Franklin Government
Securities Trust
777 Mariners Island Boulevard
P.O. Box 7777
San Mateo, California 94403-7777
1-800/DIAL BEN
Franklin Government Securities Trust ("Trust" or "Fund") is a diversified,
open-end management investment company. Its primary investment objective is to
earn income through investments in obligations of the U.S. government or its
agencies or instrumentalities. Other than investments in short-term U.S.
Treasury securities, the Fund currently intends to invest solely in obligations
of the Government National Mortgage Association.
Shares of the Fund are being offered only to Aetna Life Insurance and Annuity
Company ("Aetna") for allocation to certain of its separate accounts established
for the purpose of funding variable annuity contracts issued by Aetna. The Fund
may not be available in connection with a particular policy or contract or in a
particular state. Investors should read the appropriate Aetna separate account
prospectus that accompanies this trust prospectus for important information
about the Aetna variable annuity contract, including fees, expenses and any
restrictions on purchases.
This Prospectus briefly describes the information that investors should know
before investing in the Fund, including the risks and expenses of the Fund.
After reading the Prospectus, you should retain it for future reference.
A Statement of Additional Information ("SAI") concerning the Fund, dated May 1,
1996, as may be amended from time to time, provides additional and more detailed
information about the activities and operations of the Fund. 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 Fund at the address or
telephone number shown above.
SHARES OF THE FUND 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 FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES, OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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.
Prospectus
May 1, 1996
CONTENTS Page
Financial Highlights 3
About the Fund 4
Investment Objectives And Policies of the Fund 4
Management of the Fund 5
Distributions 6
Tax Considerations 6
How to Buy Shares of the Fund 7
How to Sell Shares of the Fund 7
Valuation of Fund Shares 7
General Information 7
Useful Terms and Definitions 8
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund from February 15, 1989 (the effective date of the registration
statement for the Fund) to December 31, 1995. The information for each of the
last five fiscal years ended December 31, 1995 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Fund's SAI. The remaining figures, which are also
audited, are not covered by the auditors' current report.
<TABLE>
<CAPTION>
Year Ended
<C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989*
________ ________ ________ ________ ________ ________ ________
Per Share Operating
Performance**
Net asset value at
beginning of year $12.05 $13.30 $13.26 $13.01 $11.72 $10.89 $10.00
________ ________ ________ ________ ________ ________ ________
Net investment income 0.67 .8500 .6500 .8000 .6100 .5800 .3600
Net realized and unrealized
gain (loss) 1.4216 (1.3463) .3385 .1602 1.1939 .5068 .5300
________ ________ ________ ________ ________ ________ ________
Total from investment
operations 2.0916 (.4963) .9885 .9602 1.8039 1.0868 .8900
________ ________ ________ ________ ________ ________ ________
Less distributions:
Dividends from undistributed
net investment income (0.7916) (.7537) (.7459) (.7102) (.5139) (.2560) -
Distributions from net
capital gains - - (.2026) - - (.0008) -
Total distributions (0.7916) (.7537) (.9485) (.7102) (.5139) (.2568) -
Net asset value at
end of year $13.35 $12.05 $13.30 $13.26 $13.01 $11.72 $10.89
________ ________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________ ________
Total return*** 17.70% (-3.75%) 7.59% 7.66% 15.87% 10.23% 8.90%
Ratios/Supplemental Data
Net assets at end of year
(in 000's) $22,491 $15,242 $16,568 $11,815 $8,641 $3,922 $1,294
Ratio of expenses to
average net assets+ .62% .63% .62% .29% 0% 0% 0%
Ratio of net income to average
net assets 6.78% 6.85% 6.68% 7.75% 8.74% 9.17% 8.63%++
Portfolio turnover rate 7.50% 13.97% 39.02% 49.71% 7.00% 6.56% .87%
</TABLE>
*For the period February 15, 1989 (effective date) to December 31, 1989.
**Selected data for a share of beneficial interest outstanding throughout the
year.
***Total Return measures the change in value of an investment over the periods
indicated. It is not annualized. It assumes reinvestment of dividends and
capital gains, if any, at net asset value.
+During the years indicated below, Franklin Advisers, Inc., ("Advisers") the
investment manager agreed in advance to reduce its management fees and
reimbursed other expenses incurred by the Fund. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
Ratio of expenses
to average net assets
1989*........... 2.36%++
1990 ........... .95
1991 ........... 1.22
1992 ........... .92
1993 ........... .83
1994 ........... .78
1995 ........... .76
++Annualized
Further information about the performance of the Fund is contained in the Annual
Report to Shareholders, which may be obtained from the Fund without charge.
ABOUT THE FUND
The Fund is a diversified, open-end management investment company. The Fund was
organized as a Massachusetts business trust on October 21, 1988, and registered
with the SEC under the 1940 Act.
Shares of the Fund are sold only to a separate account ("Separate Account") of
Aetna Life Insurance and Annuity Company ("Aetna") to fund the benefits under
variable annuity contracts ("Contracts") issued by Aetna which qualify as
"pension plan contracts" under Section 818(a) of the Code. The Separate Account
will invest in the Fund as directed by Contract Holders or Participants, as
appropriate. (See "How to Buy Shares of the Fund")
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The investment objective of the Fund is to earn income through investments in a
portfolio limited to securities which are obligations of the U.S. government or
its agencies or instrumentalities. The investment objective is a fundamental
policy of the Fund and may not be changed without Contract Holder approval. Of
course, there is no assurance that the Fund's objective will be achieved. U.S.
government securities include, but are not limited to, U.S. Treasury Bonds,
Notes and Bills, Treasury Certificates of Indebtedness and securities issued by
agencies or instrumentalities of the U.S. government. Other than investments in
short-term U.S. Treasury securities, the assets of the Fund are currently
intended to be invested solely in obligations ("GNMA", or "Ginnie Maes") of the
Government National Mortgage Association (the "Association").
