-----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, iphVjqOZPk5cFCsKWyWg/CBDJ1K5vndqVeQRhk/QC5lR8tm69JjAArLlzRCu9NoP AsGIM3cmwubBGlAGi8TJaw== 0000810742-95-000001.txt : 19950224 0000810742-95-000001.hdr.sgml : 19950224 ACCESSION NUMBER: 0000810742-95-000001 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950223 SROS: NONE 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-11963 FILM NUMBER: 95514324 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 497 1 PART P SUPPLEMENT DATED FEBRUARY 1, 1995 TO THE PROSPECTUS OF FRANKLIN PARTNERS FUNDS(R) FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND DATED MAY 1, 1994, AS AMENDED OCTOBER 21, 1994 The following sections of the prospectus are revised to reflect changes to the operational policies of the Funds, effective February 1, 1995: 1. EXPENSE TABLE Revised to reflect that investments of $1,000,000 or more are not subject to a front-end sales charge but a contingent deferred sales charge of 1% will be imposed on certain redemptions within 12 months of the calendar month following such investments. See "How to Sell Shares of the Funds - Contingent Deferred Sales Charge." 2. MANAGEMENT OF THE FUNDS Revised to add the definition "Franklin Templeton Group" to describe the subsidiaries of Resources. 3. HOW TO INVEST IN A FUND a) Add the following language as paragraph two: The Fund may impose a $10 charge for each returned item, against any shareholder account which, in connection with the purchase of Fund shares, submits a check or a draft which is returned unpaid to the Fund. b) Substitute the following for the sales charge table and the ensuing two paragraphs:
TOTAL SALES CHARGE ----------------------------------------------------------- AS A AS A DEALER CONCESSION SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,*** - ------------------- -------------- ----------------- ---------------------- Less than $100,000................... 4.25% 4.44% 4.00% $100,000 but less than $250,000...... 3.50% 3.63% 3.25% $250,000 but less than $500,000...... 2.75% 2.83% 2.50% $500,000 but less than $1,000,000.... 2.15% 2.20% 2.00% $1,000,000 or more................... none none (see below)**
*Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages set forth above. **The following commissions will be paid by Distributors, out of its own resources, to securities dealers who initiate and are responsible for purchases of $1 million or more: 0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. Dealer concession breakpoints are reset every 12 months for purposes of additional purchases. ***At the discretion of Distributors, all sales charges may at times be allowed to the securities dealer. If 90% or more of the sales commission is allowed, such securities dealer may be deemed to be an underwriter as that term is defined in the Securities Act of 1933, as amended. No front-end sales charge applies on investments of $1 million or more, but a contingent deferred sales charge of 1% is imposed on certain redemptions of investments of $1 million or more within 12 months of the calendar month following such investments ("contingency period"). See "How to Sell Shares of the Funds - Contingent Deferred Sales Charge." 1 The size of a transaction which determines the applicable sales charge on the purchase of Fund shares is determined by adding the amount of the shareholder's current purchase plus the cost or current value (whichever is higher) of a shareholder's existing investment in one or more of the funds in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these aggregation purposes are (a) the mutual funds in the Franklin Group of Funds except Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin Funds"), (b) other investment products underwritten by Distributors or its affiliates (although certain investments may not have the same schedule of sales charges and/or may not be subject to reduction) and (c) the U.S. mutual funds in the Templeton Group of Funds except Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton Funds are collectively referred to as the "Franklin Templeton Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be effective only after notification to Distributors that the investment qualifies for a discount. References throughout the Prospectus, for purposes of aggregating assets or describing the exchange privilege, refer to the above descriptions. Distributors, or one of its affiliates, may make payments, out of its own resources, of up to 100% of the amount purchased to securities dealers who initiate and are responsible for purchases made at net asset value by certain trust companies and trust departments of banks. See definition under "Description of Special Net Asset Value Purchases" and as set forth in the SAI. c) Substitute the following for the current "Purchases at Net Asset Value" subsection: PURCHASES AT NET ASSET VALUE Shares of the Funds may be purchased without the imposition of either a front-end sales charge ("net