-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Kj6WfhxFNasd4KzPvKlL1iSfwyBTR6OKKh+S78jV8GnWk/pd3CkLJbVCzeZuAtMe +V7MPCNU1x+eEhlCtunUxg== 0000802669-95-000005.txt : 19950516 0000802669-95-000005.hdr.sgml : 19950516 ACCESSION NUMBER: 0000802669-95-000005 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950227 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TAX ADVANTAGED INTERNATIONAL BOND FUND CENTRAL INDEX KEY: 0000802669 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04849 FILM NUMBER: 95515534 BUSINESS ADDRESS: STREET 1: 777 MARINER'S ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM INTERNATIONAL BOND FUND DATE OF NAME CHANGE: 19900712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TAX ADVANTAGED HIGH YIELD SECURITIES FUND CENTRAL INDEX KEY: 0000810303 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05008 FILM NUMBER: 95515463 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN TAX ADVANTAGED U S GOVERNMENT SECURITIES FUND CENTRAL INDEX KEY: 0000810742 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05007 FILM NUMBER: 95515535 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4155703000 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD CITY: SAN MATEO STATE: CA ZIP: 94404 N-30D 1 February 15, 1995 Dear Shareholder: This is the annual report of the Franklin Partners Funds(R) for the fiscal year ended December 31, 1994. Franklin Partners Funds are three separate mutual funds created to provide non-U.S. investors with high current income exempt from U.S. withholding taxes. We are pleased to report that all of the Franklin Partners Funds continued to provide high current monthly income. Nonetheless, volatility in the securities markets proved to be unsettling to some investors. Although this is understandable, in times like these it is important to remember that financial markets always have been, and always will be, subject to fluctuation. As a matter of fact, down-market cycles can often unveil outstanding buying opportunities. We therefore urge you to exercise patience and concentrate not on short-term market cycles, but on your long-term investment goals. The following pages contain detailed discussions about each of the Franklin Partners Funds. While each fund has a distinct investment objective, all of our managers are dedicated to providing shareholders with careful selection and constant professional supervision. We appreciate your continued support, welcome your comments and look forward to serving your investment needs in the years to come. Sincerely, Rupert H. Johnson, Jr. Executive Vice President and Managing General Partner TABLE OF CONTENTS FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND................... page 2 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND........................... page 6 FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND................ page 9
FRANKLIN PARTNERS FUNDS FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND The Franklin Tax-Advantaged International Bond Fund seeks to provide current income through investments in debt securities of non-U.S. issuers and foreign currency denominated debt securities of U.S. issuers.* The primary factor impacting worldwide financial markets in 1994 was rising U.S. interest rates. Following stronger than expected economic growth in the fourth quarter of 1993, the Federal Reserve Board raised short-term interest rates, hoping to prevent a resurgence in inflation. Specifically, the federal funds rate was increased six times in 1994, to 5.5% from 3.0% at the beginning of the period. This action set off a chain reaction in other countries as rates adjusted upward throughout the world. Economic growth in Europe during this period was also stronger than expected, led by increased export demand and strong business activity; strong growth heightened nervousness in the European bond markets and resulted in added volatility. Higher rates triggered some of the largest bond market declines in decades. In spite of the very difficult investment environment, we are pleased to report that the Franklin Tax-Advantaged International Bond Fund posted a cumulative total return of +2.20% for the one-year period ended December 31, 1994, earning the fund a #8 ranking for total return out of 106 global/world income funds.** In comparison, the average global/world income fund recorded a total return of - -6.49% for the same period, as measured by Lipper Analytical Services, Inc.+ Some of the fund's heaviest weightings are currently in Australia (16.2%) and Canada (11.7%). During the reporting period, the fund benefited from holdings in Australia and New Zealand, where improving commodities prices boosted market performance. The fund was also aided by its Canadian bonds, which -- after a tough first half of 1994 -- rebounded following the elections in Quebec. [GRAPHIC MATERIAL (1) OMITTED - SEE APPENDIX] *Fund share prices and returns will fluctuate with market conditions, currencies and the economic and political climates where investments are made. These special risk considerations are discussed in the prospectus. **Cumulative total return measures the change in value of an investment over the periods indicated, assuming reinvestment of dividends and capital gains at net asset value. This figure does not include the maximum 4.25% initial sales charge. +The fund was ranked #8 out of 106 global/world income funds for total return for the one-year period ended December 31, 1994, and #16 out of 44 funds for the three-year period ended December 31, 1994, as measured by Lipper Analytical Services, Inc., a nationally recognized mutual fund rating organization. Lipper rankings do not include sales charges; past and present expense limitations increased the fund's total returns. Rankings may have been different if these factors had been considered. Past performance cannot guarantee future results. 2 During the past six months, the fund benefited from the strengthening European currencies. The U.S. dollar fell relative to European currencies and, as a result, the European bonds owned by the fund increased in value for the fund's investors. The upward trends in economic growth and interest rates come at a time when many European countries are operating under large budget deficits. Because of the potential effects of these budgetary problems in the current interest-rate environment, the fund has been fairly conservative, focusing on "core" European markets -- Germany, the United Kingdom, France, the Netherlands, the European Commission (ECU) and, on occasion, Denmark. We will maintain a conservative policy as we seek to provide non-U.S. investors with high current income while minimizing risk. Please remember, however, that international investing is subject to certain risks, including fluctuation of currency rates, as discussed in the fund's prospectus. Looking forward, global bond markets appear to be stabilizing, with moderate inflationary pressures due to low wage growth and improved economic growth. Higher levels of economic growth could lead to reduced unemployment and higher tax revenues, helping foreign governments shrink their budget deficits. Given stronger than expected growth rates and the market's continuing fears of inflation, we will continue to exercise a cautionary investment policy. As always, we will purchase only those bonds issued or backed by the full faith and credit of foreign governments.* *The fund's shares are not guaranteed by any government and will fluctuate with market conditions. 3 PERFORMANCE SUMMARY The Franklin Tax-Advantaged International Bond Fund's share price, as measured by net asset value, declined to $10.78 on December 31, 1994, from $11.34 on December 31, 1993. As noted in the preceding discussion, this decline was due largely to rising interest rates throughout global markets. The fund continued to meet its investment objective of providing high current income to shareholders. For the one-year period ended December 31, 1994, your fund paid monthly income distributions totaling 79.4 cents ($0.794) per share. At the end of the reporting period, your fund's distribution rate was 7.89%, based on an annualization of the fund's distributions for the 30 days ended December 31, 1994, and the maximum offering price of $11.26 on that date. Dividends will vary based on the earnings of the fund's portfolio and past distributions are not necessarily predictive of future results. The Franklin Tax-Advantaged International Bond Fund provided a total return of +2.20% for the one-year period ended December 31, 1994. Total return measures the change in value of an investment over the periods indicated, assuming reinvestment of dividends and capital gains. This calculation does not include the initial sales charge. Past performance is not predictive of future results. We have always maintained a long-term investment perspective and we encourage our shareholders to do the same. While the fund may experience some volatility from time to time, we believe that its performance will be rewarding over the long term. In fact, your fund delivered cumulative and average annual total returns of over 45% and 7%, respectively, since its inception on June 9, 1990. For a definition of total return, please refer to the table on page 5. The graph on page 5 compares the performance of the Franklin Tax-Advantaged International Bond Fund, since inception, to the unmanaged Salomon Brothers Non-U.S. World Government Bond Index. The index has inherent performance differentials over any fund as it contains no cash in its portfolio and includes no management fees or sales charges. The fund generally holds a percentage of cash at any time. Additionally, the index contains a large weighting of Japanese bonds, whereas the fund's portfolio maintains a broad diversification. Japanese bonds have offered excellent returns through a combination of price appreciation and currency gains; however, your fund generally avoids these securities due to the lower yields they offer. Please note, one cannot invest in an index and past performance is not predictive of future results. 4 FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND Periods ended December 31, 1994
SINCE INCEPTION 1-YEAR 3-YEAR (06/09/90) ------ ------- ---------- Cumulative Total Return(1) 2.20% 13.72% 45.14% Average Annual Total Return(2) -2.12% 2.89% 7.47% Distribution Rate(3) 7.89% 30-Day Standardized Yield(4) 8.54%
