transactions. Moreover,
the High Yield Fund and the International Bond Fund may not
purchase or sell foreign currency futures or options on such
futures if the sum of the initial margin deposits on all of the
Funds' futures positions and the premiums paid for related options
would exceed 5% of a Fund's total assets. Each Fund is also
required to maintain in a segregated account cash and high quality
liquid debt securities in an amount equal to the currency to be
purchased by the Fund under a forward, futures or option on a
futures contract providing for such purchase.
Foreign exchange gains and gains realized by each Fund from its
hedging activities may be subject to U.S. tax and withholding
requirements.
The following is a description of the hedging instruments the High
Yield Fund and the International Bond Fund may utilize with respect
to foreign currency exchange rate fluctuation risks:
A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed
upon by the parties at a price set at the time of the contract.
These contracts are individually negotiated and privately traded
directly between currency traders (usually large commercial banks)
and their customers. The High Yield Fund and the International Bond
Fund are authorized to deal in forward contracts with respect to
the currencies in which their portfolio securities are (or will be)
denominated as a hedge against contractual agreements to purchase
or sell a specified security at a specified future date (up to one
year) and price at the time of the contract. Each Fund's dealings
in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging
is the forward purchase or sale of currency with respect to
receivables or payables of a Fund accruing in connection with the
purchase and sale of its portfolio securities denominated in a
particular currency. Position hedging is the forward sale of
currency with respect to portfolio security positions denominated
or quoted in such currency. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity
for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the High Yield Fund or the International
Bond Fund to hedge against a devaluation that is so generally
anticipated that neither Fund is able to contract to sell the
currency at a price above the devaluation level it anticipates.
Listed currency options give the purchaser of such options the
right to buy or sell a particular currency at a fixed price on a
future date. Listed options are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing
corporation and have standardized strike prices and expiration
dates. By way of illustration, a Fund may use currency options to
hedge the stated value in U.S. dollars of an investment in a
Japanese yen-denominated security. In such circumstances, for
example, the Fund may purchase a currency put option enabling it to
sell a specified amount of yen for dollars at a specified price by
a future date. To the extent the hedge is successful, a loss in the
value of the yen relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Fund may also
sell a call option which, if exercised, requires it to sell a
specified amount of yen for dollars at a specified price by a
future date (a technique called a "straddle"). By selling the call
option in this illustration, the Fund relinquishes the opportunity
to profit from increases in the relative value of the yen to the
dollar.
Each Fund will cover currency call options which it has written by
maintaining in a segregated account cash or securities denominated
in the currency that is the subject of the call option, in an
amount equal to the value of the optioned currency. The High Yield
Fund and the International Bond Fund will cover currency put
options which they have written by maintaining in a segregated
account cash or high quality liquid debt securities in an amount
equal to the value of currency which such Fund is required to
purchase under the put option. The exchanges on which options on
currencies are traded have generally established limitations
governing the maximum number of call or put options on the same
underlying currency (whether or not covered) which may be written
by a single investor, whether acting alone or in concert with
others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more
accounts or through one or more brokers). "Trading limits" are
imposed on the maximum number of contracts which any person may
trade on a particular trading day. The Funds' investment manager
does not believe that these trading and position limits will have
any adverse impact on the portfolio strategies for hedging the
portfolio of either the High Yield Fund or the International Bond
Fund.
Currency futures are standardized contracts traded on commodities
exchanges which involve an obligation to purchase or sell a
predetermined amount of currency at a predetermined date at a
specified price. The High Yield Fund and the International Bond
Fund would incur brokerage costs and would be required to make and
maintain "margin" deposits in connection with transactions in
futures contracts, as described below. The Funds would also be
required to segregate assets to cover futures contracts requiring
the purchase of foreign currencies. Options on currency futures
entitle the Funds to assume a position in an underlying currency
futures contract. Futures contracts and options for futures
contracts are traded on boards of trades or futures exchanges
regulated by the Commodity Futures Trading Commission, a U.S.
government agency.
At the time a futures contract or related futures option
transaction is entered into, cash or U.S. government securities
equal to the market value of the Fund's obligation under the
contract or option transaction (less any related margin deposits)
is deposited in a segregated account with the Fund's custodian bank
to collateralize the position and thereby ensure that such position
is unleveraged. The segregated account is marked to market daily.
The Funds will not engage in such hedging transactions if the sum
of the initial margin deposits on all of the Fund's futures
positions and premiums paid for related futures options would
exceed 5% of the Fund's total assets.
The use of futures and options contracts by the High Yield Fund and
the International Bond Fund involves the risk of imperfect
correlation between movements in the price of such contracts and
movements in the price of securities and currencies which are the
subject of the hedge. If the price of the contract moves more or
less than the price of the security or currency, the Fund will
experience a gain or loss which will not be completely offset by
movements in the price of the securities which are the subject of
the hedge.
Neither the High Yield Fund nor the International Bond Fund will
speculate in forward foreign currency exchange contracts, currency
options, currency futures or options on such futures and will
engage in transactions in such contracts and options solely for the
purpose of hedging against currency risk, as described herein.
Accordingly, the aggregate value of the currency which is the
subject of such contracts and options will not exceed the market
value of the securities it owns and which are denominated in such
currency, or the expected acquisition price of securities which it
has committed or anticipates to purchase and which are denominated
in such currency. In the case of securities which have been sold by
the High Yield Fund or the International Bond Fund but not yet
delivered, the aggregate value of the currency which is the subject
of such contracts and options will not exceed the proceeds of such
sale denominated in such currency. The Funds intend to enter into
options and futures transactions only if there appears to be a
liquid secondary market for such options or futures. There can be
no assurance, however, that a liquid secondary market will exist at
any specific time. Thus, it may not be possible to close an option
or futures position. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to
hedge its portfolio effectively. In addition, there is the risk of
loss by a Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom a Fund has an open position in a
foreign currency option, a futures contract or a futures option.
The High Yield Fund and the International Bond Fund may also, for
hedging purposes, purchase currencies in the form of bank deposits
as well as other non-U.S. dollar denominated money market
instruments, including, but not limited to, banker's acceptances,
certificates of deposits, commercial paper, short-term government
and corporate obligations and repurchase agreements. Each Fund's
dealing in foreign exchange transactions will be limited to the
transactions described above and may be further limited by tax
restrictions. Neither Fund is required to enter into such
transactions with regard to its positions and transactions in the
securities of non-U.S. issuers, and will not do so unless deemed
appropriate by each Fund's investment manager. In addition, while
these transactions may minimize the risk to the value of each
Fund's portfolio securities resulting from adverse currency
movements with respect to the U.S. dollar, they do not eliminate
fluctuations in the underlying prices of the securities. Such
transactions may limit potential gain from a favorable change in
the relationship between the U.S. dollar and other currencies.
