0000802669-95-000015.txt : 19950829 0000802669-95-000015.hdr.sgml : 19950829 ACCESSION NUMBER: 0000802669-95-000015 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950828 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: 95567530 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: 95567531 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: 95567532 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 MESSAGE FROM THE MANAGING GENERAL PARTNER Fellow Shareholders: It's a pleasure to bring you the semi-annual report of the Franklin Partners Funds(R) for the period ended June 30, 1995. Calendar year 1994 was one of the worst for fixed-income securities in over 20 years. The 20-year U.S. Treasury bond recorded its poorest performance since 1967.1 Following this disappointing year, 1995 to date has been a welcome change. Stock and bond markets enjoyed strong performance through the first six months of the year. In February, the Dow Jones Industrial Average(R) broke the 4,000 mark for the first time, and finished the period above 4,500. The bond market, as measured by the Lehman Brothers Aggregate Bond Index, rose 7.69% to $104.02 from $96.57 on December 31, 1994. As you know, markets experience both ups and downs, which is a normal part of investing. That's why we've always encouraged our shareholders to focus on their long-term investment goals. History has shown that, over the long term, stocks and bonds have delivered impressive results.2 By concentrating on long-term investment goals, you need not be unduly concerned with short-term market fluctuations. Furthermore, many financial experts agree that a technique known as "dollar cost averaging" may be one of the best ways to take advantage of market downturns and rallies. With dollar cost averaging, you invest a fixed dollar amount at regular intervals, regardless of the market's direction. Using this method, you automatically purchase more shares when prices are low, and fewer shares when prices are high, which can significantly reduce your average cost per share. Of course, no investment technique can assure a profit or protect against loss. But dollar cost averaging can provide you with a simple investment strategy that can minimize the effects of market volatility and help you make the most of your investment dollars.3 For more information on dollar cost averaging, please see your investment representative. Or, call Franklin Templeton Fund Information, toll free, at 1-800/DIAL BEN. You can also help minimize the effects of market fluctuations by diversifying your investments. Mutual funds offer a level of diversification that would be almost impossible for individual investors to achieve on their own. In subsequent sections of this report, specific discussions on each fund are enclosed. As always, we welcome your questions, appreciate your trust and support, and look forward to serving you in the years to come. Sincerely, Rupert H. Johnson, Jr. Executive Vice President and Managing General Partner 2. Past performance cannot guarantee future results. 3. When using this strategy, you should consider your financial ability to continue purchases through periods of low price levels or changing economic conditions. Table of Contents Page Message from the Managing General Partner 1 Fund Reports Franklin Tax-Advantaged International Bond Fund 3 Franklin Tax-Advantaged U.S. Government Securities Fund 6 Franklin Tax-Advantaged High Yield Securities Fund 8 Statement of Investments 11 Financial Statements 21 Notes to Financial Statements 24 1. Source: Ibbotson Associates. Based on one-year total returns of long-term government bonds from January 1926 to December 1994. FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND Fund Objective 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. For most of the six-month period under review, long-term interest rates declined in the United States and in foreign industrialized nations. This decline followed moves by the central banks of Germany and Japan aimed at lowering each country's interest rates and a shift in the Federal Reserve Board's monetary policy to a more neutral stance. In February 1995, Federal Reserve Chairman Alan Greenspan pointed to the slowing growth rate of the U.S. Gross Domestic Product (GDP) as a reason to keep monetary policy steady for the time being. GDP reports for the first quarter of 1995 confirmed the Fed's view that the economy had responded to the tightening moves made over the last year. Growth in the first quarter of 1995 slowed to an annualized rate of 2.7%, down from 5.1% in the fourth quarter of 1994.* However, this recent data raised concerns that growth might be slowing too quickly, prompting the Fed to lower the federal funds rate one-quarter of one percentage point on July 6, 1995. The downward growth trend in the U.S. is mirrored in the performance of other nations. For example, the strong Deutschemark is exerting pressure on the German economy while alleviating pressure on wholesale prices. The Bundesbank also eased monetary policy, amid expectations that the rate of growth will slow next year. The situation is similar in Japan, where earlier estimates of growth, around 2.5% for 1995, were revised downward to 1.8%.** GRAPHIC MATERIAL 1 OMMITTED - SEE APPENDIX AT END OF DOCUMENT Although the rate of growth is slowing globally, the world economy is still expanding. The question, then, is this: how is continued expansion affecting consumer prices? The answer seems to be that pressure on price levels is only moderate; for the most part, inflation has been subdued. For this reason, signs of slower economic growth in the U.S. in the last two months of the reporting period resulted in surging prices in global bond markets. Rising bond prices benefited the Franklin Tax- Advantaged International Bond Fund. For the six month period ending June 30, 1995, your fund reported a cumulative total return of +10.65%. At the end of the fund's previous fiscal year, following a period of market volatility, it had reported a cumulative total return of only +2.06% on December 31, 1994. Total return measures the change in value of an investment over the periods indicated, assuming the reinvestment of dividends, and does not include the fund's maximum sales charge. One of the fund's Australian positions, worth approximately 4% of the fund's portfolio, matured. With the proceeds from this holding, we were able to gain exposure to the Japanese market. We purchased a yen-dominated Eurobond issued by the International Bank of Reconstruction and Development, bringing our total holdings in Japan to 2.1% of total net assets from zero on December 31, 1994. With global interest rates on a downward trend, world economic growth occurring at a moderate pace, and inflation remaining subdued, we believe that future prospects for the fund are positive. Of course, we will maintain a conservative investment 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 currency fluctuations, as discussed in the fund's prospectus. Also, as always, we will purchase only those bonds issued or backed by the full faith and credit of foreign governments. Performance Summary The fund's share price, as measured by net asset value, increased to $11.42 on June 30, 1995, from $10.78 on December 31, 1994. Over the reporting period, shareholders received income distributions totaling 48.8 cents ($0.488) per share. Based on the fund's maximum offering price of $11.93 on June 30, 1995, and an annualization of its distributions for the 30 days ended on that date, the fund's distribution rate was 7.87%. Dividends will vary depending on income earned by the fund, and