(1) Cumulative total return reflects the change in value of an investment over the periods indicated and does not include the maximum 4.25% initial sales charge stated in the prospectus. See note below. (2) Average annual total return represents the average annual change in value of an investment over the specified periods. The figures have been restated to reflect the maximum 4.25% initial sales charge stated in the prospectus. See note below. (3) Based on an annualization of the distributions paid over the 30 days ended December 31, 1994, and the maximum offering price of $11.26 on that date. (4) Yield, calculated as required by the SEC, is based on the earnings of the fund's portfolio for the 30 days ended December 31, 1994. Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales charge, with dividends reinvested at the offering price. Thus, actual total returns for purchasers of shares during that period would have been different than noted above. Effective July 1, 1994, the fund implemented a plan of distribution under Rule 12b-1 and eliminated the sales charge on reinvested dividends, which will affect future performance. All total return calculations assume reinvestment of dividends and capital gains at net asset value. Investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. Past performance is not predictive of future results. The fund's manager is waiving a portion of the management fees, which reduces operating expenses and increases distribution rate, yield and total return to shareholders. Without these reductions, the fund's distribution rate and total return would have been lower, and yield for the period would have been 7.77%. The fee waiver may be discontinued at any time. [GRAPHIC MATERIAL (2) OMIITED - SEE APPENDIX] *Includes all sales charges, fund expenses and account fees. It also assumes that your dividends and capital gains were reinvested at net asset value. The Salomon Brothers Non-U.S. World Government Bond Index includes price appreciation or depreciation and distributions as a percentage of the original investment. Past performance is not predictive of future results. 5 FRANKLIN PARTNERS FUNDS FRANKLIN TAX-ADVANTAGED U.S.GOVERNMENT SECURITIES FUND The Franklin Tax-Advantaged U.S. Government Securities Fund is managed to provide current income through investment in U.S. government obligations, primarily Government National Mortgage Association securities. Rising interest rates made 1994 one of the most difficult years in decades for fixed-income securities. Attempting to keep potential inflationary pressures under control, the Federal Reserve Board raised the federal funds rate -- the interest rate banks charge each other for overnight loans -- six times during the reporting period, from 3.0% to 5.5%. Although the Federal Reserve Board raised only short-term rates, long-term rates followed suit. By the end of '94, 10-year U.S. government bond yields had increased over 200 basis points to 7.84%, from 5.83% a year earlier, and 30-year Treasury bonds increased over 150 basis points to 7.89%.* Rising interest rates caused bond prices to fall, since previously issued bonds, with their lower yields, became less attractive than newer issues that reflected current rates. For example, prices of 10-year Treasuries fell over 14%, while prices of 30-year Treasuries declined over 18%.(T) These rate increases resulted in negative total returns for intermediate and long-term bond investments, as income levels were not high enough to offset the price depreciation. The Government National Mortgage Association (GNMA or Ginnie Mae) securities in which your fund primarily invests have not escaped the declines caused by the increases in interest rates this past year. In January of 1994, 7% Ginnie Mae 30-year pass-throughs (mortgage-backed certificates in which income is passed directly to the investor) were trading slightly above par at $101.25. By December, these securities were down 11%, trading at $89.75. The fund's managers maintain a very straightforward investment approach and do not actively trade portfolio holdings. Instead, we invest in high quality Ginnie Maes, seeking to provide shareholders with high current income and a relatively stable share value. We have never invested in derivative securities such as collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), futures or other similar potentially vola-tile securities, and we have no intention of doing so in the future. However, price fluctuations are unavoidable and your account's value will vary with market conditions. Looking forward, we anticipate that the interest rate escalations of 1994 will increasingly have a real economic effect. To date, higher rates have apparently had only a financial effect -- lower bond prices and portfolio difficulties. (You may have heard about losses experienced by Orange County, CA and Procter & Gamble, among others, which were greatly impacted by declines in derivative securities). Hopefully, the actions of the Federal Reserve Board will moderate growth, keep inflation low and allow rates to stabilize -- providing the proverbial "soft landing." Should the Federal Reserve Board's actions have their intended effect, we should see bond prices begin to recover. We believe this is a reasonable outlook for 1995. *Source: Micropal +Source: Merrill Lynch Treasury Indices 6 PERFORMANCE SUMMARY The Franklin Tax-Advantaged U.S. Government Securities Fund's share price, as measured by net asset value, declined during the reporting period to $9.76 on December 31, 1994, from $10.91 on December 31, 1993. As noted in the preceding discussion, this decline was largely due to rising interest rates throughout fixed-income markets. The fund continued to meet its investment objective of providing high current income to shareholders. For the one-year period ended December 31, 1994, your fund paid monthly income distributions totaling 70.4 cents ($0.704) per share. At the end of the reporting period, your fund's distribution rate was 6.83%, based on an annualization of the fund's distributions for the 30 days ended December 31, 1994, and the maximum offering price of $10.19 on that date. Dividends will vary based on the earnings of the fund's portfolio and past distributions are not necessarily predictive of future results. The Franklin Tax-Advantaged U.S. Government Securities Fund reported a total return of -4.13% for the one-year period ended December 31, 1994. Total return measures the change in value of an investment over the period indicated, assuming reinvestment of dividends and capital gains. This calculation does not include the initial sales charge. Past performance is not indicative of future trends. We have always maintained a long-term investment perspective and encourage shareholders to do the same. While the fund may experience some volatility from time to time, we believe that its performance will be satisfactory over the long term. In fact, your fund delivered cumulative and average annual total returns of over 40% and 6%, respectively, for the five years ended December 31, 1994. For a definition of total return, please refer to the table on page 8. The graph on the following page illustrates that, since inception, the Franklin Tax-Advantaged U.S. Government Securities Fund has generally followed the performance of the unmanaged Lehman Brothers Intermediate Government Bond Index. Additionally, since 1987, your fund has outpaced inflation, as measured by the Consumer Price Index (CPI), which is a primary goal for any investment. It is important to understand that the index has inherent performance differentials over any fund, as it has no cash in its portfolio, involves no fund expenses, and does not contain a mortgage component. Of course, you cannot invest directly in an index. 7 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND Periods ended December 31, 1994
SINCE INCEPTION 1-YEAR 5-YEAR (05/04/87) ----- ------ ---------- Cumulative Total Return(1) -4.13% 40.83% 84.37% Average Annual Total Return(2) -8.17% 6.16% 7.70% Distribution Rate(3) 6.83% 30-Day Standardized Yield(4) 7.05%
(1) Cumulative total return reflects the change in value of an investment over the periods indicated and does not include the maximum 4.25% initial sales charge stated in the prospectus. See note below. (2) Average annual total return represents the average annual change in value of an investment over the specified periods. The figures have been restated to reflect the maximum 4.25% initial sales charge stated in the prospectus. See note below. (3) Based on an annualization of the distributions paid over the 30 days ended December 31, 1994, and the maximum offering price of $10.19 on that date. (4) Yield, calculated as required by the SEC, is based on the earnings of the fund's portfolio for the 30 days ended December 31, 1994. Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales charge, with dividends reinvested at the offering price. Thus, actual total returns for purchasers of shares during that period would have been different than noted above. Effective July 1, 1994, the fund implemented a plan of distribution under Rule 12b-1 and eliminated the sales charge on reinvested dividends, which will affect future performance. All total return calculations assume reinvestment of dividends and capital gains at net asset value. Investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. Past performance is not indicative of future results. Past expense limitations increased the fund's total returns. [GRAPHIC MATERIAL (3) OMITTED - SEE APPENDIX] *Includes all sales charges, fund expenses and account fees. It also assumes that your dividends and capital gains were reinvested at net asset value. The Lehman Brothers Intermediate Government Bond Index includes price appreciation or depreciation and distributions as a percentage of the original investment. Past performance is not predictive of future results. 8 FRANKLIN PARTNERS FUNDS FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND The Franklin Tax-Advantaged High Yield Securities Fund seeks to provide high current income by investing in a portfolio consisting of high yielding, lower-rated corporate bonds issued by U.S. and non-U.S. corporations.* During the period under review, the U.S. economy grew rapidly, with the Gross Domestic Product (GDP) increasing at an annualized rate of 3.62% for the first three quarters of 1994.** In addition, the nation's unemployment rate declined to 5.8% and the nation's factories were operating at roughly 85% of total capacity by the end of the reporting period, up from 82% in December of 1993.(T) Although reported economic data did not show significant increases in inflationary pressures, the Federal Reserve Board raised short-term interest rates in an effort to control the expected higher inflation that normally accompanies economic recoveries. Since early February, the Federal Reserve has increased the federal funds rate -- the interest rates banks charge each other for overnight loans -- on six occasions, to 5.5% from 3.0%. Both the equity and fixed income markets experienced high levels of volatility as expectations of a more robust economy sparked inflationary fears. Although higher interest rates negatively impacted bond prices in general, high yield bonds fared better due to expectations of increased business activity, which generally translates into higher revenues and improved profitability. It is important to understand, however, that an investment in high yield, lower rated securities is also accompanied by a greater degree of credit risk than an investment in higher rated securities. FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND Top 10 Holdings on 12/31/94 Based on Total Net Assets