Unanticipated changes in currency exchange rates may result in
poorer overall performance for the High Yield Fund and the
International Bond Fund than if they had not engaged in such
foreign exchange transactions.
OTHER POLICIES. There are no restrictions or limitations on
investments in obligations of the U.S., or of corporations
chartered by Congress as federal government instrumentalities for
any of the Funds. The underlying assets of each Fund may be
retained in cash, including cash equivalents which are Treasury
bills, commercial paper and short-term bank obligations such as
certificates of deposit, banker's acceptances and repurchase
agreements, subject to certain tax restrictions. It is intended,
however, that only so much of the underlying assets of each Fund be
retained in cash as is deemed necessary for normal operation of
such Fund. Each Fund may invest in securities that cannot be
offered to the public for sale without first being registered under
the Securities Act of 1933 ("restricted securities"), or in other
securities which, in the opinion of the Managing General Partners,
may be otherwise illiquid. It is the policy of each Fund, however,
that illiquid securities may not constitute, at the time of
purchase or at any time, more than 10% of the value of the total
net assets of the Fund in which they are held. Generally, an
"illiquid" security is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately
the amount at which the Fund has valued the security.
Notwithstanding this limitation, the Funds' Managing General
Partners have authorized each Fund to invest in restricted
securities where such investment is consistent with such Fund's
investment objective and has authorized such securities to be
considered to be liquid to the extent the Manager determines that
there is a liquid institutional or other market for such
securities. For example, restricted securities which may be freely
transferred among qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended, and for which a
liquid institutional market has developed will be considered liquid
even though such securities have not been registered pursuant to
the Securities Act of 1933. The Managing General Partners will
review any determination by the Manager to treat a restricted
security as a liquid security on an ongoing basis, including the
Manager's assessment of current trading activity and the
availability of reliable price information. In determining whether
a restricted security is properly considered a liquid security, the
Manager and the Managing General Partners will take into account
the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the
extent a Fund invests in restricted securities that are deemed
liquid, the general level of illiquidity in that Fund may be
increased if qualified institutional buyers become uninterested in
purchasing these securities or the market for these securities
contracts.
SECURITIES TRANSACTIONS
It is intended that portfolio changes in each Fund will be made as
infrequently as possible. Such changes will be based on market and
economic factors generally, and special considerations affecting
any particular security such as the limitation of loss or
realization of price appreciation at a time believed to be
opportune. Subject to the policy of each Fund not to purchase or
sell securities for trading purposes and to certain tax
restrictions, however, changes in particular portfolio holdings may
be made if a security has reached its anticipated level of
performance or when required for operational or other reasons. The
sale of securities held for relatively short periods and
reinvestment of the proceeds will result in increased brokerage and
transaction costs to the Funds.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXATION
DISTRIBUTIONS
As explained more fully in the following paragraphs, the daily
allocation of income by each Fund will be in a "defined amount"
equal to the daily distributable net investment income of such Fund
for that day. The daily distributable net investment income for a
particular day will be equal to the interest income for that day,
less the daily expenses for that day. For the purpose of computing
its book net income, each Fund will account for net investment
income in accordance with generally accepted accounting principles
(see "Significant Accounting Policies" in the Notes to the
Financial Statements in the Funds' Annual Report).
ADDITIONAL INFORMATION REGARDING
U.S. TAX TREATMENT OF U.S. INVESTORS
A shareholder's adjusted basis in his partnership interest in a
Fund (i.e., his aggregate shares in the Fund) will generally be the
aggregate prices paid for such shares (including sales charges),
increased by the amounts of such shareholder's distributive share
of items of income and gain of the Fund and reduced, but not below
zero, by the amounts of such shareholder's distributive share of
Fund losses and the amount of any cash distributions (including
distributions upon redemption of shares) received by such
shareholder. Subject to the limitations discussed below, each
shareholder will generally be permitted to deduct his distributive
share of Fund losses to the extent of his adjusted basis in his
Fund shares. For purposes of the "passive activity loss" rules, an
individual shareholder's share of the Fund's income or loss will be
treated as "portfolio" income or loss. Thus, income from the Fund
may not be offset by losses from "passive activities" of the
shareholder, and losses from the Fund will not reduce the
shareholder's income from "passive activities." An individual
shareholder's share of certain expenses of the Fund will be treated
as a "miscellaneous itemized deduction" and will be deductible only
by a shareholder who itemizes deductions and only to the extent
that the shareholder's total miscellaneous itemized deductions from
all sources exceed 2% of the shareholder's adjusted gross income.
An individual shareholder whose adjusted gross income exceeds a
specified amount (generally $114,700 in 1995) must reduce the
otherwise allowable itemized deductions by an amount equal to 3% of
the excess adjusted gross income.
U.S. shareholders of a Fund will not be subject to federal income
tax on cash distributions received in redemption of Fund shares to
the extent such distributions do not exceed the shareholders'
adjusted basis in their Fund shares. Redemptions of shares may be
subject to 31% backup withholding in the case of non-exempt U.S.
shareholders who have failed to furnish the Fund with their correct
taxpayer identification numbers on Form W-9.
Each item of partnership income or gain will retain its character
for tax purposes when allocated to the shareholders.
TAX CONSEQUENCES OF BEING DEEMED
ENGAGED IN A U.S. TRADE OR BUSINESS
As stated in the Prospectus, each Fund has obtained an opinion of
its counsel, Thelen, Marrin, Johnson & Bridges, to the effect that
neither the Fund nor its non-U.S. shareholders solely by virtue of
their investment in the Fund should be deemed to be engaged in a
trade or business in the U.S. if the Fund adheres to its stated
investment objectives, policies and restrictions and to certain
guidelines and operating procedures concerning its investment
activities. These opinions are based upon case law and other
authorities in effect as of the date of this Statement of
Additional Information. In the event this position is challenged,
it is the intention of each Fund to contest the challenge. A final
determination by a court of law, however, to the effect that a Fund
is engaged in a U.S. trade or business would have material tax
consequences for the Fund's shareholders. Such a determination
would nullify the applicability of the "portfolio interest"
exemption and cause all income of the Fund to be deemed to be
effectively connected with such trade or business (including such
"portfolio interest" and capital gains realized by the Fund or the
shareholders) and therefore subject to U.S. federal income tax and
U.S. tax withholding requirements.
OFFICERS AND MANAGING GENERAL PARTNERS
The Managing General Partners of each Fund have the responsibility
for the overall management of that Fund, including general
supervision and review of its investment activities. The Managing
General Partners, in turn, elect the officers of each Fund who are
responsible for administering the day-to-day operations. The
affiliations of the officers and Managing General Partners of each
Fund and their principal occupations for the past five years are
listed below. Managing General Partners who are deemed to be
"interested persons" of a Fund, as defined in the 1940 Act, are
indicated by an asterisk (*).