past performance is not predictive of future results. The Franklin Tax-Advantaged International Bond Fund reported a total return of +10.65% for the six-month period, and a total return of +14.87% for the one-year period, ended June 30, 1995. Of course, we have always maintained a long-term perspective when managing the fund, and we encourage shareholders to view their investments in a similar manner. As you can see from the table to the right, the fund has delivered a total return of over 60% since its inception on June 9, 1990. As always, it is important to remember that there are special risks involved with foreign investing. Fund share prices and returns will fluctuate with market conditions, currencies and the economic and political climates where investments are made; however, such fluctuation can provide long-term investors with opportunities to purchase securities at prices which may be depressed due to investor pessimism surrounding political and economic uncertainty. Franklin Tax-Advantaged International Bond Fund Periods ended June 30, 1995 Since Inception One-Year Five-Year (6/9/90) Cumulative Total Return1 14.87% 58.09% 60.60% Average Annual Total Return2 9.97% 8.65% 8.87% Distribution Rate3 7.87% 30-Day Standardized Yield4 7.81% 1. Cumulative total return shows the change in value of an investment over the specified periods and does not reflect the current maximum 4.25% initial sales charge. See note below. 2. Average annual total return represents the average annual change in value of an investment over the specified periods and includes the current maximum 4.25% initial sales charge. See note below. 3. Distribution rate is based on an annualization of the distributions paid over the 30 days ended June 30, 1995 and the maximum offering price of $11.93 on that date. 4. Yield, calculated as required by the SEC, is based on earnings of the fund's portfolio during the 30 days ended June 30, 1995. 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 eliminated the sales charge on reinvested dividends and implemented a plan of distribution under Rule 12b-1, which will affect future performance. All total return calculations assume reinvestment of dividends at net asset value. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Past performance is not predictive of future results. The fund's manager has agreed in advance to waive a portion of its 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 7.07%. The fee waiver may be discontinued at any time, upon notice to the fund's managing general partners. *Source: U.S. Commerce Department **Source:IMF World Economic Outlook, October 1994 and May 1995 Franklin Tax-Advantaged International Bond Fund Change in Geographic Distribution As a percentage of Total Net Assets Country 12/31/94 6/30/95 Australia 16.2% 12.1% Canada 11.7% 12.5% Denmark 11.0% 12.6% France 7.2% 8.1% Germany 2.5% 2.8% Italy 8.2% 7.9% Japan 0.0% 2.1% New Zealand 10.3% 11.0% Spain 5.7% 6.1% Sweden 7.5% 7.5% United Kingdom 12.3% 12.3% United States 7.3% 5.0% For a complete list of portfolio holdings, please see page 11 of this report. The fund's shares are not guaranteed by any government and will fluctuate with market conditions. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND Fund Objective Seeks to provide current income through investment in U.S. government obligations, primarily Government National Mortgage Association securities. Based on the U.S. economy's performance in the first half of 1995, it appears that the Federal Reserve Board successfully engineered its much sought-after "soft landing"-- higher interest rates helped slow the economy and curb inflation without sending the economy back into recession. According to the first quarter U.S. Gross Domestic Product (GDP) report, growth slowed to an annualized rate of 2.7%, from 5.1% in the fourth quarter of 1994.* As a result, the Federal Reserve began easing monetary policy. In fact, as this report was being written, the Fed lowered the federal funds rate (the rate at which banks charge each other for overnight loans) to 5.75% on July 6, 1995, from 6.00%. The economic environment of moderate growth and falling interest rates, coupled with signs of low inflation, is very positive for financial assets, and securities markets have responded accordingly. Specifically, over the six-month reporting period, U.S. Treasury bond prices rose, pushing yields down. As of June 30, 1995, the yield on 30-year U.S. Treasuries dropped to 6.63% from 7.89% on December 30, 1994.** Amid falling interest rates, mortgage rates also declined, which should stimulate the housing sector, and could lead to increased economic activity later in the year. Should this occur, subsequent Federal Reserve action would likely lead to a decline in interest rate volatility, which would be beneficial to callable securities, such as U.S. agency mortgage passthroughs (mortgage-backed certificates in which income is passed directly to the investor). Government National Mortgage Association (GNMA) securities remain the fund's primary income-generating investment. The fund may also invest in other mortgage passthroughs, such as Federal National Mortgage Association (FNMA) securities and Federal Home Loan Mortgage Corporation (FHLMC) securities. The fund will continue its policy of avoiding derivative securities. Further, the fund is not managed as an aggressive trading vehicle but as an income fund, which we feel is an appropriate way of investing in U.S. agency mortgage passthroughs. As we approach the elections in 1996, the political environment will influence financial markets. Also, several congressional legislators are considering reducing the role of the Federal Housing Administration (FHA). Potentially, that could reduce the future supply of GNMA securities, and such scarcity would thus enhance their value relative to other securities. Performance Summary The Franklin Tax-Advantaged U. S. Govern- ment Securities Fund reported a six-month total return of +12.02% and a one-year total return of +13.16% for the period ended June 30, 1995. Of course, we have always maintained a long-term perspective when managing the fund, and we encourage shareholders to view their investments in a similar manner. As you can see from the table to the right, the fund has delivered a cumulative total return of over 106% since its inception on May 4, 1987. The fund's share price, as measured by net asset value, increased from $9.76 on December 31, 1994, to $10.56 on June 30, 1995. During the sixth-month period, shareholders received distributions of 35.7 cents ($0.357) per share in dividend income. Based on the fund's maximum offering price of $11.03 on June 30, 1995, and an annualization of its distributions for the 30 days ended on that date, the fund's distribution rate was 6.51%. Of course, past performance is not indicative of future results, and dividends will vary depending on income earned by the fund. Franklin Tax-Advantaged U.S. Government Securities Fund Periods ended June 30, 1995 Since Inception One-Year Five-Year (5/4/87) Cumulative Total Return1 13.16% 52.41% 106.53% Average Annual Total Return2 8.40% 7.84% 8.72% Distribution Rate3 6.51% 30-Day Standardized Yield4 6.43% 1. Cumulative total return shows the change in value of an investment over the specified periods and does not reflect the current maximum 4.25% initial sales charge. See note below. 2. Average annual total return represents the average annual change in the value of an investment over the specified periods and includes the current maximum 4.25% initial sales charge. See note below. 