Information about GNMAs
GNMAs are mortgage-backed securities representing part ownership of a pool of
mortgage loans. GNMAs differ from other bonds in that principal may be paid back
on an unscheduled basis rather than returned in a lump sum at maturity. The Fund
will purchase GNMAs for which principal and interest are guaranteed. The Fund
also purchases "adjustable rate" GNMAs and may also purchase other types of
securities which may be issued with the Association's guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States Government. The
Association may borrow U.S. Treasury funds to the extent needed to make payments
under its guarantee. Of course, this guarantee does not extend to the market
value or yield of the GNMAs or the net asset value or performance of the Fund,
which will fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by the
Fund in securities which may bear interest at a rate higher or lower than the
obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life 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.
GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
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 increases of GNMAs
as compared to the increases experienced by noncallable debt securities over the
same periods. Moreover, any premium paid on the purchase of a GNMA will be lost
if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the Fund will have a direct impact on the net asset value per
share of the Fund.
The Fund's investments are continually monitored and changes are made as market
conditions warrant. However, the Fund does not engage in the trading of
securities for the purpose of realizing short-term profits.
Other Policies of the Fund
To-Be-Announced and Delayed Delivery Transactions. The Fund may purchase and
sell GNMA Certificates on a "To-Be-Announced" ("TBA") and "delayed delivery"
basis. These transactions are arrangements under which the Fund may purchase
securities with payment and delivery scheduled for a future time up to 60 days
after purchase. The transactions are subject to market fluctuation and the risk
that the value or yields at delivery may be more or less than the purchase price
or the yields available when the transaction was entered into. Although the Fund
will generally purchase GNMA Certificates on a TBA basis with the intention of
acquiring such securities, it may sell such securities before the settlement
date if it is deemed advisable. When the Fund is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian, cash
or high-grade marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Fund engages in TBA and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage. Securities purchased on a TBA or "delayed delivery" basis do not
generally earn interest until their scheduled delivery date.
Repurchase Agreements. The 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 the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The 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
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Board and will be held pursuant to a written agreement.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders which limit its
activities to some extent. For a list of these restrictions and more information
about the policies discussed herein, please see "Investment Objectives and
Policies of the Fund" and "Investment Restrictions" in the SAI.
MANAGEMENT OF THE FUND
The Board of Trustees ("Board") has the primary responsibility for the overall
management of the Trust and for electing the officers of the Trust who are
responsible for administering its day-to-day operations.
Franklin Advisers, Inc., ("Advisers") serves as the Fund's investment manager.
Advisers is a wholly-owned subsidiary of 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. Resources is engaged in
various aspects of the financial services industry through its subsidiaries.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies (119 separate series) with aggregate assets of over $81
billion.
The team responsible for the day-to-day management of the Fund's portfolio is
Jack Lemein, Roger Bayston and Anthony Coffey, all of whom have managed the Fund
since inception.
Jack Lemein
Senior Vice President and Portfolio Manager of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Roger Bayston
Portfolio Manager of Advisers
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. He has
been with Advisers or an affiliate since earning his MBA degree in 1991.
Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in applied mathematics and economics from
Harvard University. Mr. Coffey has been with Advisers or an affiliate since
1989. He is a member of several securities industry-related associations.
Pursuant to a management agreement, Advisers supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. Advisers performs
similar services for other funds and there may be times when the actions taken
with respect to the Fund's portfolio will differ from those taken by the Manager
on behalf of other funds. Neither the Manager (including its affiliates) nor its
officers, directors or employees nor the officers and trustees of the Fund are
prohibited from investing in securities held by the Fund or other funds which
are managed or administered by the Manager to the extent such transactions
comply with the Fund's Code of Ethics. Please see "Investment Advisory and Other
Services" and "General Information" in the SAI for further information on
securities transactions and a summary of the Fund's Code of Ethics.
During the fiscal year ended December 31, 1995, management fees, before any
advance waiver, totaled .62% of the average daily net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
.76% of the average daily net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the Fund paid management fees totaling .49% of the
average daily net assets of the Fund and operating expenses totaling .62%. This
arrangement may be terminated at any time upon notice to the Board.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because GNMA securities are generally traded in principal transactions
that involve the receipt by the broker of a spread between the bid and ask
prices for the securities and not the receipt of commissions. In the event that
the Fund does participate in transactions involving brokerage commissions, it is
the Manager's responsibility to select brokers through whom such transactions
will be effected. Advisers would try to obtain the best execution on all such
transactions. If it is felt that more than one broker would be able to provide
the best execution, Advisers will consider the furnishing of quotations and of
other market services, research, statistical and other data for Advisers and its
affiliates, as well as the sale of shares of the Fund, as factors in selecting a
broker. Further information is included under "How Does the Fund Purchase
Securities For Its Portfolio?" in the SAI.