Name, Age and Address Positions and Officers with each Fund
Principal Occupations During the Past Five Years
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Managing General Partner
President and Director, Abbott Corporation (an investment company);
and director, trustee or managing general partner, as the case may
be, of 30 of the investment companies in the Franklin Group of
Funds.
Harris J. Ashton (62)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Managing General Partner
President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers); Director, RBC
Holdings, Inc. (a bank holding company) and Bar-S Foods; and
director, trustee or managing general partner, as the case may be,
of 54 of the investment companies in the Franklin Templeton Group
of Funds.
*Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards and
Managing General Partner
Senior Vice President, Franklin Resources, Inc., Franklin Advisers,
Inc., and Franklin Templeton Distributors, Inc.; officer and/or
director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing general partner, as
the case may be, of 36 of the investment companies in the Franklin
Group of Funds.
S. Joseph Fortunato (52)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Managing General Partner
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of
General Host Corporation; director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in
the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Managing General Partner
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may be,
of 29 of the investment companies in the Franklin Group of Funds.
*Charles B. Johnson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Managing General Partner
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and General Host Corporation; and officer and/or director,
trustee or managing general partner, as the case may be, of most
other subsidiaries of Franklin Resources, Inc. and of 55 of the
investment companies in the Franklin Templeton Group of Funds.
*Charles E. Johnson (38)
777 Mariners Island Blvd.
San Mateo CA 94404
Managing General Partner
Senior Vice President and Director, Franklin Resources, Inc.;
Senior Vice President, Franklin Templeton Distributors, Inc.;
President and Director, Templeton Worldwide, Inc. and Franklin
Institutional Services Corporation; officer and/or director, as the
case may be, of some of the subsidiaries of Franklin Resources,
Inc. and officer and/or director or trustee, as the case may be, of
24 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Managing General Partner
Executive Vice President and Director, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; President and Director,
Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of 42 of the investment companies in
the Franklin Templeton Group of Funds.
Gordon S. Macklin (66)
8212 Burning Tree Road
Bethesda, MD 20817
Managing General Partner
Chairman, White River Corporation (information services); Director,
Fund American Enterprises Holdings, Inc., Martin Marietta
Corporation, MCI Communications Corporation, MedImmune, Inc.
(biotechnology), Infovest Corporation (information services), and
Fusion Systems Corporation (industrial technology); and director,
trustee or managing general partner, as the case may be, of 51 of
the investment companies in Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist Group; formerly Director, H
& Q Healthcare Investors; and formerly President, National
Association of Securities Dealers, Inc.
Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee of 41 of the investment companies in the
Franklin Templeton Group of Funds.
Martin L. Flanagan (34)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.; officer
of most other subsidiaries of Franklin Resources, Inc.; and officer
of 60 of the investment companies in the Franklin Templeton Group
of Funds.
Deborah R. Gatzek (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 36 of the investment companies in the
Franklin Group of Funds.
Diomedes Loo-Tam (55)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 36 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 31 of the investment companies
in the Franklin Group of Funds.
R. Martin Wiskemann (67)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin
Advisers, Inc.; Senior Vice President, Franklin Management, Inc.;
Vice President, Treasurer and Director, ILA Financial Services,
Inc. and Arizona Life Insurance Company of America; and officer
and/or director, as the case may be, of 19 of the investment
companies in the Franklin Group of Funds.
Managing General Partners of the Government Fund and the High Yield
Fund not affiliated with the investment manager are currently paid
fees of $150 per quarter plus $150 per meeting attended from each
Fund and are reimbursed for expenses incurred in connection with
attending such meetings. During the fiscal year ended December 31,
1994, fees totaling $7,650 and $8,400 were paid by the Government
Fund and the High Yield Fund, respectively to the managing general
partners of the Funds who are not affiliated with the Funds'
investment manager. As indicated above, certain of the managing
general partners and officers hold positions with other companies
in the Franklin Group of Funds and the Templeton Group of Funds.
The following table indicates the fees paid by the Fund to its
directors and the total fees received by such directors from the
Fund and from other Franklin Templeton Funds for which they serve
as directors, trustees or managing general partners and for which
they spent significant time in preparation for and attendance at
the meetings which are scheduled at least once per month. The
Managing General Partners of the International Fund are not
currently, but may in the future, be paid fees and receive
reimbursement of expenses for attending meetings.
NUMBER OF TOTAL
AGGREGATE AGGREGATE FRANKLIN COMPENSATION
COMPENSATION COMPENSATION TEMPLETON FROM FUNDS
FROM FROM FUNDS BOARDS AND
GOVERNMENT HIGH YIELD ON WHICH FUND
NAME FUND* FUND EACH SERVES COMPLEX**
Frank H. Abbott, III $1,650 $1,800 30 $176,870
Harris J. Ashton 1,500 1,650 54 319,925
S. Joseph Fortunato 1,500 1,650 56 336,065
David W. Garbellano 1,500 1,650 29 153,300
Gordon S. Macklin 1,500 1,650 51 303,685
*For the fiscal year ended December 31, 1994.
**For the calendar year ended December 31, 1994.
No officer or Managing General Partner received any other
compensation directly from the Funds. As of February 10, 1995, the
Managing General Partners and officers, as a group, together with
Franklin Partners, Inc. as the Non-Managing General Partner, owned
596,495 or 1.3% of the total outstanding shares of the Government
Fund, 122,064 or 1.2% of the outstanding shares of the High Yield
Fund and 34,839 or 1.7% of the total outstanding shares of the
International Bond Fund. Officers and Managing General Partners, as
a group, owned of record and beneficially approximately 54 shares
of the High Yield Fund, 96 shares of the International Bond Fund
and 41 shares of the Government Fund or less than 1% of each Fund's
outstanding shares. In addition, many of the Funds' Managing
General Partners own shares in various of the other funds in the
Franklin Group of Funds and the Templeton Group of Funds. Certain
officers or Managing General Partners who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees
paid to its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers and the father and uncle, respectively of Charles
E. Johnson.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of each Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary of
Franklin Resources, Inc. ("Resources"), a publicly owned holding
company whose shares are listed on the New York Stock Exchange
("Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently
manage over $118 billion in assets for over 3.8 million
shareholders. The preceding table indicates those officers and
Managing General Partners who are also affiliated persons of
Distributors and Advisers.
Pursuant to a management agreement with each Fund, the Manager
provides investment research and portfolio management services,
including the selection of securities for each Fund to purchase,
hold or sell and the selection of brokers through whom each Fund's
portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of each Fund's Managing
General Partners to whom the Manager renders periodic reports of
each Fund's investment activities. The Manager, at its own expense,
furnishes each Fund with office space and office furnishings,
facilities and equipment required for managing the business affairs
of each Fund; maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Manager is
covered by fidelity insurance on its officers, directors and
employees for the protection of each Fund. Each Fund bears all of
the expenses not assumed by the Manager. See the Statement of
Operations in the financial statements in the Funds' Annual Report
for additional details of these expenses.