COMPANY % OF TOTAL INDUSTRY NET ASSETS - ------------------------------------------ Healthtrust, Inc. 3.68% Healthcare - ------------------------------------------ Dr. Pepper Bottling, Inc. 3.64% Food & Beverage - ------------------------------------------ Pathmark Stores, Inc. 3.37% Food Retailing - ------------------------------------------ IMC Fertilizer Group, Inc. 2.85% Chemicals - ------------------------------------------ Fort Howard, Corp. 2.80% Forest & Paper Products - ------------------------------------------ Abbey Healthcare Group, Inc. 2.80% Healthcare - ------------------------------------------ Truck Components, Inc. 2.59% Automotive - ------------------------------------------ Aztar Corp. 2.50% Gaming/Leisure - ------------------------------------------ Specialty Foods Corp. 2.48% Food & Beverage - ------------------------------------------ New World Television, Inc. 2.46% Media/Broadcasting
FOR A DETAILED LISTING OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 13 OF THIS REPORT. *High yields reflect the higher credit risk associated with certain lower rated securities in the fund's portfolio and, in some cases, the lower market prices for these instruments. **Source: U.S. Commerce Dept. +Source: U.S. Federal Reserve Board of Governors 9 The fund continued to diversify its investments throughout the reporting period. We added new industry groups such as wireless communication, and we reduced our exposure to certain sectors such as food retailing, which fell to 6.3% of total net assets on December 31, 1994, from 16.77% on December 31, 1993. The fund strategically underweighted sectors that we believed would underperform the market, and subsequently overweighted sectors that were expected to outperform the market. For example, we chose to underweight our holdings in the gaming and leisure sector, which underperformed the high yield corporate group, while increasing our holdings in the healthcare sector, which performed better than the high yield group as a whole. It should be noted, however, that we increased our holdings in the gaming and leisure sector in the last month of the reporting period, due largely to our perception that this sector appeared undervalued. Lastly, we continued to purchase "senior" bonds, as they have a higher claim on a corporation's assets than subordinated, or "junior," securities. In 1995, we will continue to seek out attractive sectors as well as individual securities with improving fundamental values. Further interest rate increases appear likely, given continued strong economic growth. Although the Federal Reserve Board's actions to control inflation hurt prices of fixed-income investments over the short term, we consider these actions to be positive from a long-term perspective. 10 PERFORMANCE SUMMARY The Franklin Tax-Advantaged High Yield Securities Fund's share price, as measured by net asset value, declined during the reporting period to $7.99 on December 31, 1994, from $8.97 on December 31, 1993. As noted in the preceding discussion, this decline was largely due to rising interest rates. The fund continued to meet its investment objective of providing high current income to shareholders. For the one-year period ended December 31, 1994, your fund paid monthly income distributions totaling 76 cents ($0.760) per share. At the end of the reporting period, your fund's distribution rate was 9.52%, based on an annualization of the fund's distributions for the 30 days ended December 31, 1994, and the maximum offering price of $8.34 on that date. Dividends will vary based on the earnings of the fund's portfolio and past distributions are not necessarily predictive of future results. The Franklin Tax-Advantaged High Yield Securities Fund reported a total return of -2.41% for the one-year period ended December 31, 1994. Total return measures the change in value of an investment over the period indicated, assuming reinvestment of dividends and capital gains. This calculation does not include the initial sales charge. Past performance is not indicative of future trends. We have always maintained a long-term investment perspective and encourage shareholders to do the same. While the fund may experience some volatility from time to time, we believe that its performance will be satisfactory over the long term. In fact, your fund delivered cumulative and average annual total returns of over 68% and 10%, respectively, for the five years ended December 31, 1994. For a definition of total return, please refer to the table on page 12. Based on a $10,000 investment, the graph on page 12 compares the performance of the Franklin Tax-Advantaged High Yield Securities Fund to the unmanaged Salomon Brothers Combined Corporate Index, which is a composite of investment grade and non-investment grade, high yielding corporate bonds. This broad index has inherent performance differentials over the fund, as it contains a different mix of securities and incurs no sales charges or management expenses. Additionally, the index does not contain cash, while the fund must maintain a minimum level of liquidity. Of course, you cannot invest directly in an index. 11 FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND Periods ended December 31, 1994
SINCE INCEPTION 1-YEAR 5-YEAR (05/04/87) ------ ------ ---------- Cumulative Total Return(1) -2.41% 68.47% 93.24% Average Annual Total Return(2) -6.58% 10.03% 8.36% Distribution Rate(3) 9.52% 30-Day Standardized Yield(4) 10.15%
(1) Cumulative total return reflects the change in value of an investment over the periods indicated and does not include the maximum 4.25% initial sales charge stated in the prospectus. See note below. (2) Average annual total return represents the average annual change in value of an investment over the specified periods. The figures have been restated to reflect the maximum 4.25% initial sales charge stated in the prospectus. See note below. (3) Based on an annualization of the distributions paid over the 30 days ended December 31, 1994, and the maximum offering price of $8.34 on that date. (4) Yield, calculated as required by the SEC, is based on the earnings of the fund's portfolio for the 30 days ended December 31, 1994. Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales charge, with dividends reinvested at the offering price. Thus, actual total returns for purchasers of shares during that period would have been different than noted above. Effective July 1, 1994, the fund implemented a plan of distribution under Rule 12b-1 and eliminated the sales charges on reinvested dividends, which will affect future performance. All total return calculations assume reinvestment of dividends and capital gains at net asset value. Investment return and principal value will fluctuate with market conditions, and you may have a gain or loss when you sell your shares. Past performance is not indicative of future results. Past expense limitations increased the fund's total returns. [GRAPHIC MATERIAL (4) OMITTED - SEE APPENDIX] *Includes all sales charges, fund expenses and account fees. It also assumes that your dividends and capital gains were reinvested at net asset value. The Salomon Brothers Combined Corporate Index includes price appreciation or depreciation and distributions as a percentage of the original investment. Past performance is not predictive of future results. 12 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
FACE VALUE COUNTRY* AMOUNT FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (NOTE 1) - --------------------------------------------------------------------------------------------------------------- FOREIGN NOTES, BILLS, BONDS & GOVERNMENTS SECURITIES 89.1% AUSTRALIA 12.6% AU 820,000 EIB Global Bond, 10.25%, 10/01/01................................... $ 644,445 AU 1,000,000 Euro FIMA, 9.875%, 01/17/07......................................... 751,990 AU 425,000 Queensland Treasury Corp., notes, 12.00%, 07/15/99.................. 351,516 AU 1,660,000 Queensland Treasury Corp., notes, 8.00%, 05/14/03................... 1,120,643 ----------- 2,868,594 ----------- CANADA 11.7% CA 400,000 Government of Canada, 8.50%, 04/01/02............................... 276,600 CA 945,000 Government of Canada, 10.25%, 02/01/04.............................. 720,160 CA 420,000 Hydro-Quebec, Eurobonds, 11.25%, 10/10/00........................... 320,520 CA 250,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96......................... 182,445 CA 150,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02........................... 103,992 CA 1,500,000 Province of British Columbia, 9.00%, 01/09/02....................... 1,051,684 ----------- 2,655,401 ----------- DENMARK 11.0% DK 3,750,000 Government of Denmark, 9.00%, 11/15/00.............................. 616,442 DK 1,746,000 Nykredit, 9.00%, 10/01/12........................................... 280,414 DK 5,935,000 Nykredit, 6.00%, 10/01/26........................................... 704,106 DK 7,723,000 Real Kredit Danmark, 6.00%, 10/01/26................................ 916,228 ----------- 2,517,190 ----------- FRANCE 7.2% FR 4,250,000 Credit National, 9.25%, 10/02/01.................................... 831,539 FR 2,000,000 Electricite de France, 8.30%, 02/09/99.............................. 377,457 FR 4,250,000 (c)French OAT, Bond, 0.00%, 10/25/15................................... 137,821 FR 510,000 (c)French OAT, Strip, 0.00%, 10/25/16.................................. 14,829 FR 1,500,000 Government of France, OAT, 8.50%, 12/26/12.......................... 281,829 ----------- 1,643,475 ----------- GERMANY 2.5% DD 850,000 West Japan Railway Co., 8.70%, 06/25/97............................. 564,436 ----------- ITALY 8.2% IT 2,000,000,000 Certificati di Credito del Tesoro, 12.00%, 01/20/98................. 1,239,704 IT 1,000,000,000 Certificati di Credito del Tesoro, 9.30%, 01/01/00.................. 616,769 ----------- 1,856,473 ----------- NEW ZEALAND 10.3% NZ 2,275,000 New Zealand Government, 8.00%, 07/15/98............................. 1,410,761 NZ 1,500,000 New Zealand Government, 8.00%, 04/15/04............................. 930,220 ----------- 2,340,981 -----------
The accompanying notes are an integral part of these financial statements. 13 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