Advisers, out of its own resources and not as a separate expense of the Fund,
may pay Aetna a fee equal to 0.15% per annum of the average daily net assets of
the Fund, for performing certain administrative services in connection with the
operation of the Fund.
Franklin/Templeton Investor Services, Inc. ("Investor Services") a wholly owned
subsidiary of Resources, maintains the records of the Aetna separate account
shareholder account, processes purchases and redemptions of the Fund's shares,
and serves as the Fund's dividend-paying agent.
DISTRIBUTIONS
The Fund will declare and pay to the Aetna separate account (the "separate
account") shareholder once each year following the close of the calendar year
(i) all of its net investment income (which includes interest received on the
Fund's Investments less expenses incurred in the Fund's operations) and (ii) all
net realized short-term and long-term capital gains, if any, of the Fund during
the preceding calendar year.
All distributions, whether from net capital gains or net investment income, will
be paid in the form of additional shares of the Fund at net asset value. Because
the value of the Fund's shares is based directly on the amount of its net
assets, including any undistributed net income, any distribution of income or
capital gains will result in a decrease in the value of the Fund's shares equal
to the amount of the distribution. The price of the Fund's shares is quoted
ex-dividend on the record date.
TAX CONSIDERATIONS
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes. The Fund is exempt from and does not intend to satisfy the
additional diversification requirements of Section 817(h) of the Code because
all of its shares will be held under variable annuity contracts that qualify as
"pension plan contracts" in connection with Section 818(a) of the Code.
The Fund is not subject to any federal excise tax on undistributed income
because its shares are held exclusively by a segregated asset account of an
insurance company in connection with variable contracts.
Dividends and distributions made by the Fund to Aetna are taxable, if at all, to
Aetna; they are not taxable to variable annuity contract holders or
participants. Information on the tax aspects of variable annuity Contracts is
found in the Aetna Separate Account Prospectus.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are sold only to a Separate Account of Aetna Life Insurance
and Annuity Company to fund the benefits under variable annuity contracts issued
by Aetna which qualify as "pension plan contracts" under the Code.
Aetna purchases shares of the Fund for the Separate Account using premiums
allocated thereto by the Contract Holders or Participants. All shares are sold
by the Fund to the Separate Account at net asset value without a sales charge.
Shares are purchased by the Separate Account at the net asset value of the Fund
next determined after Aetna receives the premium payment.
All investments in the Fund are credited to the Separate Account in the form of
full and fractional shares of the Fund (rounded to the nearest 1/1000 of a
share). The Fund does not issue share certificates. Initial and subsequent
payments allocated to the Fund are subject to the limits applicable in the
Contracts issued by Aetna.
HOW TO SELL SHARES OF THE FUND
Aetna redeems shares of the Fund to make benefit or surrender payments under the
terms of its variable annuity Contracts. Redemptions are processed on any day on
which the Fund is open for business (each day the New York Stock Exchange (the
"Exchange") is open) and are effected at the Fund's net asset value next
determined after Aetna receives a surrender request in acceptable form.
Payment for redeemed shares will be made promptly, but in no event later than
seven days. However, the right of redemption may be suspended or the date of
payment postponed in accordance with the Rules under the 1940 Act. Redemptions
are taxable events and the amount received upon redemption of the shares of the
Fund may be more or less than the amount paid for the shares depending upon the
fluctuations in the market value of the assets owned by the Fund.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading.
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
GENERAL INFORMATION
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest, $.01 par
value, which may be issued in any number of series and classes. As of the date
of this Prospectus, only one series of the Trust had been created with only one
class of shares. Shares issued will be fully paid and non-assessable and will
have no preemptive, conversion, or sinking rights. Shares of the Trust have
equal and exclusive rights as to dividends and distributions declared by the
Trust and the net assets of the Trust upon liquidation or dissolution.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or any
other matters which are required to be acted on by shareholders under the 1940
Act. A meeting may also be called by the trustees in their discretion or by
shareholders holding at least ten percent of the outstanding shares of the
Trust. The Separate Account, as the Fund's sole shareholder, has the right to
vote Fund shares at any meeting of shareholders; however, the Separate Account
will vote Fund shares in accordance with instructions received from Contract
Holders. See, "Voting Rights" in the Separate Account Prospectus.
The management agreement between the Trust and Advisers includes a distribution
plan pursuant to Rule 12b-1 under the 1940 Act ("Plan"). However, no additional
payments are to be made by the Fund as a result of the Plan other than payments
which the Fund is otherwise obligated to make pursuant to the then effective
management agreement or as incurred in the ordinary course of its business,
which are deemed indirectly to be payments 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. In connection with their approval of the management
agreement, the Board, including a majority of the non-interested Trustees,
determined that in the exercise of their reasonable business judgment, and in
light of their fiduciary duties, there is a reasonable likelihood that the
implementation of the Plan will benefit the Fund and the Contract Holders and
Participants whose payments have indirectly been invested in the Fund.
No payments have been made pursuant to the Plan from its adoption through the
fiscal year ended December 31, 1995. (For further details of this Plan, see the
SAI.)
Any questions or communications regarding a Contract Holder's or a Participant's
account should be directed to Aetna Life Insurance and Annuity Company at the
address shown on the cover of the product prospectus.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Code - Internal Revenue Code of 1986, as amended.
Exchange - New York Stock Exchange.
Investor Services - Franklin/Templeton Investor Services, Inc.
Net asset value (NAV) - the value of the Fund is determined by deducting the
fund's liabilities from the total assets of the portfolio. The net asset value
per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
U.S. - United States.