Pursuant to the management agreements, each Fund is obligated to
pay the Manager a fee computed at the close of business on the last
business day of each month equal to a monthly rate of 5/96 of 1%
(approximately 5/8 of 1% per year) for the first $100 million of
net assets of each Fund; 1/24 of 1% (approximately 1/2 of 1% per
year) of net assets of each Fund in excess of $100 million up to
$250 million; and 9/240 of 1% (approximately 45/100 of 1% per year)
of net assets of each Fund in excess of $250 million.
For fiscal years ended December 31, 1992, 1993 and 1994, the High
Yield Fund paid $249,995, $340,356 and $481,741 in management fees
and the Government Fund paid $1,185,915, $2,331,382 and $2,608,074
for the respective years.
The Manager has limited its management fees and has assumed
responsibility for making payments, if necessary, to offset certain
operating expenses otherwise payable by the International Bond
Fund. This action by the Manager to limit its management fees and
to assume responsibility for payment of the expenses related to the
operations of the International Bond Fund may be terminated by the
Manager at any time. For the fiscal years ended December 31, 1992,
1993 and 1994, the management fees which would have been accrued by
the Manager for the International Bond Fund were $59,203, $100,033
and $141,108, respectively; however, the Manager agreed in advance
to waive all of its management fees for the same periods. The
management agreements for each Fund specify that the management fee
will also be reduced to the extent necessary to comply with the
most stringent limits on the expenses which may be borne by a Fund
prescribed by any state in which a Fund's shares are offered for
sale. The most stringent current limit requires the Manager to
reduce or eliminate such fee to the extent that aggregate operating
expenses of each Fund (excluding interest, taxes, brokerage
commissions and extraordinary expenses such as litigation costs)
would otherwise exceed in any fiscal year 2 1/2% of the first $30
million of net assets of each Fund, 2% of the next $70 million of
net assets of each Fund and 1 1/2% of average annual net assets of
each Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements.
The management agreements are in effect until April 30, 1996.
Thereafter, they may continue in effect for successive annual
periods providing such continuance is specifically approved at
least annually by a vote of each such Fund's Managing General
Partners or by a vote of the holders of a majority of each Fund's
outstanding voting securities, and in either event by a majority
vote of each Fund's Managing General Partners who are not parties
to the management agreements or interested persons of any such
party (other than as Managing General Partners of the Funds), cast
in person at a meeting called for that purpose. Each management
agreement may be terminated without penalty at any time by the Fund
or by the Manager on 60 days' written notice and will automatically
terminate in the event of their assignment, as defined in the 1940
Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for each Fund and
acts as each Fund's transfer agent and distribution-paying agent.
Investor Services is compensated by each Fund on the basis of a
fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of each Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the independent auditors for each Fund.
During the fiscal year ended December 31, 1994, their auditing
services consisted of rendering an opinion on the financial
statements included in the Funds' Annual Report.
THE FUNDS' POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS
Under the current management agreements with Advisers, the
selection of brokers and dealers to execute transactions in each
Fund's portfolios is made by the Manager in accordance with
criteria set forth in the management agreements and any directions
which each Fund's Managing General Partners may give.
When placing a portfolio transaction, the Manager attempts to
obtain the best net price and execution of the transaction. On
portfolio transactions which are done on a securities exchange, the
amount of commission paid by a Fund is negotiated between the
Manager and the broker executing the transaction. The Manager seeks
to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions.
The determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio
transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review of
such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities
industry and information available to them concerning the level of
commissions being paid by other institutional investors of
comparable size. The Manager will ordinarily place orders for the
purchase and sale of over-the-counter securities on a principal
rather than agency basis with a principal market maker unless, in
the opinion of the Manager, a better price and execution can
otherwise be obtained. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include
a spread between the bid and ask price. The Funds will seek to
obtain prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be
considered in the selection of a broker to execute a trade. If it
is felt to be in a Fund's best interests, the Manager may place
portfolio transactions with brokers who provide the types of
services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were
given to the broker's furnishing of these services. This will be
done only if, in the opinion of the Manager, the amount of any
additional commission is reasonable in relation to the value of the
services. Higher commissions will be paid only when the brokerage
and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its
responsibilities to the Fund, or when it is otherwise in the best
interest of the Fund to do so, whether or not such data may also be
useful to the Manager in advising other clients.
When it is felt that several brokers are equally able to provide
the best net price and execution, the Manager may decide to execute
transactions through brokers who provide quotations and other
services to each Fund, specifically including the quotations
necessary to determine the value of each Fund's net assets, in such
amount of total brokerage as may reasonably be required in light of
such services, and through brokers who supply research, statistical
and other data to each Fund and Manager in such amount of total
brokerage as may reasonably be required.
It is not possible to place a dollar value on the special
executions or on the research services received by Advisers from
dealers effecting transactions in portfolio securities. The
allocation of transactions in order to obtain additional research
services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of
individuals and research staff of other securities firms. As long
as it is lawful and appropriate to do so, the Manager and its
affiliates may use this research and data in their investment
advisory capacities with other clients. Provided that each Fund's
officers are satisfied that the best execution is obtained, the
sale of Fund shares may also be considered as a factor in the
selection of broker dealers to execute a Fund's portfolio
transactions.
Because Distributors is a member of the National Association of
Securities Dealers, it is sometimes entitled to obtain certain fees
when the Funds tender portfolio securities pursuant to a tender-
offer solicitation. As a means of recapturing brokerage for the
benefit of the Funds, any portfolio securities tendered by a Fund
will be tendered through Distributors if it is legally permissible
to do so. In turn, the next management fee payable to Advisers
under the management agreements will be reduced by the amount of
any fees received by Distributors in cash, less any costs and
expenses incurred in connection therewith.
If purchases or sales of securities of each Fund and one or more
other investment companies or clients supervised by the Manager are
considered at or about the same time, transactions in such
securities will be allocated among the several investment companies
and clients in a manner deemed equitable to all by the Manager,
taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. It is recognized that
in some cases this procedure could possibly have a detrimental
effect on the price or volume of the security so far as each Fund
is concerned. In other instances it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Funds.
The High Yield Fund and the International Bond Fund anticipate that
brokerage transactions involving the securities of non-U.S. issuers
will be conducted primarily on the principal stock exchange of such
countries. Most foreign stock exchange transactions are executed at
fixed commission rates. Fixed commissions on foreign stock exchange
transactions are generally higher than negotiated commissions on
United States transactions, although the Funds will endeavor to
achieve the best net results in effecting their portfolio
transactions. There is generally less government supervision and
regulation of stock exchanges and brokers outside the United
States.