FACE VALUE COUNTRY* AMOUNT FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (NOTE 1) - --------------------------------------------------------------------------------------------------------------- FOREIGN NOTES, BILLS, BONDS & GOVERNMENT SECURITIES (CONT.) SPAIN 5.7% ES 73,000,000 Government of Spain, 11.60%, 01/15/97............................... $ 563,591 ES 100,000,000 Government of Spain, 10.90%, 08/30/03............................... 720,798 ----------- 1,284,389 ----------- SWEDEN 7.6% SE 8,000,000 Government of Sweden, 6.00%, 02/09/05............................... 762,582 SE 5,100,000 Staten Bostadiffinansier, 12.50%, 01/23/97.......................... 713,604 SE 1,800,000 Staten Bostadiffinansier, 11.00%, 01/21/99.......................... 243,527 ----------- 1,719,713 ----------- UNITED KINGDOM 12.3% GB 300,000 Abbey National Treasury Service, 10.50%, 04/22/97................... 485,638 GB 460,000 Export-Import Bank of Japan, 10.75%, 05/15/01....................... 770,049 GB 270,000 Government of Italy, Eurobonds, 10.50%, 04/28/14.................... 454,097 GB 715,000 United Kingdom Treasury, Conversion, 7.00%, 08/06/97................ 1,087,859 ----------- 2,797,643 ----------- TOTAL FOREIGN NOTES, BILLS, BONDS & GOVERNMENT SECURITIES (COST $21,773,675).......................................... 20,248,295 ----------- SHORT TERM INVESTMENTS 6.8% AUSTRALIA 3.6% AU 1,050,000 New South Wales Treasury Corp., Eurobonds, 12.10%, 04/01/95 (COST $746,704)............................................ 821,003 ----------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $22,520,379).................................. 21,069,298 ----------- (d),(e) RECEIVABLES FROM REPURCHASE AGREEMENTS 3.2% US 756,682 Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $733,782) (COST $733,306) Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99............................................... 733,306 ----------- TOTAL INVESTMENTS (COST $23,253,685) 95.9% ............... 21,802,604 OTHER ASSETS AND LIABILITIES, NET 4.1% ................... 922,638 ----------- NET ASSETS 100.0% ........................................ $22,725,242 ===========
The accompanying notes are an integral part of these financial statements. 14 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
VALUE FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (NOTE 1) - -------------------------------------------------------------------------------------------------------------------- At December 31, 1994, the net unrealized depreciation based on the cost of investments for income tax purposes of $23,253,685 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost.......................... $ 194,729 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value......................... (1,645,810) ----------- Net unrealized depreciation......................................... $(1,451,081) ===========
PORTFOLIO ABBREVIATION: OAT - Obligations Assumable by the Treasurer
COUNTRY LEGEND: AU - Australia GB - United Kingdom CA - Canada IT - Italy DD - Germany NZ - New Zealand DK - Denmark SE - Sweden ES - Spain US - United States of America FR - France
* Securities traded in currency of country indicated. (c)Zero coupon bonds. Accretion rate may vary. (d)Face amount for repurchase agreements is for the underlying collateral. (e)See Note 1(g) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. 15 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (NOTE 1) - ---------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 93.2% $ 9,956,635 GNMA I, SF, 6.00%, 10/15/23 - 11/15/23...................................... $ 8,310,684 71,985,493 GNMA I, SF, 6.50%, 05/15/23 - 03/15/24...................................... 62,424,955 7,872,246 GNMA II, M, 6.50%, 09/20/23................................................. 6,767,676 21,507,267 GNMA I, PL, 7.00%, 05/15/13 - 06/15/28...................................... 18,832,300 65,017,281 GNMA I, SF, 7.00%, 03/15/22 - 09/15/23...................................... 58,393,645 21,966,985 GNMA II, 7.00%, 11/20/16 - 11/20/23......................................... 19,591,806 61,354,722 GNMA I, SF, 7.50%, 01/15/17 - 04/15/23...................................... 56,964,055 63,984,228 GNMA II, 7.50%, 09/20/16 - 09/20/23......................................... 59,045,477 1,163,945 GNMA I, PL, 8.00%, 03/15/32................................................. 1,087,561 74,492,701 GNMA I, SF, 8.00%, 11/15/15 - 05/15/24...................................... 71,280,202 12,033,017 GNMA II, 8.00%, 11/20/16 - 08/20/22......................................... 11,468,969 7,183,303 GNMA I, PL, 8.25%, 07/15/31................................................. 6,806,180 18,723,453 GNMA I, SF, 8.50%, 06/15/16 - 05/15/22...................................... 18,407,494 6,531,236 GNMA II, M, 8.50%, 11/20/21 - 03/20/22...................................... 6,380,201 4,802,099 GNMA I, SF, 9.00%, 05/15/16 - 11/15/21...................................... 4,850,120 3,857,852 GNMA I, SF, 9.50%, 01/15/17 -10/15/21....................................... 3,986,851 175,151 GNMA, GPM , 9.75%, 08/15/16................................................. 178,654 2,570,269 GNMA I, SF, 10.00%, 01/15/16 - 06/15/19..................................... 2,706,012 1,076,008 GNMA II, 10.00%, 10/20/16 - 11/20/20........................................ 1,118,041 342,908 GNMA, GPM , 10.25%, 02/15/16 - 09/15/20..................................... 354,482 1,160,716 GNMA I, SF, 10.50%, 02/15/16 - 07/15/19..................................... 1,240,153 2,254,290 GNMA II, 10.50%, 07/20/17 - 02/20/19........................................ 2,371,938 239,348 GNMA I, SF, 11.00%, 10/15/13 - 09/15/14..................................... 260,516 1,539,795 GNMA II, 11.00%, 07/20/17 - 05/20/19........................................ 1,649,025 176,384 GNMA I, SF, 11.50%, 08/15/16 - 12/15/17..................................... 193,747 515,628 GNMA II, M, 11.50%, 08/20/16 - 03/20/19..................................... 556,073 189,164 GNMA I, SF, 12.00%, 06/15/15................................................ 210,031 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $468,651,739)..... 425,436,848 ------------ (d),(e) RECEIVABLES FROM REPURCHASE AGREEMENTS 3.9% 18,529,227 Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $17,960,175) (COST $17,948,532) Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99..... 17,948,532 ------------ TOTAL INVESTMENTS (COST $486,600,271) 97.1% ................. 443,385,380 OTHER ASSETS AND LIABILITIES, NET 2.9% ...................... 13,035,726 ------------ NET ASSETS 100.0% .......................................... $456,421,106 ============
The accompanying notes are an integral part of these financial statements. 16 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------ At December 31, 1994, the net unrealized depreciation based on the cost of investments for income tax purposes of $486,642,763 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ...................................................................... $ 663,075 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value .................................................................... (43,920,458) ------------ Net unrealized depreciation .......................................................... $(43,257,383) ============
PORTFOLIO ABBREVIATIONS: GPM - Graduated Payment Mortgage M - Multi-Issuers PL - Project Loan SF - Single Family (d) Face amount for repurchase agreements is for the underlying collateral. (e) See Note 1(g) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. 17 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------ BONDS 95.2% AUTOMOTIVE 4.0% $1,100,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 .......................................... $ 1,101,375 2,000,000 Truck Components, Inc., senior notes, 12.25%, 06/30/01 .................................. 2,100,000 ----------- 3,201,375 ----------- CABLE TELEVISION 8.0% 1,500,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 ........................................ 1,365,000 1,900,000 Continental Cablevision, Inc., senior sub. deb., 9.00%, 09/01/08 ........................ 1,729,000 2,500,000 (c)Diamond Cable Communication Co., senior disc. notes, zero coupon to 09/30/99, (original accretion rate 13.25%), 13.25% thereafter, 09/30/04 .......................... 1,221,875 1,200,000 (f)Rogers Cablesystems, Inc., senior secured deb. (Canada), 9.65%, 01/15/14 ................ 701,479 200,000 Scott Cable Communications, Inc., S.F., sub. deb., 12.25%, 04/15/01 ..................... 130,000 1,500,000 Time Warner, Inc., senior notes, 9.125%, 01/15/13 ....................................... 1,357,500 ----------- 6,504,854 ----------- CHEMICALS 8.0% 1,250,000 Applied Extrusion Technology, senior notes, 11.50%, 04/01/02 ............................ 1,225,000 1,500,000 Harris Chemical North America, Inc., senior sub. notes, 10.75%, 10/15/03 ................ 1,402,500 1,500,000 Huntsman Corp., first mortgage, 11.00%, 04/15/04 ........................................ 1,563,750 2,225,000 IMC Fertilizer Group, Inc., senior notes, 10.75%, 06/15/03 .............................. 2,314,000 ----------- 6,505,250 ----------- CONSUMER GOODS 2.2% 1,000,000 Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 ....................... 877,500 1,000,000 Revlon Consumers Products Corp., senior sub. notes, 10.50%, 02/15/03 .................... 900,000 ----------- 1,777,500 ----------- FINANCIAL 1.0% 750,000 American Reinsurance Corp., senior sub. notes, 10.875%, 09/15/04 ........................ 808,360 ----------- FOOD & BEVERAGES 13.0% 950,000 Beatrice Foods, Inc., senior sub. notes, 12.00%, 12/01/01 ............................... 935,750 1,500,000 Coca Cola Bottling Group Southwest, Inc., senior sub. notes, 9.00%, 11/15/03 ............ 1,320,000 300,000 (b)Curtice-Burns Foods, Inc., senior sub. notes, 12.75%, 02/01/05 .......................... 303,750 2,065,000 (c)Dr Pepper Bottling Holdings, S.F., senior disc. notes, zero coupon to 02/15/98, (original accretion rate10.25%), 10.25% thereafter, 02/15/00 ........................... 2,059,838 1,129,000 (c)Dr Pepper/Seven-Up Cos., Inc., S.F., senior sub. disc. notes, zero coupon to 11/01/97, (original accretion rate 11.50%), 11.50% thereafter, 11/01/02 .......................... 891,910 1,800,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 .............................. 1,710,000 2,250,000 Specialty Foods Corp., senior notes, 10.25%, 08/15/01 ................................... 2,013,750 1,500,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 .......................... 1,323,750 ----------- 10,558,748 -----------