FRANKLIN GOVERNMENT SECURITIES TRUST
777 Mariners Island Blvd.,
P. O. Box 7777
San Mateo, California 94403-7777
800/DIAL BEN
Statement of Additional Information
May 1, 1996
Contents Page
How Does the Fund Invest Its Assets? B-2
Investment Restrictions B-2
Officers and Trustees B-3
Investment Advisory and Other Services B-5
How Does the Fund Purchase Securities For Its Portfolio? B-6
How Are Fund Shares Valued? B-6
Redemption of Fund Shares B-7
General B-7
Financial Statements B-8
A Prospectus for the Franklin Government Securities Trust ("Trust" or "Fund")
dated May 1, 1996, as may be amended from time to time, provides the basic
information an investor should know before investing in the Fund and may be
obtained without charge from the Fund at the address listed 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 YOU WITH ADDITIONAL INFORMATION
REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE READ, IN
CONJUNCTION WITH THE FUND'S PROSPECTUS.
Shares of the Fund are offered only to Aetna Life Insurance and Annuity Company
("Aetna") for allocation to a separate account ("Separate Account") established
for the purpose of funding variable annuity contracts ("Contracts") issued by
Aetna which qualify as "pension plan contracts" under the Internal Revenue Code
of 1986, as amended (the "Code").
How Does the Fund Invest Its Assets?
As discussed in the Prospectus, the Fund's investment objective is to earn
income through investments in securities which are obligations of the U.S.
government or its agencies or instrumentalities.
Illiquid Investments. It is the policy of the 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 the 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.
Securities Lending. The Fund does not loan its securities.
Foreign Securities. The Fund does not acquire securities of foreign issuers.
Portfolio Turnover
In the fiscal years ended December 31, 1994 and December 31, 1995, the Fund's
portfolio turnover rates were 13.97% and 7.50%, respectively.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the Investment Company Act of
1940, as amended (the "1940 Act"), a "vote of a majority of the outstanding
voting securities" of the Fund means the affirmative vote of the lesser of (i)
more than 50% of the outstanding shares of the Fund or (ii) 67% or more of the
shares of the Fund present at a shareholder meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in person or by
proxy. The Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that borrowings for temporary or emergency purposes, and a pledge of assets
therefor, may be made from banks 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 bonds,
debentures, notes, to-be-announced securities or other debt securities
authorized by its investment policies.
4. Act as underwriter of securities issued by other persons except insofar as
the 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 the total assets of the Fund in the
securities of any one issuer, but 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 (other than U.S. government
securities) which would result in the Fund owning more than 10% of any
class of the outstanding voting securities of such issuer.
7. Purchase from or sell to its officers or trustees, or any firm of which an
officer or trustee is a member, as principal, any securities, but 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 the
Fund, one or more of its officers, trustees or investment adviser, own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of
such securities.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other
mineral exploration or development programs.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies.
11. Invest its assets in a manner which does not comply with the income source
and investment diversification requirements of the Code in order to qualify
as a regulated investment company thereunder.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of a majority of its outstanding
shares) not to engage in joint or joint and several trading accounts in
securities, except that the Fund may participate with other investment companies
in the Franklin Templeton Funds in a joint account to engage in repurchase
transactions, and may combine orders to purchase or sell securities with orders
from other persons to obtain lower brokerage commissions.
Officers and Trustees
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The trustees, in turn, elect the officers of the Fund who
are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and trustees and their principal occupations for
the past five years are listed below. Trustees who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk
(*).
Positions and Principal Occupations
Name, Age and Address Offices with the Trust During Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
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 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (51) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
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 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
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 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin 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 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President, General Counsel, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 37 of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
The preceding table also indicates those officers and trustees who are
"affiliated persons" of Distributors and the investment manager, as defined in
the 1940 Act. Trustees not affiliated with the investment manager
("nonaffiliated trustees") may be but are not currently, paid fees or expenses
incurred in connection with attending meetings. As indicated above, certain of
the Trust's nonaffiliated trustees also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Group of Funds
and the Templeton Group of Funds (the "Franklin Templeton Group of Funds") from
which they may receive fees for their services. The following table indicates
the total fees paid to nonaffiliated trustees by other funds in the Franklin
Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Received from the Templeton Group
Franklin Templeton of Funds on Which
Name Group of Funds* Each Serves**
Frank Abbott $162,420 31
Harris Ashton $327,925 56
Joseph S. Fortunato $344,745 58
David Garbellano $146,100 30
Frank LaHaye $143,200 26
Gordon Macklin $321,525 53
*For the calendar year ended December 31, 1995.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of approximately 162 U.S. based
funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Fund. Certain officers or trustees who are shareholders of Franklin Resources,
Inc. ("Resources") may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers").
Advisers is a wholly-owned subsidiary of Resources, a publicly owned holding
company whose shares are listed on the New York Stock Exchange (the "Exchange").
Resources owns several other subsidiaries that are involved in investment
management and shareholder services.