During the fiscal years ended December 31, 1993 and 1994, the Funds
paid no brokerage commissions. For fiscal year 1992, the High Yield
Fund paid $594 in brokerage commissions while the Government Fund
and the International Bond Fund paid none. As of December 31, 1994,
the Funds did not own securities of their regular broker-dealers.
ADDITIONAL INFORMATION
REGARDING FUND SHARES
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Fund must be denominated in
U.S. dollars. The Fund reserves the right, in its sole discretion,
to either (a) reject any order for the purchase or sale of shares
denominated in any other currency, or (b) to honor the transaction
or make adjustments to a shareholder's account for the transaction
as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see Prospectus "Exchange Privilege"),
it should be noted that since the proceeds from the sale of shares
of an investment company generally are not available until the
fifth business day following the redemption, the funds into which
Fund shareholders are seeking to exchange reserve the right to
delay issuing shares pursuant to an exchange until said fifth
business day. The redemption of shares of a Fund to complete an
exchange for shares of any of the investment companies will be
effected at the close of business on the day the request for
exchange is received in proper form at the net asset value then
effective.
Shares are eligible to receive distributions beginning on the first
business day following settlement of the purchase transaction,
through the date on which the Fund writes a check or sends a wire
on redemption transactions.
All shares will be redeemed in cash (paid by check in U.S.
dollars). The value of shares on redemption or repurchase may be
more or less than the investor's cost or capital contribution,
depending upon the market value of the respective Fund's portfolio
securities at the time of redemption or repurchase.
Distribution checks which are returned to a Fund marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the distribution option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
A Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund
shares, submits a check or a draft which is returned unpaid to such
Fund.
Each Fund may deduct from a shareholder's account the costs of its
efforts to locate the shareholder if the shareholder's mail is
returned as undeliverable or the Fund is otherwise unable to locate
the shareholder or verify the current mailing address. These costs
may include a percentage of the account when a search company
charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China,
the Funds' shares are available to such banks' discretionary trust
funds at net asset value. The banks may charge service fees to
their customers who participate in the discretionary trusts.
Pursuant to agreements, a portion of such service fees may be paid
to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including
expenses related to local literature fulfillment and communication
facilities.
Shares of the Funds may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan,
shares of each Fund will be offered with the following schedule of
sales charges:
SALES
SIZE OF PURCHASE IN CHARGE
U.S. DOLLARS
Up to $100,000 3%
$100,000 to $400,000 2%
Over $400,000 0%
PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS
Orders for the purchase of shares of a Fund received in proper form
prior to the close of the Exchange (generally 1:00 p.m. Pacific
time) any business day that the Exchange is open for trading and
promptly transmitted to the Fund will be based upon the public
offering price determined that day. Purchase orders received by
securities dealers or other financial institutions after the close
of the Exchange (generally 1:00 p.m. Pacific time) will be effected
at each Fund's public offering price on the day it is next
calculated. The use of the term "securities dealer" herein shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with the Fund. Such reference,
however, is for convenience only and does not indicate a legal
conclusion of capacity.
Orders for the redemption of shares are effected at net asset value
subject to the same conditions concerning time of receipt in proper
form. It is the securities dealer's responsibility to transmit the
order in a timely fashion and any loss to the customer resulting
from failure to do so must be settled between the customer and the
securities dealer.
SPECIAL NET ASSET VALUE PURCHASES
As discussed in the Prospectus under "How to Invest in a Fund" -
Description of Special Net Asset Value Purchases," certain
categories of investors may purchase shares of the Funds without a
front-end sales charge ("net asset value") or a contingent deferred
sales charge. Distributors or one of its affiliates may make
payments, out of its own resources, to securities dealers who
initiate and are responsible for such purchases, as indicated
below. Distributions may make these payments in the form of
contingent advance payments, which may be recovered from the
securities dealer, or set off against other payments due to the
securities dealer, in the event of investor redemptions made within
12 months of the calendar month following purchase. Other
conditions may apply. All terms and conditions may be imposed by
an agreement between Distributors, or its affiliates, and the
securities dealer.
The following amounts may be paid by Distributors or one of its
affiliates, out of its own resources, to securities dealers who
initiate and are responsible for (i) purchases of most equity and
taxable-income Franklin Templeton Funds made at net asset value by
certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25%
on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more; and (ii) purchases of most taxable
income Franklin Templeton Funds made at net asset value by non-
designated retirement plans: 0.75% on sales of $1 million but less
than $2 million, plus 0.60% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. These
payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net asset
value by certain trust companies and trust departments of banks and
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, Distributors, or one
of its affiliates, out of its own resources, may pay up to 1% of
the amount invested.
LETTER OF INTENT
An investor may qualify for a reduced sales charge on the purchase
of shares of the Fund, as described in the prospectus. At any time
within 90 days after the first investment which the investor wants
to qualify for the reduced sales charge, a signed Shareholder
Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each
additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter.
Sales charge reductions based upon purchases in more than one of
the Franklin Templeton Funds will be effective only after
notification to Distributors that the investment qualifies for a
discount. The shareholder's holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter of Intent is
filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions made by the shareholder, during
the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is
not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward
adjustment does not apply to designated benefit plans. An investor
who executes a Letter of Intent prior to a change in the sales
charge structure for the Fund will be entitled to complete the
Letter of Intent at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the time
the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of
the total intended purchase will be reserved in shares of the Fund
registered in the investor's name. If the total purchases, less
redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the
investor or delivered to the investor or the investor's order. If
the total purchases, less redemptions, exceed the amount specified
under the Letter of Intent and is an amount which would qualify for
a further quantity discount, a retroactive price adjustment will be
made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect
such further quantity discount) on purchases made within 90 days
before and on those made after filing the Letter. The resulting
difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single
purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified
under the Letter, the investor will remit to Distributors an amount
equal to the difference in the dollar amount of sales charge
actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases
had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an
account in the name of the investor or delivered to the investor or
to the investor's order. If within 20 days after written request
such difference in sales charge is not paid, the redemption of an
appropriate number of reserved shares to realize such difference
will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption,
and the balance will be forwarded to the investor.
REDEMPTIONS IN KIND
Each Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of such Fund's net assets at the beginning of
such period. Such commitment is irrevocable without the prior
approval of the Securities and Exchange Commission. In the case of
requests for redemption in excess of such amounts, the Managing
General Partners reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the
shareholder is redeeming, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the
existing shareholders of the Fund. In such circumstances, the
securities distributed would be valued at the price used to compute
the Fund's net assets. Should the Fund do so, a shareholder may
incur brokerage fees in converting the securities to cash. The
Funds do not intend to redeem illiquid securities in kind; however,
should it happen, shareholders may not be able to timely recover
their investment and may also incur brokerage costs in selling such
securities.