The accompanying notes are an integral part of these financial statements. 18 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) FOOD RETAILING 5.7% $1,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02 .............................. $ 962,500 2,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 .............................. 1,775,000 1,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 ........................................ 877,500 1,000,000 Ralphs Grocery Co., senior sub. notes, 10.25%, 07/15/02 ................................. 982,500 ---------- 4,597,500 ---------- FOREST & PAPER PRODUCTS 7.0% 1,500,000 Container Corp. of America, guaranteed senior notes, 11.25%, 05/01/04 ................... 1,545,000 1,000,000 Fort Howard Corp., senior sub. notes, 9.00%, 02/01/06 ................................... 860,000 1,500,000 Fort Howard Corp., sub. notes., 10.00%, 03/15/03 ........................................ 1,410,000 1,500,000 REPAP Wisconsin, Inc., senior notes, 9.875%, 05/01/06 ................................... 1,320,000 500,000 (b)S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 .................................... 512,500 ---------- 5,647,500 ---------- GAMING & LEISURE 8.0% 2,000,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 ........................................ 2,030,000 2,000,000 Bally's Grand, first mortgage, Series B, 10.375%, 12/15/03 .............................. 1,740,000 500,000 Harrah's Jazz Co., first mortgage, 14.25%, 11/15/01 ..................................... 526,250 500,000 MGM Grand Hotels Finance Corp., guaranteed first mortgage, 11.75%, 05/01/99 ............. 530,000 2,000,000 Showboat, Inc., senior notes, 9.25%, 05/01/08 ........................................... 1,690,000 ---------- 6,516,250 ---------- HEALTH CARE SERVICES 9.0% 2,500,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 ........................ 2,268,750 1,000,000 (b)Dade International, Inc., senior sub. notes, 13.00%, 02/01/05 ........................... 1,005,000 1,000,000 Healthtrust, Inc.-The Hospital Co., sub. notes, 10.25%, 04/15/04 ........................ 1,063,750 2,000,000 Healthtrust, Inc.-The Hospital Co., sub. notes, 8.75%, 03/15/05 ......................... 1,920,000 1,000,000 OrNda Healthcorp., S.F., senior sub. deb., 12.25%, 05/15/02 ............................. 1,065,000 ---------- 7,322,500 ---------- INDUSTRIAL 1.7% 1,500,000 (c)American Standard, Inc., senior sub. deb., zero coupon to 06/01/98, (original accretion rate 11.50%), 11.50% thereafter, 06/01/05 .......................... 975,000 450,000 American Standard, Inc., sub. disc. deb., 9.875%, 06/01/01 .............................. 439,875 ---------- 1,414,875 ---------- MEDIA & BROADCASTING 6.1% 1,000,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 .......................... 1,025,000 1,500,000 K-III Communications Corp., S.F., senior notes, 10.25%, 06/01/04 ........................ 1,425,000 2,000,000 New World Group, Inc., S.F., senior notes, 11.00%, 06/30/05 ............................. 2,000,000 500,000 News America Holdings, Inc., senior notes, 9.125%, 10/15/99 ............................. 505,152 ---------- 4,955,152 ----------
The accompanying notes are an integral part of these financial statements. 19 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------ BONDS (CONT.) RESTAURANTS 1.5% $1,500,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 ................................ $ 1,248,750 ----------- RETAIL 1.8% 1,500,000 Eckerd Jack Corp., senior sub. notes, 9.25%, 02/15/04 ................................... 1,477,500 ----------- TECHNOLOGY & INFORMATION SERVICES 4.5% 2,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03 ........................... 1,850,000 1,500,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00 ........................................ 1,391,250 400,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 .................................. 378,000 ----------- 3,619,250 ----------- TEXTILES & APPAREL 2.5% 1,030,000 Forstmann & Co., Inc., S.F., senior sub. notes, 14.75%, 04/15/99 ........................ 1,107,250 1,000,000 Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ............................. 910,000 ----------- 2,017,250 ----------- TRANSPORTATION 4.2% 1,500,000 Gearbulk Holding, Ltd., senior notes, 11.25%, 12/01/04 .................................. 1,530,000 2,000,000 Southern Pacific Transportation Co., senior notes, 9.375%, 08/15/05 ..................... 1,850,000 ----------- 3,380,000 ----------- UTILITIES 1.2% 1,000,000 Midland Funding II, S.F., senior lease obligation, Series B, 13.25%, 07/23/06 ........... 982,012 ----------- WIRELESS COMMUNICATION 5.8% 2,500,000 (c)Dial Call Communications, units, senior disc. notes, zero coupon to 04/15/99, (original accretion rate 12.25%), 12.25% thereafter, 04/15/04 .......................... 875,000 2,500,000 Paging Network, senior sub. notes, 8.875%, 02/01/06 ..................................... 1,987,500 1,000,000 Roger Cantel Mobile Communications, Inc., S.F., senior sub. notes, 10.75%, 11/01/01 ..... 1,020,000 800,000 Roger Cantel Mobile Communications, Inc., senior sub. notes, 10.875%, 04/15/04 .......... 812,000 ----------- 4,694,500 ----------- TOTAL BONDS (COST $82,148,755) .................................................... 77,229,126 ----------- SHARES/ WARRANTS - ---------- COMMON STOCKS .6% 33,878 (a)Kash N' Karry Food Stores, Inc. (Cost $1,462,392) ....................................... 491,235 ----------- WARRANTS 2,500 (a)Dial Page, Inc. ......................................................................... 625 300 (a)Foodmaker, Inc. ......................................................................... 2,988 ----------- TOTAL WARRANTS (COST $1,828) ...................................................... 3,613 ----------- TOTAL BONDS, COMMON STOCKS AND WARRANTS (COST $83,612,975) ........................ 77,723,974 -----------
The accompanying notes are an integral part of these financial statements. 20 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994 (CONT.)
FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (NOTE 1) - ------------------------------------------------------------------------------------------------------------------------------ (d),(e) RECEIVABLES FROM REPURCHASE AGREEMENTS 1.5% $1,250,914 Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $1,212,488) (COST $1,211,702) Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99............. $ 1,211,702 ----------- TOTAL INVESTMENTS (COST $84,824,677) 97.3%........................... 78,935,676 OTHER ASSETS AND LIABILITIES, NET 2.7%................................ 2,215,057 ----------- NET ASSETS 100.0%..................................................... $81,150,733 =========== At December 31, 1994, the net unrealized depreciation based on the cost of investments for income tax purposes of $84,824,677 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost..................................................... $ 862,297 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value..................................................... (6,751,298) ----------- Net unrealized depreciation........................................................ $(5,889,001) ===========
PORTFOLIO ABBREVIATION: S.F. - Sinking Fund (a) Non-income producing. (b) See Note 5 regarding Rule 144A securities. (c) Zero coupon/step-up bonds. The current effective yield may vary. The original accretion rate will remain constant. (d) Face amount for repurchase agreements is for the underlying collateral. (e) See Note 1(g) regarding Joint Repurchase Agreement. (f) Face amount stated in foreign currencies, value in U.S. dollars. The accompanying notes are an integral part of these financial statements. 21 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1994
FRANKLIN FRANKLIN FRANKLIN TAX-ADVANTAGED TAX-ADVANTAGED TAX-ADVANTAGED INTERNATIONAL U.S. GOVERNMENT HIGH YIELD BOND FUND SECURITIES FUND SECURITIES FUND -------------- --------------- --------------- Assets: Investments in securities: At identified cost.............................................. $ 22,520,379 $ 468,651,739 $ 83,612,975 ============== ============== ============= At value........................................................ 21,069,298 425,436,848 77,723,974 Receivables from repurchase agreements, at value and cost 733,306 17,948,532 1,211,702 Cash............................................................. -- -- 340,524 Foreign currencies (Cost $59,929)................................ 59,142 -- -- Receivables: Interest........................................................ 871,747 2,810,050 1,936,050 Investment securities sold...................................... -- 13,447,031 -- From affiliates................................................. 31,755 -- -- -------------- -------------- ------------- Total assets................................................ 22,765,248 459,642,461 81,212,250 -------------- -------------- ------------- Liabilities: Payables: Distributions to partners....................................... 27,608 31,275 -- Management fees................................................. -- 192,130 42,200 Distribution fees............................................... 2,673 62,273 10,628 Partners' servicing costs....................................... 1,006 7,800 1,900 Bank overdraft................................................... -- 2,895,733 -- Accrued expenses and other payables.............................. 8,719 32,144 6,789 -------------- -------------- ------------- Total liabilities........................................... 40,006 3,221,355 61,517 -------------- -------------- ------------- Net assets, at value.............................................. $ 22, 725,242 $ 456,421,106 $ 81,150,733 ============== ============== ============= Net assets consist of:........... Undistributed net investment income.............................. $ -- $ -- 145,950 Unrealized depreciation on investments and translation of assets and liabilities denominated in foreign currencies..... (1,444,578) (43,214,891) (5,889,961) Net realized gain (loss) from investments........................ and foreign currency transactions............................... 645,253 (8,004,768) (3,722,779) Partners' capital................................................ 23,524,567 507,640,765 90,617,523 -------------- -------------- ------------- Net assets, at value.............................................. $ 22,725,242 $ 456,421,106 $ 81,150,733 ============== ============== ============= Shares outstanding................................................ 2,108,233 46,759,786 10,153,969 ============== ============== ============= Net asset value per share......................................... $ 10.78 $ 9.76 $ 7.99 ============== ============== ============= Representative computation of net asset value and offering price per share: Net asset value and redemption price per share (International Bond Fund) ($22,725,242 -- 2,108,233)........... $ 10.78 ============== Maximum offering price (100/95.75 of $10.78).................... $ 11.26 ==============
The accompanying notes are an integral part of these financial statements. 22 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS (CONT.) STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
FRANKLIN FRANKLIN FRANKLIN TAX-ADVANTAGED TAX-ADVANTAGED TAX-ADVANTAGED INTERNATIONAL U.S. GOVERNMENT HIGH YIELD BOND FUND SECURITIES FUND SECURITIES FUND --------------- --------------- ---------------- Investment income: Interest (Note 1)..................................... $ 1,784,378 $ 39,713,088 $ 7,779,908 --------------- --------------- ---------------- Expenses: Management fees (Note 4).............................. -- 2,608,074 481,741 Partners' servicing costs (Note 4).................... 11,767 98,180 22,282 Distribution fees (Note 4)............................ 8,166 174,620 29,926 Custodian fees........................................ 33,116 54,702 8,701 Reports to partners................................... 16,176 110,794 29,231 Registration fees..................................... 15,394 107,053 22,787 Professional fees..................................... 6,204 49,232 9,569 Managing partners' fees and expenses.................. -- 7,996 8,451 Other................................................. 6,063 15,073 7,465 Expense reduction (Note 4)............................ (31,755) -- -- --------------- --------------- ---------------- Total expenses................................... 65,131 3,225,724 620,153 --------------- --------------- ---------------- Net investment income........................... 1,719,247 36,487,364 7,159,755 --------------- --------------- ---------------- Realized and unrealized gain (loss) from investments and foreign currency: Net realized gain (loss) from: Investments......................................... (72,159) (6,576,310) 418,383 Foreign currency transactions....................... (7,584) -- (7,855) Net unrealized appreciation (depreciation) on: Investments......................................... (1,215,053) (54,248,227) (9,328,465) Translation of assets and liabilities in foreign currencies......................................... 30,353 -- (960) --------------- --------------- ---------------- Net realized and unrealized loss from investments and foreign currency transactions.................. (1,264,443) (60,824,537) (8,918,897) --------------- --------------- ---------------- Net increase (decrease) in net assets resulting from operations......................................... $ 454,804 $ (24,337,173) $ (1,759,142) =============== =============== ================