3. Distribution rate is based on an annualization of the distributions paid over the 30 days ended June 30, 1995, and the maximum offering price of $11.03 on that date. 4. Yield, calculated as required by the SEC, is based on earnings of the fund's portfolio during the 30 days ended June 30, 1995. 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 eliminated the sales charge on reinvested dividends and implemented a plan of distribution under Rule 12b-1, which will affect future performance. All total return calculations assume reinvestment of dividends at net asset value. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Past performance is not predictive of future results. *Source: U.S. Commerce Department **Source:Micropal FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND Fund Objective Seeks to provide high current income from a portfolio of high yielding, lower-rated corporate bonds issued by U.S. and non-U.S. corporations. During the six months under review, the economy demonstrated signs of low inflation and slow growth. Since the start of the reporting period, interest rates have declined; in fact, the yield on the 30-year U.S. Treasury bond decreased to 6.63% on June 30, 1995, down from 7.89% on December 31, 1994.* On July 6, 1995, in response to slowing growth, the Federal Reserve Board moved to ease monetary policy by lowering short-term interest rates to 5.75% from 6.00%. Lower interest rates, as well as strong corporate earnings, were positive factors for the high yield market. Despite a relatively heavy volume of new issues within this sector, demand remained brisk, causing prices of high yield securities to rise. Thanks to both the positive performance of the high yield market and a carefully engineered re-direction of the fund's portfolio, we are pleased to announce that the fund outperformed many of its competitors. In fact, the fund's total return of +16.22% earned it a #1 ranking out of 106 high yield funds for the one-year period ended June 30, 1995, as measured by Lipper Analytical Services, Inc., a nationally recognized mutual fund research organization.** The average return for funds in this category was +8.71%. The steps we took to achieve this ranking included careful issue selection and strategic changes in industry weightings. We purchased additional securities in defensive industries that is, industries which tend to perform well during periods of economic uncertainty. For example, we increased the portfolio's weighting in the health care services industry to 12.3% of total net assets on June 30, 1995, from 9.0% at the beginning of the reporting period. We also reduced our exposure to more cyclical industries, such as wireless communications. Our weighting in that industry was 3.1% of the fund's portfolio at the end of the reporting period, down from 5.8% on December 31, 1994. Finally, the fund increased its exposure to the gaming industry, to 9.3% on June 30, 1995, from 8.0% on December 31, 1994. We felt the gaming sector was undervalued, and we were pleased to see it outperform the overall high yield market. The overall credit quality of the fund's portfolio also improved. This improvement occurred as a result of both stronger ratings of securities held and purchases of higher rated securities. For example, as rated by Moody's Investors Service, the amount of B1-rated securities increased to 20.1% by June 30, 1995, from 16.1% at the beginning of the year. Second, the amount of B2-rated securities decreased to 24.8% of the fund on June 30, 1995, from 32.3% on December 31, 1994. If recent economic trends continue, then moderate growth with subdued inflation could continue in the months ahead. Such a trend would prove positive for financial markets overall, and for the high yield market in particular. With these market conditions, the portfolio's improved credit quality, and a heavy weighting in defensive industries, we feel the fund is well-positioned for the future. Performance Summary The Franklin Tax-Advantaged High Yield Securities Fund reported a six-month total return of +14.13% and a one-year total return of +16.22% for period ended June 30, 1995. Of course, we have always maintained a long-term perspective when managing the fund, and we encourage shareholders to view their investments in a similar manner. As you can see from the table to the right, the fund has delivered a cumulative total return of over 120% since its inception on May 4, 1987. The fund's share price, as measured by net asset value, increased to $8.69 on June 30, 1995, from $7.99 on December 31, 1994. During the sixth-month period, shareholders received distributions totaling 40.7 cents ($0.407) per share in dividend income. Based on the fund's maximum offering price of $9.08 on June 30, 1995, and an annualization of its distributions for the 30 days ended on that date, the fund's distribution rate was 8.66%. Of course, past performance is not indicative of future results, and dividends will vary depending on income earned by the fund. As always, it is important to remember that there are special risks involved with foreign investing. Fund share prices and returns will fluctuate with market conditions, currencies and the economic and political climates where investments are made; however, such fluctuations can provide long-term investors with opportunities to purchase securities at prices which may be depressed due to investor pessimism surrounding political and economic uncertainty. Franklin Tax-Advantaged High Yield Securities Fund Periods ended June 30, 1995 Since Inception One-Year Five-Year (5/4/87) Cumulative Total Return1 16.22% 98.34% 120.53% Average Annual Total Return2 11.22% 13.69% 9.59% Distribution Rate3 8.66% 30-Day Standardized Yield4 8.74% 1. Cumulative total return shows the change in value of an investment over the specified periods and does not reflect the current maximum 4.25% initial sales charge. See note below. 2. Average annual total return represents the average annual change in the value of an investment over the specified periods and includes the current maximum 4.25% initial sales charge. See note below. 3. Distribution rate is based on an annualization of the distributions paid over the 30 days ended June 30, 1995, and the maximum offering price of $9.08 on that date. 4. Yield, calculated as required by the SEC, is based on earnings of the fund's portfolio during the 30 days ended June 30, 1995. 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 eliminated the sales charge on reinvested dividends and implemented a plan of distribution under Rule 12b-1, which will affect future performance. All total return calculations assume reinvestment of dividends at net asset value. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than their original cost. Past performance is not predictive of future results. Past expense reductions by the fund's manager increased the fund's total returns. *Source: Micropal **Source: Lipper Analytical Services, Inc. The fund was ranked #7 out of 60 funds for the five-year period, ended June 30, 1995, as measured by Lipper Analytical Services, Inc. Lipper rankings do not include sales charges; past expense reductions by the fund's manager increased the fund's total return. Rankings may have been different if these factors had been considered. Past performance is not predictive of future results. Franklin Tax-Advantaged High Yield Securities Fund Top Ten Holdings on June 30, 1995 As a percentage of total net assets Company % of total Industry net assets Columbia/HCA Healthcare 3.30% Health Care services Pathmark Stores, Inc. 2.98% Food Retailing Abbey Healthcare Group, Inc. 2.56% Healthcare Services IMC Fertilizer Group, Inc. 2.39% Chemicals Fort Howard Corp. 2.37% Forest & Paper Products Aztar Corp. 2.24% Gaming & Leisure Specialty Foods Corp. 2.21% Food Retailing Truck Components, Inc. 2.19% Automotive Dr. Pepper Bottling Holdings, S.F. 2.09% Food & Beverages New World Group, Inc., S.F. 2.06% Media & Broadcasting For a complete list of portfolio holdings, please see page 16 of this report. Franklin Partners Fund FRANKLIN PARTNERS FUNDS Statement of Investments in Securities and Net Assets, June 30, 1995 (unaudited)