REDEMPTIONS BY THE FUNDS
Due to the relatively high cost of handling small investments, each
Fund reserves the right to redeem, involuntarily, at net asset
value the shares of any shareholder whose account has been in
existence for at least 12 months and (i) whose account contains
less than $2,000, or such lesser amount to be determined by the
Managing General Partners upon notice to all shareholders, and (ii)
who has not made an investment (other than the reinvestment of any
distributions) within the six months preceding notice of the Fund's
intention to take this action. In the event it is determined that
such a redemption should be made by a Fund, six months' notice of
the Fund's intention to redeem will be given, during which period
the shareholder can increase the value of the account to the
minimum amount, thereby avoiding redemption.
REPORTS TO SHAREHOLDERS
The Fund sends annual and semi-annual reports to its shareholders
regarding the Fund's performance and its portfolio holdings.
Shareholders who would like to receive an interim quarterly report
may phone Fund Information at 1-800 DIAL BEN.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectus, each Fund generally calculates net
asset value as of the scheduled closing time of the Exchange
(generally 1:00 p.m. Pacific time each day that the Exchange is
open for trading. As of the date of this SAI, the Funds are
informed that the Exchange observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in corporate bonds, U.S. government
securities and money market instruments is substantially completed
each day at various times prior to the close of the Exchange. The
value of such securities used in computing the net asset value of a
Fund's shares are determined as of such times. Occasionally, events
affecting the value of such securities may occur between the times
at which they are determined and the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) which will not be
reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
fair value as determined in good faith by the Managing General
Partners.
THE FUNDS' UNDERWRITER
Pursuant to underwriting agreements in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public
offering for shares of each Fund.
Distributors pays the expenses of distribution of each Fund's
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the public.
Each Fund pays the expenses of preparing and printing amendments to
its registration statements and prospectuses (other than those
necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The underwriting agreements will continue in effect for successive
annual periods provided that their continuance is specifically
approved at least annually by a vote of each Fund's Managing
General Partners, or by a vote of the holders of a majority of each
Fund's outstanding voting securities, and in either event by a
majority vote of Managing General Partners who are not parties to
the underwriting agreement or interested persons of any such party
(other than as Managing General Partners), cast in person at a
meeting called for that purpose. The underwriting agreements
terminate automatically in the event of their assignment and may be
terminated by either party on 90 days' written notice.
Until April 30, 1994, distributions were reinvested at the offering
price (which includes the sales charge) and Distributors allowed
50% of the entire commission to the securities dealer of record, if
any, on an account. Starting with any distributions paid after
April 30, 1994, such reinvestment will be at net asset value.
In connection with the offering of the High Yield Fund's shares,
aggregate underwriting commissions for the fiscal years ended 1992,
1993 and 1994 were $341,120, $691,683 and $400,528, respectively.
After allowances to dealers, Distributors retained $22,661, $32,168
and $24,102, during the respective periods. In connection with the
offering of the Government Fund's shares, aggregate underwriting
commissions for the fiscal years ended 1992, 1993 and 1994 were
$4,805,768, $6,282,489 and $2,067,833, respectively. After
allowances to dealers, Distributors retained $109,843, $190,128 and
$150,068, during the respective periods. For fiscal years ended
December 31, 1992, 1993 and 1994, underwriting commissions for the
International Bond Fund were $265,867, $303,473 and $219,143,
respectively, of which $9,039, $12,255 and $12,763 was retained by
Distributors for the respective periods. Distributors received no
other compensation from the Funds for acting as underwriter.
DISTRIBUTION PLANS
The Funds have approved Distribution Plans pursuant to Rule 12b-1
under the 1940 Act (the "Plans") whereby each Fund may pay up to a
maximum of 0.15% per annum of its average daily net assets for
expenses incurred in the promotion and distribution of its shares.
In implementing each Plan, the Managing General Partners have
determined that initially the annual fees payable thereunder will
be equal to the sum of: (i) the amount obtained by multiplying
0.15% by the average daily net assets represented by shares of a
Fund that were acquired by investors on or after the Effective Date
of each Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by
shares of each Fund that were acquired before the Effective Date of
each Plan ("Old Assets"). Such fees will be paid to the current
securities dealers of record on the shareholder's account. In
addition, until such time as the maximum payment of 0.15% is
reached on a yearly basis, up to an additional 0.02% will be paid
to Distributors under each Plan. The payments to be made to
Distributors will be used by Distributors to defray other marketing
expenses that have been incurred in accordance with each Plan, such
as advertising.
The fees are a Fund expense so that all shareholders regardless of
when they purchased their shares will bear expenses under the Plans
at the same rate. That rate initially will be at least 0.07% (0.05%
plus 0.02%) of average daily net assets and, as Fund shares are
sold on or after the Effective Date, will increase over time. Thus,
as the proportion of Fund shares purchased on or after the
Effective Date increases in relation to outstanding Fund shares,
the expenses attributable to payments under each Plan will also
increase (but will not exceed 0.15% of average daily net assets).
While this is the currently anticipated calculation for fees
payable under each Plan, the Plans permit each Fund's Managing
General Partners to allow the respective Fund to pay a full 0.15%
on all assets at any time. The approval of the Managing General
Partners would be required to change the calculating of the
payments to be made under each Plan.
Pursuant to the Plans, Distributors or others will be entitled to
be reimbursed each quarter (up to the maximum as stated above) for
actual expenses incurred in the distribution and promotion of each
Fund's shares, including, but not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including
a prorated portion of Distributors' overhead expenses attributable
to the distribution of Fund shares, as well as any distribution or
service fees paid to securities dealers or their firms or others
who have executed a servicing agreement with the Fund, Distributors
or its affiliates.
In addition to the payments to which Distributors or others are
entitled under the Plans, the Plans also provide that to the extent
each Fund, the Manager or Distributors or other parties on behalf
of the Fund, the Manager or Distributors, make payments that are
deemed to be payments for the financing of any activity primarily
intended to result in the sale of shares of the Fund within the
context of Rule 12b-1 under the 1940 Act, then such payments shall
be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which
include payments made under the Plans, plus any other payments
deemed to be made pursuant to the Plans, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plans relating to required reports,
term, and approval are consistent with Rule 12b-1. The Plans do not
permit unreimbursed expenses incurred in a particular year to be
carried over to or reimbursed in subsequent years.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions,
certain banks will not be entitled to participate in the Plans as a
result of applicable federal law prohibiting certain banks from
engaging in the distribution of mutual fund shares. Such banking
institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a
bank were prohibited from providing such services, its customers
who are shareholders would be permitted to remain shareholders of
the Fund, and alternate means for continuing the servicing of such
shareholders would be sought. In such an event, changes in the
services provided might occur and such shareholders might no longer
be able to avail themselves of any automatic investment or other
services then being provided by the bank. It is not expected that
shareholders would suffer any adverse financial consequences as a
result of any of these changes. Securities laws of states in which
the Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required
to register as dealers pursuant to state law.