Pursuant to the management agreement, Advisers provides investment research and
portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. Advisers' activities are subject to
the review and supervision of the Board to whom Advisers renders periodic
reports of the Fund's investment activities. Under the terms of the management
agreement, Advisers provides office space and office furnishings, facilities and
equipment required for managing the business affairs of the Fund; maintains all
internal bookkeeping, clerical, secretarial and administrative personnel and
services; and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers also provides management services to numerous other investment
companies or funds or other clients pursuant to management agreements with each
fund. Advisers may give advice and take action with respect to any of the other
funds it manages, or for its own account, which may differ from action taken by
Advisers on behalf of the Fund. Similarly, with respect to the Fund, Advisers is
not obligated to recommend, purchase or sell, or to refrain from recommending,
purchasing or selling any security that Advisers and access persons, as defined
by the 1940 Act, may purchase or sell for its or their own account or for the
accounts of any other fund. Furthermore, Advisers is not obligated to refrain
from investing in securities held by the Fund or other funds which it manages or
administers. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics.
The Fund is obligated to pay Advisers a monthly fee for its services based upon
the Fund's average net assets. The fee for the Fund is to be computed and
accrued daily and paid monthly at the annual rate of:
.625 of 1% of the value of average daily net assets up to and including
$100,000,000;
.50 of 1% of the value of average daily net assets over $100,000,000 up to and
including $250,000,000;
.45 of 1% of the value of average daily net assets over $250,000,000 up to and
including $10,000,000,000;
.44 of 1% of the value of average daily net assets over $10,000,000,000 up to
and including $12,500,000,000;
.42 of 1% of the value of average daily net assets over $12,500,000,000 up to
and including $15,000,000,000; and
.40 of 1% of the value of average daily net assets over $15,000,000,000.
Advisers agreed in advance to waive a portion of its management fees. For the
fiscal years ended December 31, 1993, 1994 and 1995, management fees, before any
advance waiver, were $89,237, $99,092 and $114,871, respectively. Management
fees paid by the Fund for the same periods were $59,638, $74,896 and $90,126
respectively. Total operating expenses, including management fees, would have
been $118,170, $123,335, and $139,365 for 1993, 1994, and 1995, respectively.
For the fiscal years ended December 31, 1993, 1994, and 1995 the Fund paid total
operating expenses, including management fees, equal to .62%, .63%, and .62%
respectively, of the Fund's average daily net assets.
The management agreement is in effect until February 29, 1997. Thereafter, it
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Board or the vote of
the holders of a majority of the outstanding voting securities, and in either
event by a majority of the Trustees who are not parties to the management
agreement or interested persons of any such party (other than as Trustees of the
Trust), cast in person at a meeting called for that purpose. The management
agreement may be terminated without penalty at any time by the Board or by a
vote of the holders of a majority of the Fund's outstanding voting securities,
or by Advisers on 60 days' written notice and will automatically terminate in
the event of its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"), a wholly owned
subsidiary of Resources, is the shareholder servicing agent for the Fund and
acts as the Fund's transfer agent and dividend-paying agent. Investor Services
is compensated on the basis of a fixed fee per account.
Bank of New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286 acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104 acts as custodian for cash received in connection with the
purchase of Fund shares. 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 Fund's independent auditors. During the fiscal year ended December 31,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report and this SAI.
How Does the Fund Purchase Securities For Its Portfolio?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or purchasing principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by utilizing the services of a broker.
Purchases of portfolio securities from underwriters, however, 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 prices. The Fund
seeks to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services rendered by such dealers in the
execution of orders.
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, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. Provided that the
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 the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers 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
Advisers, 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 the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended December 31, the Fund paid no brokerage
commissions.
How Are Fund Shares Valued?
As noted in the Prospectus, the Fund calculates net asset value as of the
scheduled close 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 Fund is
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.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. 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 Advisers.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the values of these securities occur
during such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
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. With the approval of Board, the Fund
may utilize a pricing service, bank or securities dealer to perform any of the
above described functions.
Redemption of Fund Shares
Payments to the Aetna Separate Account, to which all shares of the Fund are
currently sold, as explained in the Prospectus, for shares of the Fund redeemed
or repurchased will be made within seven days after receipt by the Fund of a
written request in proper form, except that the Fund may suspend the right of
redemption or postpone the date of payment for the Fund during any period when
(a) trading on the Exchange is restricted as determined by the Securities and
Exchange Commission ("SEC") or such Exchange is closed for other than weekends
and holidays; (b) an emergency exists as determined by the SEC making disposal
of portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders.
All shares will be redeemed in cash. The value of shares on redemption or
repurchase may be more or less than the shareholder's cost, depending upon the
market value of the Fund's securities at the time of redemption or repurchase.
General
Advisers also provides management services to numerous other investment
companies or funds or other clients pursuant to management agreements with each
fund. Advisers may give advice and take action with respect to any of the other
funds it manages, or for its own account, which may differ from action taken by
Advisers on behalf of the Fund. Similarly, with respect to the Fund, Advisers is
not obligated to recommend, purchase or sell, or to refrain from recommending,
purchasing or selling any security that Advisers and access persons, as defined
by the 1940 Act, may purchase or sell for its or their own account or for the
accounts of any other fund. Furthermore, Advisers is not obligated to refrain
from investing in securities held by the Fund or other funds which it manages or
administers. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics.
Additional Tax Information. Distributions of investment company taxable income
and the excess of net short-term capital gains over net long-term capital losses
will be treated as ordinary income to Aetna. Distributions of the excess of net
long-term capital gains over net short-term capital losses are considered as
long-term capital gains to Aetna, regardless of the length of time the shares of
the Fund have been held. Losses on redemptions of shares may be disallowed or
altered in character under certain circumstances. Certain distributions of the
Fund that are declared in one calendar year and paid the following January will
be reportable by Aetna as if received in the year of declaration.