asset value") or a contingent deferred sales charge by companies exchanging shares with or selling assets pursuant to a merger, acquisition or exchange offer. Shares of the Funds may be purchased at net asset value by persons who have redeemed, within the previous 120 days, their shares of the Funds or another of the Franklin Templeton Funds which were purchased with a front-end sales charge or assessed a contingent deferred sales charge on redemption. An investor may reinvest an amount not exceeding the redemption proceeds. While credit will be given for any contingent deferred sales charge paid on the shares redeemed, a new contingency period will begin. Shares of the Funds redeemed in connection with an exchange into another fund (see "Exchange Privilege") are not considered "redeemed" for this privilege. In order to exercise this privilege, a written order for the purchase of shares of the Funds must be received by the Funds or the Fund's Shareholder Services Agent within 120 days after the redemption. The 120 days, however, do not begin to run on redemption proceeds placed immediately after redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at net asset value may also be handled by a securities dealer or other financial institution, who may charge the shareholder a fee for this service. Shares of the Funds may be purchased at net asset value and without the imposition of a contingent deferred sales charge by investors who have, within the past 60 days, redeemed an investment in an unaffiliated mutual fund which charged the investor a contingent deferred sales charge upon redemption and which has investment objectives similar to those of the Funds. Shares of the Funds may be purchased at net asset value and without the imposition of a contingent deferred sales charge by registered investment advisors and/or their affiliated broker-dealers, who have entered into a supplemental agreement with Distributors, on behalf of their clients who are participating in a comprehensive fee program (sometimes known as a wrap fee program). 2 DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES. Shares of the Funds may be purchased at net asset value and without the imposition of a contingent deferred sales charge by trust companies and bank trust departments for funds over which they exercise exclusive discretionary investment authority and which are held in a fiduciary, agency, advisory, custodial or similar capacity for qualifying investors. (In such case, the beneficial owner, if a non-U.S. person, may still be required to submit an executed Form W-8 [or substitute]) Such purchases are subject to minimum requirements with respect to amount of purchase, which may be established by Distributors. Currently, those criteria require that the amount invested or to be invested during the subsequent 13-month period in these Funds or any of the Franklin Templeton Investments must total at least $1,000,000. Orders for such accounts will be accepted by mail accompanied by a check or by telephone or other means of electronic data transfer directly from the bank or trust company, with payment by federal funds received by the close of business on the next business day following such order. Refer to the SAI for further information. 4. EXCHANGE PRIVILEGE Add the following subsection: "ADDITIONAL INFORMATION REGARDING EXCHANGES": A contingent deferred sales charge will not be imposed on exchanges. If, however, the exchanged shares were subject to a contingent deferred sales charge in the original fund purchased, and shares are subsequently redeemed within the contingency period, a contingent deferred sales charge will be imposed. The contingency period will be tolled (or stopped) for the period such shares are exchanged into and held in a Franklin or Templeton money market fund. See also "How to Sell Shares of the Funds - Contingent Deferred Sales Charge." 5. HOW TO SELL SHARES OF THE FUNDS Add the following subsection: CONTINGENT DEFERRED SALES CHARGE In order to recover commissions paid to securities dealers on qualified investments of $1 million or more, a contingent deferred sales charge of 1% applies to redemptions of those investments within the contingency period of 12 months of the calendar month following their purchase. The charge is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested distributions) or the total cost of such shares, and is retained by Distributors. In determining if a charge applies, shares not subject to a contingent deferred sales charge are deemed to be redeemed first, in the following order: (i) Shares representing amounts attributable to capital appreciation of those shares held less than 12 months; (ii) shares purchased with reinvested distributions; and (iii) other shares held longer than 12 months; and followed by any shares held less than 12 months, on a "first in, first out" basis. The contingent deferred sales charge is waived for: exchanges; redemptions through a Systematic Withdrawal Plan set up prior to February 1, 1995 and, for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an account's net asset value (3% quarterly, 6% semiannually or 12% annually); and redemptions initiated by the Funds due to a shareholder's account falling below the minimum specified account size. Requests for redemptions for a specified dollar amount will result in additional shares being redeemed to cover any applicable contingent deferred sales charge, while requests for redemption of a specific number of shares will result in the applicable contingent deferred sales charge being deducted from the total dollar amount redeemed. 