The Plans have been approved by the Managing General Partners of
the Funds, including those Managing General Partners who are not
interested persons, as defined in the 1940 Act. The Plans are
effective through June 30, 1995 and renewable annually by a vote
of the Managing General Partners, including a majority vote of the
Managing General Partners who are non-interested persons of the
Funds and who have no direct or indirect financial interest in the
operation of the Plans, cast in person at a meeting called for that
purpose. It is also required that the selection and nomination of
such Managing General Partners be done by the non-interested
Managing General Partners. The Plans and any related agreement may
be terminated at any time, without any penalty, by vote of a
majority of the non- interested Managing General Partners on not
more than 60 days' written notice, by Distributors on not more than
60 days' written notice, by any act that constitutes an assignment
of the Management Agreement with the Manager, or by vote of a
majority of each Fund's outstanding shares. Distributors or any
dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The Plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without
approval by a majority of each Fund's outstanding shares, and all
material amendments to the Plans or any related agreements shall be
approved by a vote of the non-interested Managing General Partners,
cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Managing
General Partners at least quarterly on the amounts and purpose of
any payment made under the Plan and any related agreements, as well
as to furnish the Managing General Partners with such other
information as may reasonably be requested in order to enable the
Managing General Partners to make an informed determination of
whether the Plan should be continued.
For the fiscal year ended December 31, 1994, the total amount paid
by the Government Fund, High Yield Fund and the International Bond
Fund pursuant to the Plans were $174,620, $29,926, and $8,166,
which were used for the following purposes.
GOVERNMENT FUND
DOLLAR AMOUNT
Advertising $15,716
Printing and mailing of $12,223
prospectuses to other than
current shareholders.
Payments to underwriters $24,447
Payments to brokers or dealers $122,234
HIGH YIELD FUND
DOLLAR AMOUNT
Advertising $3,292
Printing and mailing of $2,693
prospectuses to other than
current shareholders.
Payments to underwriters $4,190
Payments to brokers or dealers $19,751
INTERNATIONAL BOND FUND
DOLLAR AMOUNT
Advertising $1,552
Printing and mailing of $1,143
prospectuses to other than
current shareholders.
Payments to underwriters $1,470
Payments to brokers or dealers $4,001
GENERAL INFORMATION
Each Fund is organized as a California limited partnership pursuant
to the California Revised Limited Partnership Act. The full text of
the Agreement of Limited Partnership of each Fund is set forth
herein as Appendix A (Government Fund), Appendix B (High Yield
Fund) and Appendix C (International Bond Fund). The California
Revised Limited Partnership Act does not specifically authorize the
exercise by limited partners of the voting rights required by the
1940 Act which are specified in each Partnership Agreement.
Although there are no authoritative judicial decisions on this
matter and no absolute assurances can be given on this point, it is
the opinion of counsel to each Fund that the existence or exercise
of these voting rights will not subject the limited partners of any
Fund to liability as general partners under California laws. There
is not, however, specific statutory or other authority for the
existence or exercise of some or all these voting rights in most
other jurisdictions. As a result, to the extent that a Fund is
subject to the jurisdiction of courts in these other jurisdictions,
it is possible that these courts may not apply California law, or,
if they apply California law, they may nevertheless interpret the
law to subject the Funds' limited partners to liability as general
partners.
Investors in each Fund will be informed of its progress through
periodic reports. Financial statements certified by independent
auditors will be submitted to shareholders at least annually.
PERFORMANCE
As noted in the Prospectus, each Fund may from time to time quote
various performance figures to illustrate the Fund's past
performance. It may occasionally cite statistics to reflect its
volatility or risk.
Performance quotations by investment companies are subject to rules
adopted by the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non- standardized performance quotation
furnished by each Fund be accompanied by certain standardized
performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used by
each Fund are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other
methods used by each Fund to compute or express performance
follows.
TOTAL RETURN
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five- and ten-
year periods, or fractional portion thereof, that would equate an
initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase order and all income
distributions are reinvested at net asset value. The quotation
assumes the account was completely redeemed at the end of each one-
, five- and ten-year period, or fractional portion thereof, and the
deduction of all applicable charges and fees. If a change is made
on the sales charge structure, historical performance information
will be restated to reflect the maximum front-end sales charge in
effect currently.
In considering the quotations of total return by the Funds,
investors should remember that the maximum front-end sales charge
reflected in each quotation is a one-time fee (charged on all
direct purchases) which will have its greatest impact during the
early stages of an investor's investment in a Fund. The actual
performance of an investment will be affected less by this charge
the longer an investor retains the investment in a Fund. The
average annual compounded rates of return for each Fund for the
indicated periods ended on the date of the financial statements
incorporated herein by reference were as follows:
ONE-YEAR FIVE-YEAR FROM
PERIOD PERIOD INCEPTION
Government Fund -8.17% 6.16% 7.70%*
High Yield Fund -6.58% 10.03% 8.36%*
International
Bond Fund -2.12% n/a 7.47%**
*Inception May 4, 1987
**From change of investment manager on June 9, 1990
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the one-, five- or ten-year periods at
the end of the one-, five-, or ten-year periods (or
fractional portion thereof)
As discussed in the Prospectus, each Fund may quote total rates of
return in addition to its average annual total return. Such
quotations are computed in the same manner as each Fund's average
annual compounded rate, except that such quotations will be based
on each Fund's actual return for a specified period rather than to
its average return over one-, five-, and ten-year periods, or
fractional portion thereof. The total rates of return for each Fund
for the indicated periods ended on the date of the financial
statements incorporated herein by reference were follows:
ONE-YEAR FIVE-YEAR FROM
PERIOD PERIOD INCEPTION
Government Fund -8.17% 34.86% 76.60%*
High Yield Fund -6.58% 61.27% 85.09%*
International
Bond Fund -2.12% n/a 38.98%**
*Inception May 4, 1987
**From change of investment manager on June 9, 1990
YIELD
Current yield reflects the income per share earned by each Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders during the base period. The yield
for each Fund for the 30-day period ended on the date of the
financial statements incorporated herein by reference were as
follows:
Government Fund 7.05%
High Yield Fund 10.15%
International Bond Fund 8.54%
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a =dividends earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period
CURRENT DISTRIBUTION RATE
Yield which is calculated according to a formula prescribed by the
SEC is not indicative of the amounts which were or will be paid to
a Fund's shareholders. Amounts paid to shareholders are reflected
in the quoted "current distribution rate." The current distribution
rate is computed by dividing the total amount of distributions per
share paid by a Fund during the past 12 months by a current maximum
offering price. Under certain circumstances, such as when there has
been a change in the amount of income distribution payout, or a
fundamental change in investment policies, it might be appropriate
to annualize the distributions paid over the period such policies
were in effect, rather than using the distributions during the past
12 months. The current distribution rate differs from the current
yield computation because it may include distributions to
shareholders from sources other than interest, such as short-term
capital gain, and is calculated over a different period of time.