Distribution Plan. Because of the uncertainty concerning how various expenses
may be classified under the 1940 Act, the Fund has adopted a Plan of
Distribution pursuant to Rule 12b-1 ("Plan") under the 1940 Act with respect to
the distribution of the Fund's shares. However, the Plan provides that no
additional payments are to be made by the Fund as a result of the Plan other
than the payments it is otherwise obligated to make to Advisers and its
shareholder services agent, Custodian, or others pursuant to their respective
agreements in effect from time to time. To the extent, however, any payments by
the Fund, to or by Advisers or its Agents, or payments made in the ordinary
course of its business, are deemed to be payments 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 under the 1940 Act, then such payments shall be
deemed to be made pursuant to the Plan as set forth therein. The activities
intended to be within the scope of the Plan include, but are not necessarily
limited to, the following:
(a) the costs of the preparation, printing, and mailing of all required reports
and notices to shareholders, all prospectuses, statements of additional
information, any proxy statements and proxies;
(b) all fees and expenses relating to the qualification of the Fund and/or its
shares under the securities or "Blue Sky" laws of any jurisdiction; and all
fees under the Securities Act of 1933;
(c) all costs of the preparation and mailing of confirmations of shares sold or
redeemed, and reports of share balances; and
(d) all costs of responding to telephone or mail inquiries of Contract Holders
and Participants or prospective Contract Holders and Participants.
The terms and provisions of the Plan relating to required reports, term, and
approval are as required by Rule 12b-1. No interested person or Trustee of the
Fund has a direct or indirect financial interest in the Plan or related
agreement except as indicated in connection with the discussion of the
management agreement. No amounts were spent by the Fund pursuant to the Plan
during the year ended December 31, 1995, and none are anticipated during the
forthcoming fiscal year. The Board evaluated and considered the Plan in
connection with the continuation of the current management agreement.
Miscellaneous Information. The organizational expenses of the Fund were
amortized on a straight line basis over a period of five years from the
commencement of the offering of the Fund's shares. Contract Holders and
Participants allocating payments to shares of the Fund after the effective date
of the Fund's Registration Statement under the Securities Act of 1933 bore such
expenses during the amortization period only as such charges were accrued daily
against the investment income of the Fund. (See "Note to Financial Statement.")
The Fund's initial capital was furnished by Franklin Resources, Inc. However,
the Aetna Separate Account is the sole shareholder of the Fund as of the date of
this SAI.
Contract Holders and Participants will be informed of the Fund's progress
through periodic reports. The Fund has an affirmative obligation to assist
Contract Holder or Participant communications. Financial statements certified by
independent public accountants will be available at least annually.
The shareholders of a Massachusetts business trust, could, under certain
circumstances, be held personally liable as partners for its obligations. The
Trust's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Trust's assets for any shareholder held personally liable
for obligations of the Trust. The Declaration of Trust provides that the Trust
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and shall satisfy any
judgment thereon. All such rights are limited to the assets of the Fund. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the Fund as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the Fund's total
assets. Thus, the risk of incurring financial loss on account of shareholder
liability is limited to the unlikely circumstances in which both inadequate
insurance exists and the Fund itself is unable to meet its obligations.
The Fund is registered with the SEC as a management investment company. Such
registration does not involve supervision of the management or policies of the
Fund by the SEC. The Prospectus and this SAI omit certain of the information
contained in the Registration Statement filed with the SEC, copies of which may
be obtained from the SEC upon payment of the prescribed fee.
Financial Statements
Franklin Government Securities Trust
Statement of Investments in Securities and Net Assets, December 31, 1995
Face Value
Amount (Note 1)
------- ---------
Government Securities 93.3%
Government National Mortgage Association (GNMA)
$ 949,379 GNMA I, SF, 6.00%, 11/15/23 $ 922,677
2,679,860 GNMA I, SF, 6.50%, 10/15/23 - 03/15/24 2,661,436
1,064,616 GNMA II, SF, 6.50%, 05/20/24 - 09/20/25 1,049,312
3,250,817 GNMA I, SF, 7.00%, 10/15/22 - 10/15/23 3,292,469
944,178 GNMA II, SF, 7.00%, 09/20/25 - 12/20/25 949,785
2,658,327 GNMA I, SF, 7.50%, 06/15/17 - 04/15/24 2,736,413
939,038 GNMA II, 7.50%, 07/20/23 - 10/20/25 960,753
3,084,555 GNMA I, SF, 8.00%, 02/15/17 - 11/15/24 3,215,648
58,576 GNMA II, 8.00%, 10/20/16 60,626
476,663 GNMA I, SF, 8.25%, 04/15/25 498,858
1,263,518 GNMA I, SF, 8.50%, 03/15/20 - 07/15/22 1,327,485
353,468 GNMA I, SF, 9.00%, 06/15/16 - 11/15/21 374,788
761,269 GNMA I, SF, 9.50%, 10/15/09 - 10/15/21 817,651
420,000 cGNMA II, 9.50%, 04/20/25 443,757
1,290,540 GNMA I, SF, 10.00%, 03/15/16 - 08/15/21 1,418,787
79,974 GNMA II, SF, 10.00%, 12/20/18 - 08/20/20 86,272
152,048 GNMA II, 10.50%, 09/20/15 - 02/20/21 165,639
-------------
Total Government National Mortgage
Association (GNMA)
(Cost $20,659,896) 20,982,356
-------------
Short Term Investments
a,bReceivables from Repurchase Agreements7.0%
1,514,841 Joint Repurchase Agreement, 5.75%, 01/02/96
(Cost $1,576,650)
Bear Stearns & Co., Inc. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.75% - 8.875%,
2/29/96 - 08/31/00
Daiwa Securities America, Inc.