Face Value Country* Amount Franklin Tax-Advantaged International Bond Fund (Note 1) Foreign Notes, Bills, Bonds & Government Securities 94.2%....... Australia 12.1% AU 820,000 EIB Global Bond, 10.25%, 10/01/01 ............................... $ 633,085 AU 1,000,000 Eurofima, 9.875%, 01/17/07 ...................................... 744,069 AU 425,000 Queensland Treasury Corp., notes, 12.00%, 07/15/99 .............. 338,403 AU 1,660,000 Queensland Treasury Corp., notes, 8.00%, 05/14/03 ............... 1,099,784 ------------- 2,815,341 ------------- Canada 11.7% CA 400,000 Government of Canada, 8.50%, 04/01/02 ........................... 302,821 CA 945,000 Government of Canada, 10.25%, 02/01/04 .......................... 787,953 CA 420,000 Hydro-Quebec, Eurobonds, 11.25%, 10/10/00 ....................... 347,312 CA 150,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02 ....................... 114,435 CA 1,500,000 Province of British Columbia, 9.00%, 01/09/02 ................... 1,152,557 ------------- 2,705,078 ------------- Denmark 12.6% DK 3,750,000 Government of Denmark, 9.00%, 11/15/00 .......................... 720,895 DK 1,716,000 Nykredit, 9.00%, 10/01/12 ....................................... 320,409 DK 5,893,000 Nykredit, 6.00%, 10/01/26 ....................................... 818,154 DK 7,671,000 Real Kredit Denmark, 6.00%, 10/01/26 ............................ 1,065,002 ------------- 2,924,460 ------------- France 8.1% FR 4,250,000 Credit National, 9.25%, 10/02/01 ................................ 947,791 FR 2,000,000 Electricite de France, 8.30%, 02/09/99 .......................... 427,271 FR 4,250,000 c French OAT, Bond, 0.00%, 10/25/15 ............................... 167,153 FR 510,000 c French OAT, Strip, 0.00%, 10/25/16 .............................. 18,303 FR 1,500,000 Government of France, OAT, 8.50%, 12/26/12 ...................... 324,226 ------------- 1,884,744 ------------- Germany 2.8% DD 850,000 West Japan Railway Co., 8.70%, 06/25/97 ......................... 652,404 ------------- Italy 7.9% IT 2,000,000,000 Certificati di Credito del Tesoro, 12.00%, 01/20/98 ............. 1,227,807 IT 1,000,000,000 Certificati di Credito del Tesoro, 12.25%, 01/01/00 ............. 613,476 ------------- 1,841,283 ------------- Japan 2.1% JP 34,000,000 International Bank of Reconstruction and Development, 6.75%, 03/15/20 484,726 ------------- New Zealand 11.0% NZ 2,275,000 New Zealand Government, 8.00%, 07/15/98 ......................... $ 1,524,515 NZ 1,500,000 New Zealand Government, 8.00%, 04/15/04 ......................... 1,033,825 ------------- 2,558,340 ------------- Spain 6.1% ES 73,000,000 Government of Spain, 11.60%, 01/15/97 ........................... 608,409 ES 100,000,000 Government of Spain, 10.90%, 08/30/03 ........................... 798,349 ------------- 1,406,758 ------------- Sweden 7.5% SE 8,000,000 Government of Sweden, 6.00%, 02/09/05 ........................... 782,119 SE 5,100,000 Staten Bostadiffinansier, 12.50%, 01/23/97 ...................... 719,997 SE 1,800,000 Staten Bostadiffinansier, 11.00%, 01/21/99 ...................... 248,129 ------------- 1,750,245 ------------- United Kingdom 12.3% GB 300,000 Abbey National Treasury Service, 10.50%, 04/22/97 ............... 495,186 GB 460,000 Export-Import Bank of Japan, 10.75%, 05/15/01 ................... 794,941 GB 270,000 Government of Italy, Eurobonds, 10.50%, 04/28/14 ................ 449,156 GB 715,000 United Kingdom Treasury, Conversion, 7.00%, 08/06/97 ............ 1,122,996 ------------- 2,862,279 ------------- Total Foreign Notes, Bills, Bonds & Government Securities (Cost $22,003,680) 21,885,658 ------------- Short Term Investments 2.2% Canada .8% CA 250,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96 (Cost $216,240)...... 185,805 ------------- Total Investments before Repurchase Agreements (Cost $22,219,920) 22,071,463 ------------- d,e Receivables from Repurchase Agreements 1.4% US 341,683 Joint Repurchase Agreement, 6.22%, 07/03/95 (Maturity Value $333,298) (Cost $333,125) Collateral: U.S. Treasury Bills, 10/19/95 - 06/27/96 U.S. Treasury Notes, 3.875% - 8.625%, 09/30/95 - 02/15/00. ... 333,125 ------------- Total Investments (Cost $22,553,045) 96.4% ........... 22,404,588 ------------- Other Assets and Liabilities, Net 3.6% ............... 827,773 ------------- Net Assets 100.0% .................................... $23,232,361 ============= At June 30, 1995, the net unrealized depreciation based on the cost of investments for income tax purposes of $22,553,045 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ..................... $ 946,830 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ....... ............ (1,095,287) ------------- Net unrealized depreciation ................................... $ (148,457) =============
PORTFOLIO ABBREVIATION: OAT - Obligations Assumable by the Treasurer COUNTRY LEGEND: AU - Australia CA - Canada DD - Germany DK - Denmark ES - Spain FR - France GB - United Kingdom IT - Italy JP - Japan NZ - New Zealand SE - Sweden US - United States of America *Securities traded in currency of country indicated. cZero coupon bonds. Accretion rate may vary. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(h) regarding Joint Repurchase Agreement. The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Statement of Investments in Securities and Net Assets, June 30, 1995 (unaudited)
Face Value Amount Franklin Tax-Advantaged U.S. Government Securities Fund (Note 1) Government National Mortgage Association (GNMA) 96.5% $ 9,772,443 GNMA I, SF, 6.00%, 10/15/23 - 11/15/23 ....................................... $ 9,146,401 66,034,762 GNMA I, SF, 6.50%, 05/15/23 - 03/15/24 ....................................... 63,475,914 7,719,674 GNMA II, 6.50%, 09/20/23 ..................................................... 7,362,639 21,366,142 GNMA I, PL, 7.00%, 03/15/13 - 06/15/28 ....................................... 20,558,245 55,874,194 g GNMA I, SF, 7.00%, 03/15/22 - 07/20/25 ....................................... 55,018,646 21,557,660 GNMA II, 7.00%, 11/20/16 - 11/20/23 .......................................... 21,092,833 48,561,028 GNMA I, SF, 7.50%, 01/15/17 - 04/15/23 ....................................... 48,849,381 57,251,137 GNMA II, 7.50%, 09/20/16 - 09/20/23 .......................................... 57,269,054 1,161,548 GNMA I, PL, 8.00%, 03/15/32 .................................................. 1,163,358 73,965,528 GNMA I, SF, 8.00%, 11/15/15 - 05/15/24 ....................................... 75,744,984 11,646,625 GNMA II, 8.00%, 11/20/16 - 08/20/22 .......................................... 11,883,143 7,168,622 GNMA I, PL, 8.25%, 07/15/31 .................................................. 7,233,548 17,667,802 GNMA I, SF, 8.50%, 06/15/16 - 05/15/22 ....................................... 18,357,869 6,197,624 GNMA II, 8.50%, 11/20/21 - 03/20/22 .......................................... 6,400,955 4,580,319 GNMA I, SF, 9.00%, 05/15/16 - 11/15/21 ....................................... 4,815,037 3,607,683 GNMA I, SF, 9.50%, 01/15/17 -10/15/21 ........................................ 