3 FRANKLIN PARTNERS FUNDS(R) Franklin Tax-Advantaged U.S. Government Securities Fund Franklin Tax-Advantaged High Yield Securities Fund Franklin Tax-Advantaged International Bond Fund PROSPECTUS MAY 1, 1994 AS AMENDED OCTOBER 21, 1994 [FRANKLIN LOGO] 777 Mariners Island Blvd., P.O. Box 7777 San Mateo, CA 94403-7777 1-800/DIAL BEN The Franklin Partners Funds(R) (collectively or separately, the "Funds" or "Fund") consists of three separate and distinct funds: Franklin Tax-Advantaged U.S. Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged High Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged International Bond Fund (the "International Bond Fund"), each a California limited partnership. Each Fund is designed to earn income for qualifying non-United States ("U.S.") investors that is not subject to U.S. federal income tax or U.S. tax withholding requirements (including "Non-Resident Alien" tax withholding). The primary investment objective of the Government Fund is current income through investment in obligations of the U.S. government, its agencies or instrumentalities. The assets of this Fund will be primarily invested in obligations of the Government National Mortgage Association ("GNMA"), an agency of the U.S. government. The primary investment objective of the High Yield Fund is to earn a high level of current income, with capital appreciation as a secondary objective. The assets of this Fund will generally be invested in various classes of fixed-income debt securities of U.S. issuers, which may include high risk securities, although securities of non-U.S. issuers also may be acquired. The primary investment objective of the International Bond Fund is to seek current income by investing in debt securities of non-U.S. issuers and foreign currency denominated debt securities of U.S. issuers. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL DEFAULT AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE HIGH YIELD FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 This Prospectus is intended to set forth in a clear and concise manner information about each Fund that a prospective investor should know before investing. After reading the Prospectus, it should be retained for future reference; it contains information about the purchase and sale of shares and other items which a prospective investor will find useful to have. A Statement of Additional Information concerning the Funds (the "SAI"), dated May 1, 1994, as may be amended from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission ("SEC") and is incorporated herein by reference. A copy is available without charge from the Funds or from the Funds' principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or telephone number listed above (in U.S. only). This Prospectus is not an offering of the securities herein described in any state in which the offering is not authorized. No sales representative, dealer, or other person is authorized to give any information or make any representations other than those contained in this Prospectus. Further information may be obtained from the underwriter.
CONTENTS PAGE Expense Table.................... 3 Financial Highlights............. 4 About the Franklin Partners Funds........................... 5 Investment Objective and Policies of Each Fund........... 7 Risk Considerations.............. 15 Management of the Funds.......... 18 Distributions to Shareholders.... 21 Taxation of the Funds and Their Shareholders.......... 22 How to Invest in a Fund.......... 26 Other Programs and Privileges Available to Fund Shareholders.. 31 Exchange Privilege............... 33 How to Sell Shares of the Funds.. 35 Telephone Transactions........... 37 Valuation of Fund Shares......... 38 How to Get Information Regarding an Investment in the Funds....................... 39 Performance...................... 40 General Information.............. 40 Account Registrations............ 41 Summary of Partnership Agreements...................... 42 Portfolio Operations............. 45 Appendix......................... 46
2 Expense Table The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder will bear directly or indirectly in connection with an investment in each Fund. These figures are based on restated operating expenses of each Fund for the fiscal year ended December 31, 1993.