The accompanying notes are an integral part of these financial statements. 23 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS (CONT.) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED U.S. FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND GOVERNMENT SECURITIES FUND HIGH YIELD SECURITIES FUND ------------------------ ---------------------------- -------------------------- 1994 1993 1994 1993 1994 1993 ----------- --------- ---------- ---------- ----------- ------------ Increase (decrease) in net assets: Operations: Net investment income................ $ 1,719,247 $ 1,151,914+ $ 36,487,364 $ 29,897,079 $ 7,159,755 $ 4,885,294 Net realized gain (loss) from investments and foreign currency transactions............... (79,743) 17,057 (6,576,310) (748,210) 410,528 827,429 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies................... (1,184,700) 663,249 (54,248,227) 3,288,640 (9,329,425) 2,429,269 ------------ ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in net assets resulting from operations................. 454,804 1,832,220 (24,337,173) 32,437,509 (1,759,142) 8,141,992 Distributions to partners from undistributed net investment income................................ (1,626,579) (1,151,914) (36,487,364) (29,897,079) (7,005,950) (4,885,294) Increase (decrease) in net assets from partnership's capital shares transactions (Note 2)................. 4,291,465 6,262,922 (56,761,159) 258,821,610 20,370,511 27,157,621 ------------ ----------- ------------ ------------ ----------- ----------- Net increase (decrease) in net assets................... 3,119,690 6,943,228 (117,585,696) 261,362,040 11,605,419 30,414,319 Net assets: Beginning of year..................... 19,605,552 12,662,324 574,006,802 312,644,762 69,545,314 39,130,995 ------------ ----------- ------------ ------------ ----------- ----------- End of year........................... $ 22,725,242 $19,605,552 $456,421,106 $574,006,802 $81,150,733 $69,545,314 ============ =========== ============ ============ =========== =========== Undistributed net investment income included in net assets: Beginning of year.................... $ 52,452 $ 52,452 $ -- $ -- $ -- $ -- ============ =========== ============ ============ =========== =========== End of year.......................... $ -- $ 52,452 $ -- $ -- $ 145,950 $ -- ============ =========== ============ ============ =========== ===========
(+) Includes realized loss of $19,835 from foreign currency transactions. The accompanying notes are an integral part of these financial statements. 24 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Franklin Partners Funds (the "Funds") consist of three separate and distinct Funds (each organized as a California Limited Partnership): Franklin Tax-Advantaged International Bond Fund (the "International Bond Fund"), Franklin Tax-Advantaged U.S. Government Securities Fund (the "Government Fund"), and Franklin Tax-Advantaged High Yield Securities Fund (the "High Yield Fund"). Each Fund is an open-end diversified management investment company (mutual fund). Each Fund issues one class of shares in the form of partnership interests, and purchasers of shares of any of the Funds become limited partners of such Fund. Each Fund maintains a totally separate investment portfolio. The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. The policies are in conformity with generally accepted accounting principles for investment companies. A. SECURITIES VALUATIONS: 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 asked prices. Other securities for which market quotations are readily available are valued at current market values, obtained from pricing services, which are 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 securities. Portfolio securities which are traded both in the over-the-counter market and on a securities exchange are valued according to the broadest and most representative market as determined by the Manager. Other securities for which market quotations are not available, if any, are valued in accordance with procedures established by the Managing General Partners. Short-term securities and similar investments with remaining maturities of 60 days or less are valued at amortized cost, which approximates value. Securities denominated in foreign currencies and traded on foreign exchanges or in foreign markets are valued in a similar manner and these values are translated into U.S. dollars at current market quotations of their respective currency against U.S. dollars last quoted by a major bank or, if no such quotation is available, at the rate of exchange determined in accordance with procedures established by the Managing General Partners. B. INCOME TAXES: No provision for income taxes has been made since all income and expenses are allocated to the partners for inclusion in their income tax returns, if any. 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 for both financial statement and income tax purposes. D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Net investment income includes income, calculated on an accrual basis, amortization of discount, if any, and expenses as incurred on an accrual basis. A proportionate share of each Fund's net investment income is allocated to the partners daily and distributed monthly. Daily allocations of net investment income will commence on the first business day after receipt of a partner's investment, or settlement of a partner's wire order trade. Bond premium and discount are amortized as required by the Internal Revenue Code. Net capital gains (or losses) realized by the Funds on transactions in their respective portfolio securities will be allocated proportionately to each partner and will not be distributed. Thus, they will be reflected in the value of a partner's shares. Net investment income differs for financial statement and tax purposes primarily due to differing treatments of realized foreign currency transactions. 25 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.) Net realized capital gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sale transactions. E. EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets. In all other respects, expenses are charged to each Fund as incurred on a specific identification basis. F. FOREIGN CURRENCY TRANSLATION: The accounting records of the Funds are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the rate of exchange of such currencies against U.S. dollars on the date of the valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. Differences between income and expense amounts recorded and collected or paid are recognized when reported by the custodian bank. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized between the trade date and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds' books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in exchange rates. G. REPURCHASE AGREEMENTS: The Funds 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 Agreements are allocated to the Funds based on their pro-rata interest. In a repurchase agreement, the Funds purchase a U.S. government security from a dealer or bank subject to an agreement to resell it at a mutually agreed upon price and date. Such a transaction is accounted for as a loan by the Fund to the seller, collateralized by the underlying security. The transaction requires the initial collateralization of the seller's obligation by U.S. government securities with market value, including accrued interest, of at least 102% of the dollar amount invested by the Funds, with the value of the underlying security marked to market daily to maintain coverage of at least 100%. The collateral is delivered to the Funds' custodian and held until resold to the dealer or bank. At December 31, 1994, all outstanding joint repurchase agreements held by the Funds had been entered into on December 30, 1994. H. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION Effective December 31, 1994, the International Bond Fund adopted AICPA Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. As a result, components of net assets have been reclassified to better present financial statement amounts and distributions in accordance with Statement of Position 93-2. Accordingly, amounts as of December 31, 1994 have been restated to reflect an increase in Partners' capital of $52,452 and a corresponding decrease in undistributed net investment income. 26 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) H. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION (CONT.) During the year ended December 31, 1994, the Funds adopted AICPA Statement of Position 93-4: Foreign Currency Accounting and Financial Statement Presentation for Investment Companies. The adoption of SOP 93-4 had no effect on net assets for the fiscal year ended December 31, 1994, but affected the classification of foreign currency transactions from assets and liabilities other than investments on the income statement. 2. SHARES OF PARTNERSHIP INTEREST At December 31, 1994, the Partners' capital for the International Bond Fund, the Government Fund and the High Yield Fund aggregated $23,472,115, $507,640,765 and $90,617,523, respectively. Transactions in each of the Fund's shares were as follows:
FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND U.S. GOVERNMENT SECURITIES FUND HIGH YIELD SECURITIES FUND ----------------------- ------------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- -------- -------------- -------------- ------------ ------------ 1994 Shares sold ..................... 681,584 $ 7,568,224 9,376,014 $ 97,542,462 3,788,180 $ 31,774,475 Shares issued in reinvestment of distributions ............... 116,915 1,275,908 2,227,965 22,612,334 550,742 4,553,397 Shares redeemed ................. (508,697) (5,542,452) (16,916,846) (171,346,081) (2,120,443) (17,531,363) Changes from exercise of exchange privilege: Shares sold ................... 140,119 1,545,467 543,055 5,719,211 511,117 4,375,839 Shares redeemed ............... (50,657) (555,682) (1,097,168) (11,289,085) (331,962) (2,801,837) -------- ----------- ----------- ------------- ---------- ------------ Net increase (decrease) ......... 379,264 $ 4,291,465 (5,866,980) $ (56,761,159) 2,397,634 $ 20,370,511 ======== =========== =========== ============= ========== ============ 1993 Shares sold ..................... 760,047 $ 8,523,058 30,841,608 $ 338,759,242 3,115,991 $ 27,332,506 Shares issued in reinvestment of distributions ............... 73,355 822,307 1,704,225 18,704,892 307,662 2,703,677 Shares redeemed ................. (222,516) (2,515,622) (8,003,493) (87,855,328) (947,430) (8,315,371) Changes from exercise of exchange privilege: Shares sold ................... 78,571 878,546 333,004 3,662,335 743,976 6,495,754 Shares redeemed ............... (127,797) (1,445,367) (1,321,300) (14,449,531) (120,241) (1,058,945) -------- ----------- ----------- ------------- ---------- ------------ Net increase .................... 561,660 $ 6,262,922 23,554,044 $ 258,821,610 3,099,958 $ 27,157,621 ======== =========== =========== ============= ========== ============
3. PURCHASES AND SALES OF SECURITIES Aggregate purchases and sales of securities (excluding purchases and sales of short-term securities) for the year ended December 31, 1994 were as follows:
FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND U.S. GOVERNMENT SECURITIES FUND HIGH YIELD SECURITIES FUND ----------------------- ------------------------------- -------------------------- Purchases $7,198,258 $ 51,898,015 $34,561,341 ======================= =============================== ========================== Sales $1,290,178 $110,428,739 $13,215,248 ======================= =============================== ==========================
27 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 3. PURCHASES AND SALES OF SECURITIES (CONT.) For tax purposes, the aggregate cost of securities is higher (and unrealized depreciation is higher) than for financial reporting purposes at December 31, 1994 by $42,492 in the Government Fund. 4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES Franklin Advisers, Inc., under the terms of an agreement, provides investment advice, administrative services, office space and facilities to each Fund, and receives fees computed monthly on the net assets of each Fund on the last day of the month at an annualized rate of 5/8 of 1% of the first $100 million of net assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million, and 45/100 of 1% of net assets in excess of $250 million. Under a subadvisory agreement effective June 28, 1994, Templeton Investment Counsel, Inc. ("TICI" or the "Subadvisor"), an indirect subsidiary of Templeton Worldwide, Inc., which is a direct, wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), TICI provides services to the International Bond Fund and receives from Franklin Advisers, Inc. a monthly fee computed at an annual rate of .026 of 1% of the value of the International Bond Fund's net assets up to and including $100 milion; .021 of 1% of net assets in excess of $100 million up to and including $250 million; and .019 of 1% of net assets in excess of $250 million. The terms of the agreement provide that aggregate annual expenses of each Fund 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 Funds' shares are registered. The Funds' expenses did not exceed these limitations; however, for the year ended December 31, 1994, Franklin Advisers, Inc. agreed in advance to waive its management fees by $141,108 and made payments of other expenses of $31,755 for the International Bond Fund. In its capacity as underwriter for the shares of the Funds, Franklin/Templeton Distributors, Inc. received commissions on sales of such shares of the International Bond Fund, the Government Fund and the High Yield Fund for the year ended December 31, 1994, totalling $219,143, $2,067,833 and $400,528, respectively, of which $206,380, $1,917,765 and $376,426, respectively, were subsequently paid to other dealers. Commissions are deducted from the gross proceeds received from the sale of the Funds' shares, and as such are not expenses of the Funds. Pursuant to a partners' service agreement with Franklin/Templeton Investor Services, Inc., the Funds pay costs on a per partner account basis. Such costs incurred for the year ended December 31, 1994, aggregated $11,767, $98,180 and $22,282 for the International Bond Fund, the Government Fund and the High Yield Fund, respectively. Effective July 1, 1994, the Funds implemented a plan of distribution under Rule 12b-1 of the Investment Company Act of 1940, pursuant to which the Funds will reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of 0.15% per annum of the Funds' average daily net assets for costs incurred in the promotion, offering and marketing of the Funds' shares. Costs incurred by the International Bond Fund, Government Fund and High Yield Fund under the agreement aggregated $8,166, $174,620 and $29,926 respectively, for the year ended December 31, 1994. Certain officers and Managing General Partners of the Funds are also officers and/or directors of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and Franklin/Templeton Investor Services, Inc., all wholly owned subsidiaries of Franklin Resources, Inc. 5. RULE 144A SECURITIES Rule 144A provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act of 1933 for specified resales of restricted securities to qualified institutional investors. The Funds value these securities as disclosed in Note 1. At December 31, 1994, the High Yield Fund held 144A securities with a value aggregating $1,821,250, representing 2.2% of the Fund's net assets. See the accompanying statement of investments in securities and net assets for specific information on such securities. 6. CREDIT RISK Although the High Yield Fund has a diversified portfolio, 94.3% of its Portfolio is invested in lower rated and unrated securities. Investments in higher yield securities are accompanied by a greater degree of credit risk and such lower quality securities tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default 28 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 6. CREDIT RISK (CONT.) 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. Although each of the Funds has a diversified investment portfolio, there are certain credit risks and foreign currency exchange risks due to the manner in which the Funds are invested, which may subject the Funds more significantly to economic changes occurring in certain industries, sectors or countries as follows: The International Bond Fund has investments in excess of 10% in Australian, Canadian, Danish, New Zealand and British Securities. The High Yield Fund has investments in excess of 10% in the Food & Beverages Industry. 7. FINANCIAL HIGHLIGHTS Selected data for each share outstanding throughout each year by Fund are as follows:
PER SHARE OPERATING PERFORMANCE - --------------------------------------------------------------------------------------------------------------- NET ASSET NET REALIZED DIVIDENDS NET ASSET YEAR VALUE NET & UNREALIZED TOTAL FROM FROM NET VALUE ENDED BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT AT END TOTAL DEC. 31 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME OF YEAR RETURN++ - ------------------------------------------------------------------------------------------------------------------------------ FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND 1990 $11.20 $1.133 $ .819 $ 1.952 $(1.202) $11.95 $15.46%+ 1991 11.95 1.018 .112 1.130 (1.030) 12.05 9.86 1992 12.05 1.012 (1.110) (.098) (1.102) 10.85 (1.43) 1993 10.85 .808 .505 1.313 (.823) 11.34 12.13 1994 11.34 .794 (.560) .234 (.794) 10.78 2.06 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND 1990 10.17 .922 .060 .982 (.922) 10.23 9.82 1991 10.23 .865 .570 1.435 (.865) 10.80 14.31 1992 10.80 .785 (.050) .735 (.785) 10.75 6.80 1993 10.75 .733 .160 .893 (.733) 10.91 8.19 1994 10.91 .704 (1.150) (.446) (.704) 9.76 (4.26) FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND 1990 8.52 1.132 (2.430) (1.298) (1.132) 6.09 (16.89) 1991 6.09 .982 1.890 2.872 (.982) 7.98 49.19 1992 7.98 .922 .420 1.342 (.922) 8.40 16.96 1993 8.40 .815 .570 1.385 (.815) 8.97 16.72 1994 8.97 .770 (.990) (.220) (.760) 7.99 (2.58) RATIOS/SUPPLEMENTAL DATA - ----------------------------------------------------------------------------- RATIO OF RATIO OF NET NET ASSETS EXPENSES INVESTMENT YEAR AT END TO AVERAGE INCOME PORTFOLIO ENDED OF YEAR NET ASSETS TO AVERAGE TURNOVER DEC. 31 (IN 000'S) (SEE NOTE 4)* NET ASSETS RATE - ------------------------------------------------------------------------------ FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND 1990 $ 4,236 .95% 9.75% 18.40% 1991 5,060 -- 9.05 60.77 1992 12,662 .13 9.71 15.26 1993 19,606 .25 7.31 6.80 1994 22,725 .29 7.69 6.46 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND 1990 86,967 .60 9.16 9.36 1991 127,637 .80 8.13 12.42 1992 312,645 .67 7.22 15.26 1993 574,007 .59 6.63 14.63 1994 456,421 .61 6.92 10.20 FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND 1990 27,155 .55 15.51 13.29 1991 57,469 .87 12.96 38.35 1992 39,131 .76 11.00 29.79 1993 69,545 .76 9.17 32.27 1994 81,151 .81 9.36 18.39
+For the period June 9, 1990 (transfer of management) to December 31, 1990. ++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 and are not annualized. Effective July 1, 1994, with the implementation of the Rule 12b-1 distribution plan, as disclosed in Note 4, the existing sales charge on reinvested dividends has been eliminated. *During the periods indicated, the Manager agreed to waive in advance its management fees and made payments of other expenses incurred by the International Bond Fund. Had such action not been taken, the ratio of operating expenses to average net assets for the years ended December 31, 1990, 1991, 1992, 1993 and 1994, respectively, would have been 1.42%, .89%, .92%, .97% and 1.06%. 29 FRANKLIN PARTNERS FUNDS REPORT OF INDEPENDENT AUDITORS To the Limited Partners and Managing General Partners of Franklin Tax-Advantaged International Bond Fund (A California Limited Partnership), Franklin Tax-Advantaged U.S. Government Securities Fund (A California Limited Partnership), and Franklin Tax-Advantaged High Yield Securities Fund (A California Limited Partnership): We have audited the accompanying statements of assets and liabilities of the various funds comprising the Franklin Partners Funds, including each Fund's statement of investments in securities and net assets, as of December 31, 1994, and the related statements 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 Funds' 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, 1994, 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 various funds comprising Franklin Partners Funds as of December 31, 1994, the results of each Fund's 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 February 01, 1995 30 APPENDIX DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304 (a) of REGULATION S-T) GRAPHIC MATERIAL (1) This chart shows in pie chart format the fund's securities breakdown by geographic distribution as a percentage of the fund's total net assets.