3,825,273 173,969 GNMA, GPM , 9.75%, 08/15/16 .................................................. 185,250 2,480,886 GNMA I, SF, 10.00%, 01/15/16 - 06/15/19 ...................................... 2,702,616 939,061 GNMA II, 10.00%, 10/20/16 - 11/20/20 ......................................... 1,010,078 271,439 GNMA, GPM , 10.25%, 02/15/16 - 09/15/20 ...................................... 294,088 1,096,790 GNMA I, SF, 10.50%, 02/15/16 - 07/15/19 ...................................... 1,209,212 1,955,555 GNMA II, 10.50%, 07/20/17 - 02/20/19 ......................................... 2,124,222 236,686 GNMA I, SF, 11.00%, 10/15/13 - 09/15/14 ...................................... 263,018 1,411,534 GNMA II, 11.00%, 07/20/17 - 05/20/19 ......................................... 1,543,865 151,679 GNMA I, SF, 11.50%, 08/15/16 - 12/15/17 ...................................... 170,876 502,100 GNMA II, 11.50%, 08/20/16 - 03/20/19 ......................................... 555,606 180,951 GNMA I, SF, 12.00%, 06/15/15 ................................................. 205,944 ------------- Total Government National Mortgage Association (Cost $427,976,053) ..... 422,462,055 ------------- d,e Receivables from Repurchase Agreements 3.7% 16,852,731 Joint Repurchase Agreement, 6.20%, 07/03/95 (Maturity Value $16,467,926) (Cost $16,459,394) Collateral: U.S. Treasury Bills, 10/19/95 - 06/27/96 U.S. Treasury Notes, 3.875% - 8.625%, 09/30/95 - 02/15/00 . ...... 16,459,394 ------------- Total Investments (Cost $444,435,447) 100.2% ...................... 438,921,449 Liabilities in Excess of Other Assets, Net (.2 %) ................. (1,020,316) ------------- Net Assets 100.0% ................................................. $437,901,133 ============= At June 30, 1995, the net unrealized depreciation based on the cost of investments for income tax purposes of $444,476,693 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ................................................ $ 3,520,983 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value............................................... (9,076,227) ------------- Net unrealized depreciation ................................................ $ (5,555,244) =============
PORTFOLIO ABBREVIATIONS: GPM - Graduated Payment Mortgage PL - Project Loan SF - Single Family dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(h) regarding Joint Repurchase Agreement. gSee Note 1(e) regarding securities purchased on a when-issued or delayed delivery basis. The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Statement of Investments in Securities and Net Assets, June 30, 1995 (unaudited)
Face Value Amount Franklin Tax-Advantaged High Yield Securities Fund (Note 1) Bonds 92.5% Automotive 3.4% $1,100,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ................................. $ 1,160,500 2,000,000 Truck Components, Inc., senior notes, 12.25%, 06/30/01 ......................... 2,215,000 ------------- 3,375,500 ------------- Building Products .7% 800,000 Nortek, Inc., senior sub. notes, 9.875%, 03/01/04 .............................. 724,000 ------------- Cable Television 7.5% 1,500,000 Comcast Corp. , senior sub. deb., 9.50%, 01/15/08 .............................. 1,511,250 1,900,000 Continental Cablevision, Inc., senior sub. deb., 9.00%, 09/01/08 ............... 1,930,875 2,500,000c Diamond Cable Communication Co., senior disc. notes, zero coupon to 09/30/99, (original accretion rate 13.25%), 13.25% thereafter, 09/30/04 . ................. 1,656,250 1,200,000f Rogers Cablesystems, Inc., senior secured deb. (Canada), 9.65%, 01/15/14 ....... 742,493 200,000 Scott Cable Communications, Inc., S.F., sub. deb., 12.25%, 04/15/01 ............ 151,000 1,500,000 Time Warner, Inc., senior notes, 9.125%, 01/15/13 .............................. 1,545,000 ------------- 7,536,868 ------------- Chemicals 5.1% 1,250,000 Applied Extrusion Technology, senior notes, 11.50%, 04/01/02 ................... 1,318,750 1,500,000 Harris Chemical North America, Inc., senior sub. notes, 10.75%, 10/15/03 ....... 1,410,000 2,225,000 IMC Fertilizer Group, Inc., senior notes, 10.75%, 06/15/03 ..................... 2,414,125 ------------- 5,142,875 ------------- Consumer Goods 1.9% 1,000,000 Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 .............. 943,750 1,000,000 Revlon Consumers Products Corp., senior sub. notes, 10.50%, 02/15/03 ........... 985,000 ------------- 1,928,750 ------------- Financial .8% 750,000 American Reinsurance Corp., senior sub. notes, 10.875%, 09/15/04 ............... 830,757 ------------- Food & Beverages 11.3% 950,000 Beatrice Foods, Inc., senior sub. notes, 12.00%, 12/01/01....................... 900,125 1,500,000 Coca Cola Bottling Group Southwest, Inc., senior sub. notes, 9.00%, 11/15/03 ... 1,479,375 300,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.75%, 02/01/05 ................ 320,250 2,065,000c Dr Pepper Bottling Holdings, S.F., senior disc. notes, zero coupon to 02/15/98, (original accretion rate 10.25%), 10.25% thereafter, 02/15/00 .................. 2,116,625 1,129,000c 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 .................. 1,011,866 1,800,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 .................... 1,876,500 2,250,000 Specialty Foods Corp., senior notes, 10.25%, 08/15/01 .......................... 2,233,125 1,500,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 ................. 1,477,500 ------------- 11,415,366 ------------- Food Retailing 5.9% $1,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02 ..................... $ 1,055,000 2,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 ..................... 1,960,000 1,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 ............................... 945,000 1,000,000 Ralphs Grocery Co., senior notes, 10.450%, 06/15/04 ............................ 1,005,000 1,000,000 Ralphs Grocery Co., senior sub. notes, 11.00%, 06/15/05 ........................ 975,000 ------------- 5,940,000 ------------- Forest & Paper Products 5.9% 1,500,000 Container Corp. of America, guaranteed senior notes, 11.25%, 05/01/04 .......... 1,580,625 1,000,000 Fort Howard Corp., senior sub. notes, 9.00%, 02/01/06 .......................... 920,000 1,500,000 Fort Howard Corp., sub. notes., 10.00%, 03/15/03 ............................... 1,483,125 1,500,000 REPAP Wisconsin, Inc., senior notes, 9.875%, 05/01/06 .......................... 1,460,625 500,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 . ......................... 540,000 ------------- 5,984,375 ------------- Gaming & Leisure 9.3% 2,000,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 . ............................. 2,265,000 2,000,000 Bally's Grand, first mortgage, Series B, 10.375%, 12/15/03 . ................... 1,970,000 1,500,000 Harrah's Jazz Co., first mortgage, 14.25%, 11/15/01 . .......................... 1,560,000 500,000 MGM Grand Hotels Finance Corp., guaranteed first mortgage, 11.75%, 05/01/99 .... 543,750 1,000,000b Players International, Inc., senior notes, 10.875%, 04/15/05 ................... 987,500 2,000,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ............................ 2,067,500 ------------- 9,393,750 ------------- Health Care Services 12.3% 2,500,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 ............... 2,587,500 1,000,000 Columbia/HCA Healthcare, Inc., 6.41%, 06/15/00 . ............................... 1,143,750 2,000,000 Columbia/HCA Healthcare, Inc., 7.69%, 06/15/25 . ............................... 2,200,000 1,000,000b Dade International, Inc., senior sub. notes, 13.00%, 02/01/05 . ................ 1,055,000 1,750,000b Integrated Health Services, Inc., senior sub. notes, 9.625%, 05/31/02 .......... 