GOVERNMENT HIGH YIELD INTERNATIONAL FUND FUND BOND FUND ---------- ---------- ------------- SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) ............... 4.25% 4.25% 4.25% Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) ................ None None None Deferred Sales Charge .............................. None None None Redemption Fees .................................... None None None Exchange Fee (per transaction) ..................... $5.00* $5.00* $5.00* ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees .................................... 0.52% 0.63% 0.63%** Maximum 12b-1 Fees ................................. 0.15%+ 0.15%+ 0.15%+ Other Expenses ..................................... 0.07% 0.13% 0.34% ----- ----- ----- Total Fund Operating Expenses ...................... 0.74%++ 0.91%++ 1.12%**++ ===== ===== =====
*$5.00 fee is only imposed on Timing Accounts as described under "Exchange Privilege." All other exchanges are processed without a fee. **Represents the amount that would have been paid by the International Bond Fund. The investment manager, however, limited its management fees and assumed responsibility for making payments to offset a portion of the operating expenses otherwise payable by such Fund. With this reduction, the Fund paid no management fees and total operating expenses, including management fees, amounted to 0.25% of average net assets. This arrangement may be discontinued by the investment manager at any time. +Consistent with National Association of Securities Dealers, Inc.'s rules, it is possible that the combination of front-end sales charges and 12b-1 fees could cause long-term shareholders to pay more than the economic equivalent of the maximum front-end sales charges permitted under those same rules. ++Total operating expenses for the fiscal year ended December 31, 1993 have been restated to reflect the maximum 12b-1 fees allowed pursuant to the Funds' plans of distribution, which were effective July 1, 1994, as though such plans had been in effect for the entire fiscal year. Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual's own investment in a Fund. Rather the table has been provided only to assist investors in gaining a more complete understanding of such fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. 3 EXAMPLE As required by SEC regulations, the following example illustrates the expenses, including the initial sales charge, that apply to a $1,000 investment in a Fund over various time periods assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, none of the Funds charge a redemption fee:
GOVERNMENT HIGH YIELD INTERNATIONAL FUND FUND BOND FUND ---------- ---------- ------------- 1 Year ........................ $ 50 $ 51 $ 53 3 Years ....................... 65 70 77 5 Years ....................... 82 91 102 10 Years ...................... 130 150 173
THE EXAMPLE IS BASED ON THE TOTAL OPERATING EXPENSES OF EACH FUND, INCLUDING FEES SET BY CONTRACT, AS SHOWN ABOVE, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by each Fund and only indirectly by shareholders as a result of their investment in such Fund. In addition, federal regulations require the example to assume an annual return of 5%, but a Fund's actual return may be more or less than 5%. FINANCIAL HIGHLIGHTS Set forth below is a table containing the financial highlights for a share of each Fund from its inception (i.e. effective date of the registration statement for each Fund) throughout the fiscal years ended December 31. Except for the International Bond Fund for the periods ending prior to January 1, 1990, the figures for the years ending subsequent to December 31, 1988 are covered by the report of Coopers & Lybrand, the Funds' independent auditors, whose audit report thereon appears in the financial statements in the Funds' SAI. The figures for the International Bond Fund for the periods ending prior to January 1, 1990 were audited by Tait, Weller & Baker, the Fund's independent auditors for those periods. The remaining figures, which are also audited, are not covered by the auditors' current report. A copy of the SAI as well as a copy of the Annual Report, which contains further information regarding performance, may be obtained without charge as noted on the front cover of this Prospectus.
YEAR NET ASSET NET REALIZED DIVIDENDS NET ASSET NET ASSETS RATIO OF RATIO OF ENDED VALUE NET & UNREALIZED TOTAL FROM FROM NET VALUE AT END EXPENSES NET INCOME PORTFOLIO DECEM- BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT AT END TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER BER 31 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME OF YEAR RETURN++ (IN 000's) NET ASSETS NET ASSETS RATE - ------ --------- ---------- ------------- ---------- ---------- ------- -------- ---------- ---------- ---------- -------- FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND 1987 $10.00 $0.620 $1.420 $2.040 $(0.360) $11.68 - % $13,688 1.67% 7.49% 120.00% 1988 11.68 0.790 (0.590) 0.200 (0.800) 11.08 (2.85) 9,485 1.62 7.13 47.00 1989 11.08 0.820 0.160 0.980 (0.860) 11.20 9.15 4,709 1.72 7.64 12.00 1990(2) 11.20 1.133 0.819 1.952 (1.202) 11.95 15.46* 4,236 0.95(4) 9.75 18.40 1991 11.95 1.018 0.112 1.130 (1.030) 12.05 9.86 5,060 - (4) 9.05 60.77 1992 12.05 1.012 (1.110) (0.098) (1.102) 10.85 (1.43) 12,662 0.13(4) 9.71 15.26 1993 10.85 0.808 0.505 1.313 (0.823) 11.34 12.13 19,606 0.25(4) 7.31 6.80