(Maturity Value $136,816)
Collateral: U.S. Treasury Bills, 08/22/96
U.S. Treasury Notes, 5.125% -
6.25%, 08/31/96 - 06/30/98
Donaldson, Lufkin & Jenrette
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.125% -
8.75%, 03/31/97 - 11/30/99
Fuji Government Securities
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 7.50%,
12/31/96 - 10/31/99
Lehman Government Securities, Inc
(Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 5.75% -
8.75%, 09/30/97 - 09/30/00
Swiss Bank Corp. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes,
7.50%, 10/31/99
UBS Securities, Inc. (Maturity Value $240,140)
Collateral: U.S. Treasury Notes, 6.75% -
7.75%, 04/30/97 - 01/31/00
Total Short Term Investments 1,576,650
-------------
Total Investments
(Cost $22,236,546)100.3% 22,559,006
Liabilities in Excess of
Other Assets, Net(0.3)% (67,893)
-------------
Net Assets100.0% $22,491,113
=============
At December 31, 1995, the net unrealized
appreciation based on the cost of investments
for income tax purposes of $22,236,546
was as follows:
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 397,575
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (75,115)
-------------
Net unrealized appreciation $ 322,460
=============
PORTFOLIO ABBREVIATION:
SF - Single Family
aFace amount for repurchase agreements is for the underlying collateral.
bSee Note 1 (e) regarding Joint Repurchase Agreement.
cSee Note 1 (f) regarding securities purchased on a delayed delivery basis
The accompanying notes are an integral part of these financial statements.
Franklin Government Securities Trust
Statement of Assets and Liabilities
December 31, 1995
ASSETS:
Investments in securities, at value
(identified cost $20,659,896) $20,982,356
Receivables from repurchase agreements, at value and cost 1,576,650
Cash 4,579
Receivables:
Interest 129,143
Investment securities sold 14,215
Capital shares sold 259,539
-------------
Total assets 22,966,482
-------------
LIABILITIES:
Payables:
Investment securities purchased - delayed delivery 444,730
Management fees 10,824
Accrued expenses and other liabilities 19,815
-------------
Total liabilities 475,369
-------------
NET ASSETS, at value $22,491,113
=============
Net assets consist of:
Undistributed net investment income $ 1,246,586
Net unrealized appreciation on investments 322,460
Accumulated net realized loss (129,499)
Capital shares 16,853
Additional paid-in capital 21,034,713
-------------
Net assets, at value $22,491,113
=============
Shares outstanding 1,685,270
=============
NET ASSET VALUE per share ($22,491,113 / 1,685,270) $13.35
=============
<PAGE>
Statement of Operations
for the year ended December 31, 1995
INVESTMENTINCOME:
Interest $1,361,244
-------------
Expenses:
Management fees (Note 5) $114,871
Professional fees 21,756
Custodian fees 1,612
Reports to shareholders 277
Other 849
Payments from Manager (Note 5) (24,745)
-------------
Total expenses 114,620
-------------
Net investment income 1,246,624
-------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss (21,303)
Net unrealized appreciation during the year 1,661,836
-------------
Net realized and unrealized gain on investments 1,640,533
-------------
Net increase in net assets resulting from operations $2,887,157
=============
Statements of Changes in Net Assets
for the years ended December 31, 1995 and 1994
1995 1994
-------- --------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,246,624 $ 1,086,914
Net realized loss on investments (21,303) (58,583)
Net unrealized appreciation (depreciation)
on investments 1,661,836 (1,667,828)
-------- --------
Net increase (decrease) in net assets
resulting from operations 2,887,157 (639,497)
Distributions to shareholders:
From undistributed net investment income (1,086,914) (953,810)
Increase in net assets from capital share
transactions (Note 2) 5,448,492 267,789
-------- --------
Net increase (decrease) in net assets 7,248,735 (1,325,518)
Net assets:
Beginning of year 15,242,378 16,567,896
-------- --------
End of year (including undistributed net
investment income of $1,246,586 - 1995;
and $1,086,876 - 1994) $22,491,113 $15,242,378
-------- --------
The accompanying notes are an integral part of these financial statements.
Franklin Government Securities Trust
Notes to Financial Statements
1. Significant Accounting Policies
Franklin Government Securities Trust (the Trust) is an open-end, diversified
management investment company (mutual fund), registered under the Investment
Company Act of 1940, as amended. Shares of the Trust are sold only to a separate
account of Aetna Life Insurance and Annuity Company (Aetna) to fund the benefits
of variable annuity contracts issued by Aetna.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:Portfolio securities listed on a securities exchange or on
the NASDAQ for which market quotations are readily available are valued at the
last sale price or, if there is no sale price, within the range of the most
recent quoted bid and asked prices. Other securities are valued based on a
variety of factors, including yield, risk, maturity, trade activity and recent
developments related to the securities. The Fund may utilize a pricing service,
bank or broker/dealer experienced in such matters to perform any of the pricing
functions, under procedures approved by the Board of Trustees (the Board).