The current distribution rate for the funds for the fiscal year
ended December 31, 1994, was as follows:
Government Fund 6.83%
High Yield Fund 9.52%
International Bond Fund 7.89%
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to compare
fund net asset value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility of a fund
relative to the total market as represented by the Standard &
Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is
used to measure variability of net asset value or total return
around an average, over a specified period of time. The premise is
that greater volatility connotes greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to
purchase shares of each Fund at net asset value, sales literature
pertaining to the Funds may quote a "Current Distribution for Net
Asset Value Investments." This rate is computed by adding the
income distributions paid by each Fund during the last 12 months
and dividing that sum by the Fund's current net asset value.
Figures for yield, total return, and other measures of performance
for Net Asset Value Investments may also be quoted. These will be
derived as described elsewhere in this Statement of Additional
Information with the substitution of net asset value for the public
offering price.
Regardless of the method used, past performance is not necessarily
indicative of future results, but is an indication of the return to
shareholders only for the limited historical period used.
The Funds may include in their advertising or sales material
information relating to investment objectives and performance
results of funds belonging to the Templeton Group of Funds.
Resources is the parent company of the advisers and underwriter of
both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in a Fund may
satisfy their investment objective, advertisements and other
materials regarding the Funds may discuss various measures of a
Fund's performance as reported by various financial publications.
Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and
averages. Such comparisons may include, but are not limited to, the
following examples:
a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company stocks
(Dow Jones Utilities Average), and 20 transportation company
stocks. Comparisons of performance assume reinvestment of
distributions.
b) Standard & Poor's 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of distributions.
c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed
Income Fund Performance Analysis - measure total return and average
current yield for the mutual fund industry. Rank individual mutual
fund performance over specified time periods, assuming reinvestment
of all distributions, exclusive of any applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
e) Financial publications: The Wall Street Journal and Business
Week, Changing Times, Financial World, Forbes, Fortune, and Money
magazines - provide performance statistics over specified time
periods.
f) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics - a statistical measure of change,
over time, in the price of goods and services in major expenditure
groups.
g) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates - historical measure of yield, price, and total return
for common and small company stock, long-term government bonds,
Treasury bills, and inflation.
h) Savings and Loan Historical Interest Rates - as published in the
U.S. Savings & Loan League Fact Book.
i) Salomon Brothers Broad Bond Index or its component indices - The
Broad Index measures yield, price, and total return for Treasury,
Agency, Corporate, and Mortgage bonds.
j) Lehman Brothers Aggregate Bond Index or its component indices -
The Aggregate Bond Index measures yield, price and total return for
Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
k) International Business Communications Money Fund
Report(Registered Trademark) - Industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and
government money funds.
l) Bond Buyers 20-Bond Index - an index of municipal bond yields
based upon yields of 20 general obligation bonds maturing in 20
years.
m) Bond Buyers 30-Bond Index - an index of municipal bond yields
based upon yields of 20 revenue bonds maturing in 30 years.
n) Historical data supplied by the research departments of First
Boston Corporation, the J.P. Morgan companies, Salomon Brothers,
Merrill Lynch, Pierce Fenner & Smith, Lehman Brothers and Bloomberg
L.P.
From time to time, advertisements or information for each Fund may
include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines, or other material which
highlight or summarize the information discussed in more detail in
the communication.
Advertisements or information may also compare a Fund's performance
to the return on certificates of deposit or other investments.
Investors should be aware, however, that an investment in a Fund
involves the risk of fluctuation of principal value, a risk
generally not present in an investment in a certificate of deposit
issued by a bank. For example, as the general level of interest
rates rise, the value of the Fund's fixed-income investments, as
well as the value of its shares which are based upon the value of
such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's
shares can be expected to increase. Certificates of deposit are
frequently insured by an agency of the U.S. government. An
investment in any of the Funds is not insured by any federal, state
or private entity. In assessing such comparisons of performance, an
investor should keep in mind that the composition of the
investments in the reported indices and averages is not identical
to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula
used by the Fund to calculate its figures. In addition there can be
no assurance that the Funds will continue this performance as
compared to such other averages.
OTHER FEATURES AND BENEFITS
Each Fund may help investors achieve various investment goals such
as accumulating money for retirement, saving for a down payment on
a home, college cost and/or other long-term goals. The Franklin
College Costs Planner may assist an investor in determining how
much money must be invested on a monthly basis in order to have a
projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current
costs published by the College Board.) The Franklin Retirement
Planning Guide leads an investor through the steps to start a
retirement savings program. Of course, an investment in a Fund
cannot guarantee that such goals will be met.
MISCELLANEOUS INFORMATION
The Funds are members of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be
considered in a program for diversification of assets. Founded in
1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 47 years and now services more than
2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide,
Inc., a pioneer in international investing. Together, the Franklin
Templeton Group has over $118 billion in assets under management
for more than 3.8 million shareholder accounts and offers 111 U.S.-
based mutual funds. Each Fund may identify itself by its NASDAQ or
CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality for five of the past seven years.
As of February 10, 1995, the persons known to the Funds to own
beneficially or of record more than 5% of the Funds' outstanding
shares were as follows:
NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES OWNED SHARES
HIGH YIELD FUND
Paul W. C. Watt 575,542.59 5.6%
3385 Stagecoach Drive
Lafayette CA 94549-1824
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this
clearance; (2) Copies of all brokerage confirmations must be sent
to the Compliance Officer and within 10 days after the end of each
calendar quarter, a report of all securities transactions must be
provided to the Compliance Officer; (3) In addition to items (1)
and (2), access persons involved in preparing and making investment
decisions must file annual reports of their securities holdings
each January and also inform the Compliance Officer (or other
designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of ownership or
authority to control a shareholder's account, each Fund has the
right (but has no obligation) to: (a) freeze the account and
require the written agreement of all persons deemed by the Fund to
have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead
disputed funds or accounts with a court of competent jurisdiction;
or (c) surrender ownership of all or a portion of the account to
the Internal Revenue Service in response to a Notice of Levy.
FINANCIAL STATEMENTS
The financial statements contained in the Annual Report to
Shareholders of Franklin Partners Funds dated December 31, 1994 are
incorporated herein by reference.
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