4
YEAR NET ASSET NET REALIZED DIVIDENDS NET ASSET NET ASSETS RATIO OF RATIO OF ENDED VALUE NET & UNREALIZED TOTAL FROM FROM NET VALUE AT END EXPENSES NET INCOME PORTFOLIO DECEM- BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT AT END TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER BER 31 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME OF YEAR RETURN++ (IN 000's) NET ASSETS NET ASSETS RATE - ------ --------- ---------- ------------- ---------- ---------- ------- -------- ---------- ---------- ---------- -------- FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND 1987(1) $10.00 $0.603 $ 0.070 $ 0.673 $(0.603) $10.07 6.64% $ 9,401 - % 10.46%+ 31.53% 1988 10.07 0.986 $(0.180) 0.806 (0.986) 9.89 7.80 42,703 0.26(3) 9.62 6.80 1989 9.89 0.965 0.280 1.245 (0.965) 10.17 12.75 67,864 0.46(3) 9.55 7.07 1990 10.17 0.922 0.060 0.982 (0.922) 10.23 9.82 86,967 0.60(3) 9.16 9.36 1991 10.23 0.865 0.570 1.435 (0.865) 10.80 14.31 127,637 0.80 8.13 12.42 1992 10.80 0.785 (0.050) 0.735 (0.785) 10.75 6.80 312,645 0.67 7.22 15.26 1993 10.75 0.733 0.160 0.893 (0.733) 10.91 8.19 574,007 0.59 6.63 14.63 FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND 1987(1) 10.00 0.516 (0.760) (0.244) (0.516) 9.24 (2.60) 2,923 - 12.67+ - 1988 9.24 1.076 0.020 1.096 (1.076) 9.26 11.79 21,346 0.18(3) 10.88 2.64 1989 9.26 1.173 (0.740) 0.433 (1.173) 8.52 4.10 34,722 0.25(3) 13.08 4.95 1990 8.52 1.132 (2.430) (1.298) (1.132) 6.09 (16.89) 27,155 0.55(3) 15.51 13.29 1991 6.09 0.982 1.890 2.872 (0.982) 7.98 49.19 57,469 0.87 12.96 38.35 1992 7.98 0.922 0.420 1.342 (0.922) 8.40 16.96 39,131 0.76 11.00 29.79 1993 8.40 0.815 0.570 1.385 (0.815) 8.97 16.72 69,545 0.76 9.17 32.27
* For the period June 9, 1990 (transfer of management) to December 31, 1990. (1) For the period May 4, 1987 (effective date) to December 31, 1987. (2) On June 9, 1990, the investment manager changed from Pilgrim Management Corporation to Franklin Advisers, Inc. (3) Without a fee reduction by the investment manager, the ratio of operating expenses to average net assets for the fiscal years ended December 31, 1988, 1989 and 1990 would have been: .87%, .76% and .76%, respectively, for the U.S. Government Securities Fund; and .98%, .78% and .79%, respectively, for the High Yield Securities Fund. (4) Without a fee reduction by the investment manager, the ratio of operating expenses to average net assets for the fiscal years ended December 31, 1990, 1991, 1992 and 1993 would have been 1.42%, .89%, .92% and .97%, respectively. + Annualized ++ Total return measures the change in value of an investment over the periods indicated. It does not include the maximum initial sales charge and assumes reinvestment of dividends at the offering price and capital gains, if any, at net asset value. Effective July 1, 1994, with the implementation of the 12b-1 distribution plans, as discussed in this Prospectus, the existing sales charge on reinvested dividends has been eliminated. ABOUT THE FRANKLIN PARTNERS FUNDS Each Fund is an open-end, diversified management investment company, registered with the SEC under the Investment Company Act of 1940 (the "1940 Act"), and organized as a limited partnership in the state of California. The form of organization was adopted to preserve, for qualifying non-U.S. investors, the current exemptions from U.S. federal income tax and U.S. federal withholding tax, including U.S. "Non-Resident Alien" tax withholding (principally, the "portfolio interest" exemption for distributions from the Government Fund and the High Yield Fund and the exemption from U.S. income taxation of foreign source income for distributions from the International Bond Fund) that would be available to direct owners of the types of securities in which each Fund invests. Because the Funds are limited partnerships, distributions made by the Funds retain their original character so that qualifying income is not subject to U.S. federal income taxation when received by the Funds' qualifying non-U.S. investors. Each Fund issues only one class of shares in the form of limited partnership interests, and purchasers of shares of a Fund (referred to herein as "shareholders" or "limited partners") are required to become limited partners of that Fund. Shares of a Fund may be purchased (minimum investment $2,500 initially and $100 thereafter) at the then current public offering price 5 which is equal to such Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge based upon a variable percentage (ranging from 4.25% to 0% of the offering price) depending upon the amount invested. (See "How to Invest in a Fund.") ELIGIBLE INVESTORS Each Fund is designed primarily for investors who are not considered to be U.S. citizens, residents, corporations, partnerships, trusts or estates, or who are not non-U.S. persons engaged in a U.S. trade or business under the Internal Revenue Code of 