Geographic Breakdown on 12/31/94 Australia 16.2% Germany 2.5% Spain 5.7% France 7.2% United States 7.3% United Kingdom 12.3% Sweden 7.6% Italy 8.2% New Zealand 10.3% Denmark 11.0% Canada 11.7%
GRAPHIC MATERIAL (2) The following line graph hypothetically compares the performance of Franklin Tax-Advantaged International Bond Fund to that of the Salomon Brothers Non-U.S. World Government Bond Index, based on a $10,000 investment from 6/9/90 to 12/31/94.*
Period Ending TAIB SBNON-U.S. WLDGOV $9,575 $10,000 6/90 $9,662 $10,145 7/90 $10,224 $10,644 8/90 $10,395 $10,633 9/90 $10,455 $10,759 10/90 $10,839 $11,530 11/90 $10,974 $11,671 12/90 $11,011 $11,724 1/91 $11,234 $12,176 2/91 $11,171 $12,141 3/91 $10,424 $11,226 4/91 $10,503 $11,439 5/91 $10,475 $11,371 6/91 $10,225 $11,144 7/91 $10,606 $11,481 8/91 $10,787 $11,673 9/91 $11,354 $12,335 10/91 $11,421 $12,494 11/91 $11,646 $12,753 12/91 $12,139 $13,628 1/92 $11,850 $13,362 2/92 $11,834 $13,164 3/92 $11,822 $12,969 4/92 $11,924 $13,061 5/92 $12,273 $13,634 6/92 $12,668 $14,187 7/92 $12,901 $14,496 8/92 $13,098 $15,138 9/92 $12,867 $15,235 10/92 $12,364 $14,685 11/92 $11,951 $14,308 12/92 $12,011 $14,278 1/93 $12,130 $14,471 2/93 $12,211 $14,758 3/93 $12,567 $15,125 4/93 $12,841 $15,579 5/93 $13,014 $15,863 6/93 $12,782 $15,566 7/93 $12,734 $15,577 8/93 $13,087 $16,131 9/93 $13,197 $16,404 10/93 $13,354 $16,329 11/93 $13,143 $16,254 12/93 $13,508 $16,434 1/94 $13,846 $16,506 2/94 $13,603 $16,552 3/94 $13,453 $16,754 4/94 $13,437 $16,863 5/94 $13,371 $16,636 6/94 $13,384 $17,039 7/94 $13,464 $17,082 8/94 $13,474 $16,984 9/94 $13,581 $17,320 10/94 $13,934 $17,767 11/94 $13,814 $17,410 12/94 $13,894 $16,395
GRAPHIC MATERIAL (3) The following line graph hypothetically compares the performance of Franklin Tax-Advantaged U.S. Government Securities Fund to that of the Lehman Brothers Intermediate Government Bond Index and the Consumer Price Index, based on a $10,000 investment from 5/4/87 to 12/31/94.*
Period Ending TAUSG LBInt.Gov CPI 5/4/87 $9,579 $10,000 $10,000 5/31/87 9,714 9,978 10,035 6/30/87 9,879 10,096 10,071 7/31/87 9,977 10,118 10,098 8/31/87 9,969 10,092 10,151 9/30/87 9,748 9,966 10,204 10/31/87 9,971 10,262 10,231 11/30/87 10,154 10,324 10,240 12/31/87 10,239 10,424 10,240 1/31/88 10,565 10,683 10,266 2/29/88 10,648 10,796 10,293 3/31/88 10,641 10,751 10,337 4/30/88 10,645 10,732 10,390 5/31/88 10,617 10,681 10,426 6/30/88 10,842 10,855 10,470 7/31/88 10,824 10,822 10,515 8/31/88 10,824 10,836 10,559 9/30/88 11,052 11,024 10,630 10/31/88 11,251 11,176 10,665 11/30/88 11,134 11,080 10,674 12/31/88 11,080 11,091 10,692 1/31/89 11,226 11,202 10,745 2/28/89 11,182 11,153 10,790 3/31/89 11,183 11,205 10,852 4/30/89 11,380 11,431 10,923 5/31/89 11,671 11,652 10,985 6/30/89 11,965 11,949 11,012 7/31/89 12,118 12,192 11,038 8/31/89 12,024 12,027 11,056 9/30/89 12,083 12,085 11,091 10/31/89 12,324 12,339 11,145 11/30/89 12,456 12,461 11,171 12/31/89 12,540 12,497 11,189 1/31/90 12,467 12,419 11,304 2/28/90 12,562 12,465 11,358 3/31/90 12,594 12,480 11,420 4/30/90 12,520 12,439 11,437 5/31/90 12,848 12,705 11,464 6/30/90 12,980 12,873 11,526 7/31/90 13,186 13,053 11,571 8/31/90 13,144 13,006 11,677 9/30/90 13,224 13,122 11,775 10/31/90 13,370 13,304 11,846 11/30/90 13,629 13,505 11,872 12/31/90 14,018 13,833 11,943 2/28/91 14,092 13,917 11,961 3/31/91 14,184 13,994 11,979 4/30/91 14,323 14,138 11,996 5/31/91 14,434 14,217 12,032 6/30/91 14,464 14,228 12,067 7/31/91 14,700 14,382 12,085 8/31/91 14,925 14,655 12,121 9/30/91 15,174 14,904 12,174 10/31/91 15,376 15,074 12,192 11/30/91 15,443 15,251 12,227 12/31/91 15,852 15,621 12,236 1/31/92 15,611 15,471 12,254 2/29/92 15,767 15,519 12,298 3/31/92 15,678 15,457 12,360 4/30/92 15,808 15,596 12,378 5/31/92 16,082 15,829 12,396 6/30/92 16,309 16,056 12,440 7/31/92 16,529 16,365 12,467 8/31/92 16,735 16,532 12,502 9/30/92 16,882 16,760 12,538 10/31/92 16,651 16,559 12,582 11/30/92 16,707 16,491 12,600 12/31/92 16,980 16,704 12,591 1/31/93 17,310 17,014 12,653 2/28/93 17,523 17,264 12,697 3/31/93 17,599 17,328 12,742 4/30/93 17,666 17,463 12,777 5/31/93 17,771 17,416 12,795 6/30/93 18,043 17,669 12,813 8/31/93 18,339 17,968 12,848 9/30/93 18,307 18,042 12,875 10/31/93 18,416 18,085 12,928 11/30/93 18,221 17,996 12,937 12/31/93 18,420 18,070 12,937 1/31/94 18,619 18,249 12,973 2/28/94 18,363 17,999 13,017 3/31/94 17,695 17,736 13,061 4/30/94 17,535 17,621 13,079 5/31/94 17,588 17,633 13,088 6/30/94 17,874 17,868 13,168 8/31/94 17,896 17,920 13,221 9/30/94 17,541 17,771 13,257 10/31/94 17,451 17,774 13,266 11/30/94 17,432 17,696 13,283 12/31/94 17,660 17,755 13,283
GRAPHIC MATERIAL (4) The following line graph hypothetically compares the performance of Franklin Tax-Advantaged High Yield Securities Fund to that of the Salomon Brothers Combined Corporate Index, based on a $10,000 investment from 5/4/87 to 12/31/94.*
Period Ending T/A High Yld SB Comb. Corp 5/4/87 $9,579 $10,000 5/31/87 $9,579 $9,964 6/30/87 $9,512 $10,102 7/31/87 $9,515 $10,062 8/31/87 $9,553 $10,041 9/30/87 $9,157 $9,739 10/31/87 $8,810 $10,008 11/30/87 $9,216 $10,136 12/31/87 $9,350 $10,310 1/31/88 $9,686 $10,738 2/29/88 $9,948 $10,905 3/31/88 $9,857 $10,790 4/30/88 $9,946 $10,724 5/31/88 $9,940 $10,706 6/30/88 $10,098 $10,996 7/31/88 $10,203 $10,952 8/31/88 $10,208 $10,993 9/30/88 $10,299 $11,256 10/31/88 $10,423 $11,454 11/30/88 $10,417 $11,343 12/31/88 $10,500 $11,365 1/31/89 $10,771 $11,549 2/28/89 $10,823 $11,488 3/31/89 $10,765 $11,538 4/30/89 $10,884 $11,732 5/31/89 $11,023 $12,056 6/30/89 $11,224 $12,396 7/31/89 $11,248 $12,603 8/31/89 $11,367 $12,443 9/30/89 $11,233 $12,464 10/31/89 $10,986 $12,667 11/30/89 $10,912 $12,756 12/31/89 $10,987 $12,768 1/31/90 $10,647 $12,599 2/28/90 $10,298 $12,594 3/31/90 $10,442 $12,634 4/30/90 $10,174 $12,524 5/31/90 $10,402 $12,896 6/30/90 $10,651 $13,120 7/31/90 $10,968 $13,295 8/31/90 $10,358 $13,040 9/30/90 $9,543 $13,005 10/31/90 $8,984 $13,001 11/30/90 $9,130 $13,259 12/31/90 $9,188 $13,450 1/31/91 $8,998 $13,648 2/28/91 $9,925 $13,983 3/31/91 $10,805 $14,260 4/30/91 $11,436 $14,529 5/31/91 $11,446 $14,635 6/30/91 $11,878 $14,694 7/31/91 $12,496 $14,929 8/31/91 $12,781 $15,251 9/30/91 $12,993 $15,545 10/31/91 $13,502 $15,736 11/30/91 $13,603 $15,900 12/31/91 $13,782 $16,356 1/31/92 $14,247 $16,284 2/29/92 $14,541 $16,471 3/31/92 $14,806 $16,442 4/30/92 $14,977 $16,551 5/31/92 $15,187 $16,883 6/30/92 $15,316 $17,152 7/31/92 $15,528 $17,549 8/31/92 $15,759 $17,730 9/30/92 $15,877 $17,929 10/31/92 $15,738 $17,652 11/30/92 $15,988 $17,696 12/31/92 $16,189 $17,986 1/31/93 $16,537 $18,420 2/28/93 $16,805 $18,813 3/31/93 $17,156 $18,921 4/30/93 $17,251 $19,065 5/31/93 $17,394 $19,108 6/30/93 $17,797 $19,551 7/31/93 $18,092 $19,696 8/31/93 $18,157 $20,117 9/30/93 $18,189 $20,196 10/31/93 $18,619 $20,319 11/30/93 $18,702 $20,142 12/31/93 $18,967 $20,279 1/31/94 $19,271 $20,652 2/28/94 $19,120 $20,274 3/31/94 $18,296 $19,660 4/30/94 $18,081 $19,485 5/31/94 $18,074 $19,452 6/30/94 $18,176 $19,423 7/31/94 $18,127 $19,809 8/31/94 $18,327 $19,859 9/30/94 $18,424 $19,573 10/31/94 $18,485 $19,541 11/30/94 $18,313 $19,463 12/31/94 $18,509 $19,640
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