1,776,250 250,000 National Medical Enterprises, senior notes, 9.625%, 09/01/02 ................... 260,625 900,000 National Medical Enterprises, senior sub. notes, 10.125%, 03/01/05 ............. 956,250 1,000,000 OrNda Healthcorp., S.F., senior sub. deb., 12.25%, 05/15/02 .................... 1,105,000 1,500,000 Sola Group, Ltd., senior sub. notes, 6.00%, 12/15/03 ........................... 1,372,500 ------------- 12,456,875 ------------- Industrial 3.6% $2,500,000c American Standard, Inc., senior sub. deb., zero coupon to 06/01/98, (original accretion rate 11.50%), 11.50% thereafter, 06/01/05 ..................................... $ 1,900,000 750,000b Day International Group, senior sub. notes, 11.125%, 06/01/05 .................. 757,500 1,000,000 Easco Corp., senior notes, Series B, 10.00%, 03/15/01 .......................... 1,000,000 ------------- 3,657,500 ------------- Lodging 1.9% 2,000,000b HMH Properties, Inc., senior notes, 9.50%, 05/15/05 ............................ 1,945,000 ------------- Media & Broadcasting 6.6% 1,000,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 . ............... 1,070,000 1,400,000b Granite Broadcating Corp., senior sub. notes, 10.375%, 05/15/05 ................ 1,399,132 1,500,000 K-III Communications Corp., S.F., senior notes, 10.25%, 06/01/04 ............... 1,567,500 2,000,000 New World Group, Inc., S.F., senior notes, 11.00%, 06/30/05 .................... 2,085,000 500,000 News America Holdings, Inc., senior notes, 9.125%, 10/15/99 .................... 540,754 ------------- 6,662,386 ------------- Restaurants 1.2% 1,500,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 ....................... 1,177,500 ------------- Retail 1.5% 1,500,000 Eckerd Jack Corp., senior sub. notes, 9.25%, 02/15/04 .......................... 1,560,000 ------------- Technology & Information Services 3.9% 2,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03 .................. 2,070,000 1,500,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00 ............................... 1,473,750 400,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 ......................... 426,000 ------------- 3,969,750 ------------- Textiles & Apparel 2.0% 1,030,000 Forstmann & Co., Inc., S.F., senior sub. notes, 14.75%, 04/15/99 ............... 1,066,050 1,000,000 Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/01/05 .................... 967,500 ------------- 2,033,550 ------------- Transportation 3.6% 1,500,000 Gearbulk Holding, Ltd., senior notes, 11.25%, 12/01/04 . ....................... 1,597,500 2,000,000 Southern Pacific Transportation Co., senior notes, 9.375%, 08/15/05 ............ 2,065,000 ------------- 3,662,500 ------------- Utilities 1.0% 1,000,000 Midland Funding II, S.F., senior lease obligation, Series B, 13.25%, 07/23/06 .. 1,032,019 ------------- Wireless Communication 3.1% $2,500,000c Dial Call Communications, units, senior disc. notes, zero coupon to 04/15/99, (original accretion rate 12.25%), 12.25% thereafter, 04/15/04 . ................ $ 1,275,000 1,000,000 Roger Cantel Mobile Communications, Inc., S.F., senior sub. notes, 10.75%, 11/01/01 1,036,250 800,000 Roger Cantel Mobile Communications, Inc., senior sub. notes, 10.875%, 04/15/04 . 824,000 ------------- 3,135,250 ------------- Total Bonds (Cost $91,767,224) ........................................... 93,564,571 ------------- Shares/ Warrants Common Stocks 1.1% 33,878a Kash N' Karry Food Stores, Inc. (Cost $1,462,392) .............................. 1,143,383 ------------- Warrants 2,500a Dial Page, Inc. ................................................................ 2,500 300a Foodmaker, Inc. ................................................................ 4,113 ------------- Total Warrants (Cost $1,828) ............................................. 6,613 ------------- Total Bonds, Common Stocks and Warrants (Cost $93,231,444) ............... 94,714,567 ------------- Face Amount d,e Receivables from Repurchase Agreements 4.0% $4,125,502 Joint Repurchase Agreement, 6.22%, 07/03/95 (Maturity Value $4,031,412) (Cost $4,029,324) Collateral: U.S. Treasury Bills, 10/19/95 - 06/27/96 U.S. Treasury Notes, 3.875% - 8.625%, 09/30/95 - 02/15/00 .......... 4,029,324 ------------- Total Investments (Cost $97,260,768) 97.6% .......................... 98,743,891 ------------- Other Assets and Liabilities, Net 2.4% .............................. 2,442,821 ------------- Net Assets 100.0% ................................................... $101,186,712 ============= At June 30, 1995, the net unrealized appreciation based on the cost of investments for income tax purposes of $97,260,768 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost ............................................... $ 3,437,403 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value ............................................... (1,954,280) ------------- Net unrealized appreciation................................................... $ 1,483,123 =============
PORTFOLIO ABBREVIATION: S.F. - Sinking Fund aNon-income producing. bSee Note 5 regarding Rule 144A securities. cZero coupon/Step-up bonds. The current effective yield may vary. The original accretion rate will remain constant. dFace amount for repurchase agreements is for the underlying collateral. eSee Note 1(h) regarding Joint Repurchase Agreement. fFace amount stated in foreign currencies, value in U.S. dollars. The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Financial Statements
Statements of Assets and Liabilities June 30, 1995 (unaudited) 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 ......................................... $22,219,920 $427,976,053 $ 93,231,444 =========== =========== ========== At value ................................................... 22,071,463 422,462,055 94,714,567 Receivables from repurchase agreements, at value and cost ... 333,125 16,459,394 4,029,324 Cash ........................................................ -- -- 469,784 Foreign currencies (Cost $59,795) ........................... 60,050 -- -- Receivables: Interest ................................................... 768,151 2,626,437 2,038,565 Prepaid Expenses ............................................ 31,608 -- 1,749 ----------- ----------- ---------- Total Assets ........................................... 23,264,397 441,547,886 $101,253,989 ----------- ----------- ---------- Liabilities: Payables: Investment securities purchased: When-issued basis (Note 1)................................. -- 1,990,514 -- Distributions to partners .................................. 28,235 28,486 796 Management fees ............................................ -- 184,867 52,254 Distribution fees .......................................... 2,666 60,269 12,243 Partners' servicing costs .................................. 1,135 9,484 1,984 Bank overdraft .............................................. -- 1,303,898 -- Accrued expenses and other payables ......................... -- 69,235 -- ----------- ----------- ---------- Total liabilities ...................................... 32,036 3,646,753 67,277 ----------- ----------- ---------- Net assets, at value ......................................... $23,232,361 $437,901,133 $101,186,712 =========== =========== ========== Net assets consist of: Unrealized appreciation (depreciation) on investments and trans- lation of assets and liabilities denominated in foreign currencies (135,187) (5,513,998) 1,483,510 Net realized gain (loss) from investments and foreign currency transactions ............................................... 