1986, as amended (the "Code"). Investment by non-U.S. persons through U.S. trusts or estates is permitted. Investment by U.S. investors into the High Yield and International Bond Funds is not permitted. The Government Fund is available to U.S. investors. Since the Government Fund expects to be invested primarily in GNMA Certificates, the income from such investments would generally be subject to federal, state or local taxation for most U.S. investors. (See the discussion subcaptioned "U.S. Tax Treatment of U.S. Investors" under "Taxation of the Funds and Their Shareholders.") All prospective investors must furnish the Funds with account registration information and information on their tax status as required by the Investment Application and Subscription Agreement ("Application") included with this Prospectus, and either a Certificate of Foreign Status on Form W-8 (or substitute) or the Payer's Request for Taxpayer Identification Number on Form W-9, as applicable. By purchasing shares, each investor will be deemed to have provided the Special Power of Attorney included in the Application and each non-U.S. investor is consenting to disclosure of the information contained in the Certificate of Foreign Status (which includes each investor's name and permanent address) to the Funds and, to the extent required by the Code, to the U.S. Internal Revenue Service ("IRS") and to issuers of debt obligations in which the Funds invest. CERTAIN TAX CONSIDERATIONS Due to the structure of each Fund as a limited partnership based in the U.S. and the primary reliance on the portfolio interest exemption and the exemption of foreign source interest from U.S. income taxation under the Code to eliminate U.S. tax and tax withholding on distributions made to shareholders, certain factors should be considered by prospective investors, which are discussed more fully under "Taxation of the Funds and Their Shareholders" in this Prospectus and under "Additional Information on Distributions and Taxation" in the SAI. 1. Qualifying income generated by each Fund will not be subject to U.S. federal income tax and U.S. tax withholding requirements for qualifying non-U.S. shareholders, provided that the Fund is not deemed to be engaged in a trade or business in the U.S. Each Fund has obtained an opinion of its counsel, Thelen, Marrin, Johnson & Bridges, to the effect that it should not be deemed to be engaged in a trade or business in the U.S. if the Fund follows certain policies and guidelines concerning its investment activities. This opinion is based on counsel's interpretation of applicable court decisions and other authorities and not on any specific U.S. Treasury regulations because no such regulations have been promulgated. Although each Fund and its counsel believe that their position is fully supported by applicable law, there can be no assurance that the IRS or a court of law would not take a contrary position. 2. A shareholder with an address outside the U.S. must furnish the Fund in which it invests with a Certificate of Foreign Status on IRS Form W-8 to avoid U.S. tax withholding at the rate of 30%. If 6 the Fund does not have such a Certificate on file, the Fund must withhold the tax from any distributions (including redemption distributions) to the shareholder to the extent that such distributions include income from U.S. sources. In addition, in the absence of a Certificate, to the extent that a Fund has not distributed all of the U.S. source income allocable to the shareholder during the year, the Fund will be required to apply withholding (by liquidating shares at the end of the year) to the undistributed U.S. source income allocated to the shareholder for the year. 3. As a partnership, each Fund will be required to file an annual return with the IRS and the California Franchise Tax Board which identifies each shareholder's allocated share of the Fund's net income and gains for the taxable year, whether or not such income and gains have been distributed. Each Fund will also file an annual form with the IRS with respect to each non-U.S. shareholder (which includes, as an attachment, the Form W-8 [or substitute] furnished by the shareholder) indicating, if applicable, that no amount was withheld with respect to income allocated to such shareholder that qualified for the portfolio interest exemption or any other applicable exemption under the Code. 4. The value of Fund shares directly owned by a non-U.S. individual upon the death of such individual may be subject to U.S. estate taxes (and possibly state inheritance taxes), subject to certain exemptions and to the terms of any applicable treaty between the U.S. and the individual's country of residence. INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND The objective of each Fund is a fundamental policy and may not be changed without shareholder approval. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND The investment objective of this Fund is current income through investment in a portfolio limited to securities which are obligations of the U.S. government, its agencies or instrumentalities. These include, but are not limited to, U.S. Treasury bonds, notes and bills, Treasury Certificates of Indebtedness and securities issued by agencies and instrumentalities of the U.S. government. The assets of this Fund are expected to be invested primarily in obligations of the Government National Mortgage Association, popularly called GNMAs or Ginnie Maes. In addition to GNMAs, other eligible securities of agencies or instrumentalities include those issued or guaranteed by the Department of Housing and Urban Development, the Farmers Home Administration, the Small Business Administration and the Export-Import Bank. To produce income that is not subject to U.S. federal income tax or U.S. withholding tax for its non-U.S. investors, the Fund limits its investments to U.S. government obligations issued after July 18, 1984 in registered form. In the case of GNMAs, the Fund limits itself to GNMA Certificates representing interests in underlying mortgages which were also issued after July 18, 1984 or which meet certain other qualifying conditions under the Code, all of the interest on which will qualify for the "portfolio interest" exemption under the Code. INFORMATION ABOUT GNMAS GNMAs are mortgage-backed securities representing part ownership of a pool of mortgage loans. GNMA Certificates differ from bonds in that principal is scheduled to be paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. The Govern- 7 ment Fund will purchase "modified pass-through" type GNMA Certificates for which principal and interest are guaranteed by the U.S. government, rather than the "straight pass-through" Certificates for which such guarantee is not available. This Fund may also purchase "variable rate" GNMA Certificates or any other type which may be issued with GNMA's guarantee. THE GNMA GUARANTEE OF PRINCIPAL AND INTEREST ON GNMA CERTIFICATES IS BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. GNMA MAY BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS GUARANTEE. GNMA Certificates are created by an "issuer," which is a Federal Housing Administration ("FHA") approved lender, such as mortgage bankers, commercial banks and savings and loan associations, who also meet criteria imposed by GNMA. The issuer assembles a specific pool of mortgages insured by either the FHA or the Farmers Home Administration or guaranteed by the Veterans Administration. Upon application by the issuer, and after approval by GNMA of the pool, GNMA provides its commitment for the guarantee of principal and interest on the GNMA Certificates secured by the mortgages included in the pool. The GNMA Certificates, endorsed by GNMA, are then sold by the issuer through securities dealers. When mortgages in the pool underlying a GNMA Certificate are prepaid by mortgagees or as a result of foreclosure, such principal payments are passed through to the Certificate holders (such as the Fund). Accordingly, the life of the GNMA Certificate is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rights, it is not possible to accurately predict the life of a particular GNMA Certificate, but FHA statistics indicate that 25 to 30 year single-family dwelling mortgages have an average life of approximately 12 years. To the extent mortgage rates on the mortgages which underlie the GNMA Certificates are greater than or less than prevailing market mortgage rates, the average life of a GNMA Certificate may be less than or more than 12 years. Generally, GNMA Certificates bear a stated "coupon rate" which represents the effect of FHA- Veterans Administration mortgage rates for the underlying pool of mortgages, less 0.5% which constitutes the GNMA and issuer's fees. For providing its guarantee, GNMA currently receives an annual fee of 0.06% of the outstanding principal on Certificates backed by single-family dwelling mortgages, and the issuer currently receives an annual fee of 0.44% for assembling the pool and passing through monthly payments of interest and principal. Payments to holders of GNMA Certificates consist of the monthly distributions of interest and principal less the GNMA and issuer's fees. The portion of the monthly payment which represents a return of principal will be reinvested by the Government Fund in then-available GNMA obligations which may bear interest at a rate higher or lower than the obligation from which the payment was received. The actual yield to be earned by the holder of a GNMA Certificate is calculated by dividing such payments by the purchase price paid for the GNMA Certificate (which may be at a premium or a discount from the face value of the Certificate). Unpredictable prepayments of principal, however, can greatly change realized yields. In a period of declining interest rates it is more likely that mortgages contained in GNMA pools will be prepaid thus reducing the effective yield. Moreover, any premium paid on the purchase of a 8 GNMA Certificate will be lost if the obligation is prepaid. In periods of falling interest rates this potential for pre-payment may reduce the general upward price increase of GNMA Certificates which might otherwise occur. As with other debt instruments, the price of GNMA Certificates is likely to