Securities for which market quotations are not available are valued in
accordance with procedures established by the Board.
b. Income Taxes:The Trust intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
to make the requisite distributions to its shareholders which will be sufficient
to relieve it from income and excise taxes.
c. Security Transactions:Security transactions are accounted for on the date the
securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.
e. Repurchase Agreements:The Fund may enter into a joint repurchase agreement
whereby its uninvested cash balance is deposited into a joint cash account to be
used to invest in one or more repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. The value and face amount of the joint repurchase
agreement are allocated to the Fund based on its pro-rata interest. A repurchase
agreement is accounted for as a loan by the Fund to the seller, collateralized
by underlying U.S. government securities, which are delivered to the Fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the Fund, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. At December 31, 1995, all outstanding
repurchase agreements held by the Fund had been entered into on December 29,
1995.
f. Securities Purchased on a When-Issued or Delayed Delivery:The Fund may trade
securities on a when-issued or delayed delivery basis, with payment and delivery
scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. These securities are identified
on the accompanying Statement of Investments in Securities and Net Assets. The
Fund has set aside sufficient investment securities as collateral for these
purchase commitments.
2. Trust Shares
At December 31, 1995, there was an unlimited number of $.01 par value shares
authorized. Transactions in the Trust's shares for the years ended December 31,
1995 and 1994 were as follows:
Year Ended December 31,
--------------------------------------
1995 1994
-------------------- --------------------
Shares Amount Shares Amount
------- --------- ------- ---------
Shares sold 550,647 $7,098,487 482,593 $ 6,053,218
Shares issued
in reinvest-
ment of dis-
tributions 85,651 1,086,914 78,827 953,810
Shares
redeemed (215,498) (2,736,909) (542,950) (6,739,239)
------- --------- ------- ---------
Net increase 420,800 $5,448,492 18,470 $ 267,789
======= ========= ======= =========
3. Capital Loss Carryovers
At December 31, 1995, for tax purposes, the Trust had capital loss carryovers as
follows:
Expiring in: 2001 $ 49,613
2002 58,583
2003 21,303
-------
$129,499
=======
The aggregate cost of securities and unrealized appreciation of the Trust are
the same for tax purposes as for financial statement purposes at December 31,
1995.
4. Purchases and Sales of Securities
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended December 31, 1995 aggregated $6,626,682 and
$1,293,165, respectively.
5. Transactions with Affiliates and Related Parties
Franklin Advisers, Inc., (Advisers) under the terms of a management agreement,
provides investment advice, administrative services, office space and facilities
to the Trust, and receives fees computed daily at an annualized rate of 5/8 of
1% of the first $100 million of net assets of the Fund; 1/2 of 1% of the net
assets in excess of $100 million up to $250 million, 45/100 of 1% of net assets
in excess of $250 million up to $10 billion, 44/100 of 1% of net assets in
excess of $10 billion up to $12.5 billion, 42/100 of 1% of net assets in excess
of $12.5 billion up to $15 billion and 40/100 of 1% of net assets in excess of
$15 billion.
The terms of the management agreement provide that annual aggregate expenses of
the Trust be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Trust's shares are registered. For the year ended December 31,
1995, the Trust's expenses did not exceed these limitations; however, Advisers
agreed in advance to waive $24,745 of the management fees.
The management agreement between the Trust and Advisers includes a distribution
plan pursuant to Rule 121 under the Investment Company Act of 1940. However, no
payments were made by the Trust as a result of the plan for the year ended
December 31, 1995.
6. Financial Highlights
Selected data for each share of beneficial interest outstanding throughout each
period are as follows:
<TABLE>
<CAPTION>
Period Ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $12.05 $13.30 $13.26 $13.01 $11.72
-------- -------- -------- -------- --------
Net investment income 0.67 0.85 0.65 0.80 0.61
Net realized & unrealized gain (loss)
on securities 1.4216 (1.3463) 0.3385 0.1602 1.1939
-------- -------- -------- -------- --------
Total from investment operations 2.0916 (0.4963) 0.9885 0.9602 1.8039
-------- -------- -------- -------- --------
Less distributions:
Dividends from undistributed net
investment income (0.7916) (0.7537) (0.7459) (0.7102) (0.5139)
Distributions from net capital gains -- -- (0.2026) -- --
-------- -------- -------- -------- --------
Total distributions (0.7916) (0.7537) (0.9485) (0.7102) (0.5139)
-------- -------- -------- -------- --------
Net asset value at end of period $13.35 $12.05 $13.30 $13.26 $13.01
======== ======== ======== ======== ========
Total Return* 17.70% -3.75% 7.59% 7.66% 15.87%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $22,491 $15,242 $16,568 $11,815 $8,641
Ratio of expenses to average net assets 0.62% 0.63% 0.62% 0.29% --%
Ratio of expenses to average net assets
(excluding waiver and payments by
Manager) - Note 5 0.76% 0.78% 0.83% 0.92% 1.22%
Ratio of net investment income to
average net assets 6.78% 6.85% 6.68% 7.75% 8.74%
Portfolio turnover rate 7.50% 13.97% 39.02% 49.71% 7.00%
</TABLE>
*Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends and capital gains, if any, at
net asset value.
Franklin Government Securities Trust
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Government Securities Trust:
We have audited the accompanying statement of assets and liabilities of Franklin
Government Securities Trust including the statement of investments in securities
and net assets, as of December 31, 1995, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Government Securities Trust as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 26, 1996