646,888 (10,643,161) (3,659,223) Partners' capital ........................................... 22,720,660 454,058,292 103,362,425 ----------- ----------- ---------- Net assets, at value ......................................... $23,232,361 $437,901,133 $101,186,712 =========== =========== ========== Shares outstanding ........................................... 2,033,618 41,485,934 11,649,443 =========== =========== ========== Net asset value per share* .................................. $11.42 $10.56 $8.69 =========== =========== ========== *Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Financial Statements (cont.) Statements of Operations for the six months ended June 30, 1995 (unaudited) 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)............................................ $ 972,673 $17,169,880 $ 4,575,646 ----------- ----------- ---------- Expenses: Management fees (Note 4)..................................... -- 1,126,882 283,991 Partners' servicing costs (Note 4)........................... 5,988 45,808 11,388 Distribution fees (Note 4)................................... 9,322 157,083 38,890 Custodian fees............................................... 9,989 28,475 3,703 Reports to partners.......................................... 4,571 62,546 13,836 Registration fees............................................ 3,685 18,264 9,366 Professional fees............................................ 1,851 30,714 3,603 Managing partners' fees and expenses......................... -- 5,293 3,014 Other........................................................ 1,841 8,980 3,407 ----------- ----------- ---------- Total expenses.......................................... 37,247 1,484,045 371,198 ----------- ----------- ---------- Net investment income.................................. 935,426 15,685,835 4,204,448 ----------- ----------- ---------- Realized and unrealized gain (loss) from investments and foreign currency: Net realized gain (loss) from: Investments................................................. 34,945 (2,638,393) 63,556 Foreign currency transactions............................... 27,008 -- (1,542) Net unrealized appreciation on: Investments................................................. 1,302,624 37,700,893 7,372,124 Translation of assets and liabilities in foreign currencies. 6,767 -- 1,347 ----------- ----------- ---------- Net realized and unrealized gain from investments and foreign currency transactions........................................ 1,371,344 35,062,500 7,435,485 ----------- ----------- ---------- Net increase in net assets resulting from operations.......... $2,306,770 $50,748,335 $11,639,933 =========== =========== ========== The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Financial Statements (cont.) Statements of Changes in Net Assets for the six months ended June 30, 1995 (unaudited) and the year ended December 31, 1994 Franklin Tax-Advantaged Franklin Tax-Advantaged Franklin Tax-Advantaged International Bond Fund U.S. Government Securities Fund High Yield Securities Fund ------------------- --------------------- -------------------- Six Months Year Six Months Year Six Months Year Ended Ended Ended Ended Ended Ended 6/30/95 12/31/94 6/30/95 12/31/94 6/30/95 12/31/94 --------- --------- ---------- ---------- ---------- --------- Increase (decrease) in net assets: Operations: Net investment income.. $ 935,426 $ 1,719,247 $ 15,685,835 $ 36,487,364 $ 4,204,448 $ 7,159,755 Net realized gain (loss) from investments and foreign currency transactions............. 61,953 (79,743) (2,638,393) (6,576,310) 62,014 410,528 Net unrealized apprecia- tion (depreciation) on investments and trans- lation of assets and liabilities denominated in foreign currencies.... 1,309,391 (1,184,700) 37,700,893 (54,248,227) 7,373,471 (9,329,425) --------- --------- ---------- ---------- ---------- --------- Net increase (decrease) in net assets resulting from operations.......... 2,306,770 454,804 50,748,335 (24,337,173) 11,639,933 (1,759,142) Distributions to partners: From undistributed net investment income........ (995,744) (1,626,579) (15,685,835) (36,487,364) (4,348,856) (7,005,950) Increase (decrease) in net assets from partnership's capital shares transactions (Note 2)............... (803,907) 4,291,465 (53,582,473) (56,761,159) 12,744,902 20,370,511 --------- --------- ---------- ---------- ---------- --------- Net increase (decrease) in net assets............ 507,119 3,119,690 (18,519,973) (117,585,696) 20,035,979 11,605,419 Net assets: Beginning of period...... 22,725,242 19,605,552 456,421,106 574,006,802 81,150,733 69,545,314 --------- --------- ---------- ---------- ---------- --------- End of period............ $23,232,361 $22,725,242 $ 437,901,133 $ 456,421,106 $101,186,712 $81,150,733 ========= ========= ========== ========== ========== ========= Undistributed net investment income included in net assets: Beginning of period..... $-- $ 52,452 $ -- $ -- $ 145,950 $ -- ========= ========= ========== ========== ========== ========= End of period........... $-- $ -- $ -- $ -- $-- $ 145,950 ========= ========= ========== ========== ========== =========
The accompanying notes are an integral part of these financial statements. FRANKLIN PARTNERS FUNDS Notes to Financial Statements (unaudited) 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 ask 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. The value of a foreign security is determined as of the close of trading on the foreign exchange on which it is traded or as of the close of trading on the New York Stock Exchange, if that is earlier, and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York time, on the day the value of the foreign security is determined. If no sale is reported at that time, the mean between the current bid and ask price is used. Occasionally, events which affect the values of foreign securities and foreign exchange rates may occur between the times at which they are determined and the close of the exchange and will, therefore, not be reflected in the computation of the Funds' net asset value. If events materially affect the value of these foreign securities during such period, then these securities will be valued at fair value as determined by management and approved in good faith by the Managing General Partners. The fair values of securities restricted as to resale, if any, are determined following 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. 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) d. Investment Income, Expenses and Distributions: Net investment income includes income, calculated on an accrual basis, amortization of discount and premium, 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. e. Securities Purchased on a When-Issued or Delayed Delivery Basis: The Funds may trade securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of acquiring such securities, they may sell such securities before the settlement date. These securities are identified on the accompanying statement of investments in securities and net assets. The Funds have set aside sufficient investment securities as collateral for these purchase commitments. f. 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. g. 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 date 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 appreciation (depreciation) on translation of assets and liabilities in foreign currency arise from changes in the value of assets and liabilities other than investments in securities at the semi-fiscal year end, resulting from changes in exchange rates. 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) h. 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 Funds 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 June 30, 1995, all outstanding joint repurchase agreements held by the Funds had been entered into on that date. 2. SHARES OF PARTNERSHIP INTEREST At June 30, 1995, the Partners' capital for the International Bond Fund, the Government Fund and the High Yield Fund aggregated $22,720,660, $454,058,292 and $103,362,425, respectively. Transactions in each of the Fund's shares were as follows:
Franklin Tax-Advantaged Franklin Tax-Advantaged Franklin Tax-Advantaged International Bond FundU.S. Government Securities FundHigh Yield Securities Fund ----------------- --------------------- ------------------- Shares Amount Shares Amount Shares Amount ------- --------- --------- ----------- -------- ---------- Six months ended June 30, 1995 Shares sold ..................... 76,004 $ 849,114 1,629,516 $ 16,631,611 1,958,961 $ 16,553,046 Shares issued in reinvestment of distributions ................ 72,223 806,564 853,210 8,738,646 342,606 2,886,597 Shares redeemed ................. (206,887) (2,290,907) (7,235,557) (73,643,579) (993,345) (8,302,524) Changes from exercise of exchange privilege: Shares sold .................... 18,041 202,082 29,289 297,720 224,112 1,907,145 Shares redeemed ................ (33,996) (370,760) (550,310) (5,606,871) (36,860) (299,362) ------- --------- --------- ----------- -------- ---------- Net increase (decrease) .......... (74,615) $(803,907) (5,273,852) $ (53,582,473) 1,495,474 $ 12,744,902 ======= ========= ========= =========== ======== ========== Year ended December 31, 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 ======= ========= ========= =========== ======== ========== 3. PURCHASES AND SALES OF SECURITIES Aggregate purchases and sales of securities (excluding purchases and sales of short-term securities) for the six months ended June 30, 1995 were as follows: Franklin Tax-Advantaged Franklin Tax-Advantaged Franklin Tax-Advantaged International Bond FundU.S. Government Securities FundHigh Yield Securities Fund --------------- -------------------- ----------------- Purchases.......................... $784,958 $ 4,107,610 $15,754,178 =============== ==================== ================= Sales.............................. $1,088,193 $55,449,435 $ 6,107,500 =============== ==================== =================
For tax purposes, the aggregate cost of securities is higher (and unrealized depreciation is higher) than for financial reporting purposes for the six months ended June 30, 1995 by $41,246 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), 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 million; .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 six months ended June 30, 1995, Franklin Advisers, Inc., agreed in advance to waive its management fees by $70,761 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 six months ended June 30, 1995, totalling $31,519, $291,758 and $113,701, respectively, of which $29,464, $307,322 and $108,512, 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. Franklin/Templeton Distributors, Inc. may also make payments, out of its own resources, to dealers for certain sales. 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 six months ended June 30, 1995, aggregated $5,988, $45,808 and $11,388 for the International Bond Fund, the Government Fund and the High Yield Fund, respectively. Under the terms of a distribution agreement pursuant to Rule 12b-1 of the Investment Company Act of 1940, 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. Fees incurred by the International Bond Fund, Government Fund and High Yield Fund under the agreement aggregated $9,322, $157,083 and $38,890, respectively, for the six months ended June 30, 1995. Certain officers and Managing General Partners of the Funds are also officers and/or directors of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., Templeton Worldwide, 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 June 30, 1995, the High Yield Fund held 144A securities with a value aggregating $7,920,382, representing 7.8% 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, 85.9% of its Portfolio is invested in lower rated and comparable quality unrated high yield 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 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% of its total net assets in Australian, Canadian, Danish, New Zealand and British Securities. The High Yield Fund has investments in excess of 10% in the Food & Beverages and Health Care Services Industries. 7. FINANCIAL HIGHLIGHTS Selected data for each share outstanding throughout each year by Fund are as follows:
Per Share Operating Performance Ratios/Supplemental Data --------------------------------------------------------------------------- ---------------------------------------- Ratio of Net Net Asset Net Realized Dividends Net Asset Net Assets Ratio of Investment Year Value at Net & Unrealized Total From From Net Value at End Expenses Income Portfolio Ended Beginning Investment Gains (Losses) Investment Investment at End Total of Year to Average to Average Turnover Dec. 31 of Year Income on Securities Operations Income of Year Return++ (in 000's)Net Assets* Net Assets Rate Franklin Tax-Advantaged International Bond Fund 1990 $11.20 $1.133 $ .819 $ 1.952 $(1.202) $11.95 $15.46% $ 4,236 .95% 9.75% 18.40% 1991 11.95 1.018 .112 1.130 (1.030) 12.05 9.86 5,060 -- 9.05 60.77 1992 12.05 1.012 (1.110) (.098) (1.102) 10.85 (1.43) 12,662 .13 9.71 15.26 1993 10.85 .808 .505 1.313 (.823) 11.34 12.13 19,606 .25 7.31 6.80 1994 11.34 .794 (.560) .234 (.794) 10.78 2.06 22,725 .29 7.69 6.46 1995** 10.78 .488 .640 1.128 (.488) 11.42 10.65 23,232 .33(double+)8.27(double+)3.62 Franklin Tax-Advantaged U.S. Government Securities Fund 1990 10.17 .922 .060 .982 (.922) 10.23 9.82 86,967 .60 9.16 9.36 1991 10.23 .865 .570 1.435 (.865) 10.80 14.31 127,637 .80 8.13 12.42 1992 10.80 .785 (.050) .735 (.785) 10.75 6.80 312,645 .67 7.22 15.26 1993 10.75 .733 .160 .893 (.733) 10.91 8.19 574,007 .59 6.63 14.63 1994 10.91 .704 (1.150) (.446) (.704) 9.76 (4.26) 456,421 .61 6.92 10.20 1995** 9.76 .357 .800 1.157 (.357) 10.56 12.02 437,901 .66(double+)7.02(double+)0.96 Franklin Tax-Advantaged High Yield Securities Fund 1990 8.52 1.132 (2.430) (1.298) (1.132) 6.09 (16.89) 27,155 .55 15.51 13.29 1991 6.09 .982 1.890 2.872 (.982) 7.98 49.19 57,469 .87 12.96 38.35 1992 7.98 .922 .420 1.342 (.922) 8.40 16.96 39,131 .76 11.00 29.79 1993 8.40 .815 .570 1.385 (.815) 8.97 16.72 69,545 .76 9.17 32.27 1994 8.97 .770 (.990) (.220) (.760) 7.99 (2.58) 81,151 .81 9.36 18.39 1995** 7.99 .393 .714 1.107 (.407) 8.69 14.13 101,187 .83(double+)9.40(double+)7.15 +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 years indicated. It is not annualized. It does not include the maximum initial sales charge or the deferred contingent sales charge and assumes reinvestment of dividend and capital gains, if any, at net asset value. Prior to May 1, 1994, dividends were reinvested at the maximum offering price. *During the periods indicated, Franklin Advisers, Inc., the portfolio manager agreed in advance to waive 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, 1994 and the period ended June 30, 1995, respectively, would have been 1.42%, .89%, .92%, .97%, 1.06% and .95%.(double+) (double+)Annualized **For the six months ended June 30, 1995.
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 breakdown by region as a percentage of net asset value.
Regional Breakdown on 6/30/95 Japan 2.1% United Kingdom 12.2% Southern Europe 14.1% Northern Europe 31.6% North America 17.0% Australia/New Zealand 23.0%