decrease in times of rising interest rates. Price changes of the GNMA Certificates held by the Government Fund have a direct impact on its net asset value per share. When interest rates rise, the value of a GNMA Certificate will generally decline. Conversely, when rates fall, the GNMA Certificate value may rise although not as much as other debt issues due to the prepayment feature. ALTHOUGH THE SECURITIES IN THE GOVERNMENT FUND'S PORTFOLIO ARE GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE U.S. GOVERNMENT OR ITS INSTRUMENTALITIES, THE MARKET VALUE OF THESE SECURITIES, UPON WHICH DAILY NET ASSET VALUE IS BASED, MAY FLUCTUATE BASED UPON SUCH FACTORS AS CHANGING INTEREST RATES. AS A RESULT, THE PRICE PER SHARE THE SHAREHOLDER RECEIVES ON REDEMPTION MAY BE MORE OR LESS THAN THE PRICE PAID FOR THE SHARES. THE DISTRIBUTIONS PER SHARE PAID BY THE FUND MAY ALSO VARY. FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND The principal investment objective of this Fund is to earn a high level of current income. As a secondary objective, the High Yield Fund seeks capital appreciation to the maximum extent possible, consistent with its principal objective. TYPES OF SECURITIES WHICH THE HIGH YIELD FUND MAY PURCHASE Current yield is the primary standard used by this Fund in selecting its securities, although potential for capital appreciation may also be considered. The Fund will invest in fixed-income debt securities of U.S. and non-U.S. issuers (including corporate and municipal bonds, short-term paper and secured obligations) which are offering the highest yield available without excessive risk at the time of purchase. The Fund's investment manager will attempt to avoid excessive risk by performing an independent credit analysis of the issuer, as described below, and by diversifying the Fund's investments among different issuers. To produce income that is not subject to U.S. federal income tax or U.S. withholding tax for non-U.S. investors, the Fund limits its investments in securities of U.S. issuers to debt securities issued after July 18, 1984 in registered form. Depending upon prevailing market and economic conditions, when purchasing fixed-income debt securities, the High Yield Fund will invest at least 65% of its total assets in investment grade or lower grade securities (those having a rating below the three highest grades assigned by Moody's Investors Service ["Moody's"] or Standard & Poor's Corporation ["S&P"], two national securities rating organizations ["NSROs"]). Such lower rated securities are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. (See the discussion under "Risk Considerations - Asset Composition Table" for the ratings assigned by Moody's for the securities held by the portfolio of the High Yield Fund as of the end of the fiscal year.) The Fund may also, for defensive purposes, temporarily invest its assets in U.S. government securities, commercial paper (short-term debt securities of large corporations), various bank debt instruments or other money market instruments. The income from certain types of such short-term investments may not qualify as "portfolio interest" income or in- 9 come otherwise exempt under the Code and, therefore, would generally be subject to U.S. tax and withholding requirements. Various investment services publish ratings of some of the types of securities in which the High Yield Fund may invest. Higher yields are ordinarily available from securities in the lower rated categories of the NSROs (that is, securities rated Baa or lower by Moody's or BBB or lower by S&P - see the Appendix to this Prospectus) or from unrated securities of comparable quality. These ratings, which represent the opinions of the NSROs with respect to the issuer's ability to pay interest and repay principal, do not purport to reflect the risk of fluctuations in market value, are not absolute credit standards, and will be considered in connection with the investment of the High Yield Fund's assets, but will not be a determining or limiting factor. The High Yield Fund may invest in securities regardless of their rating (including securities in the lowest rating categories) or in securities which are not rated. The High Yield Fund will not invest in securities that are rated below Ca by Moody's or CC by S&P, or which, if unrated, are not at least of comparable quality as determined by the investment manager. Securities in these rating categories are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. The High Yield Fund will not purchase issues that are in default. As noted above, the High Yield Fund will not invest in securities which are felt by management to involve excessive risk. In the event the rating on an issue held in the High Yield Fund's portfolio is changed by the ratings service or the security goes into default, such event will be considered by the High Yield Fund in its evaluation of the overall investment merits of that security but will not necessarily result in an automatic sale of the security. Rather than relying principally on the ratings assigned by rating services, the investment analysis of securities being considered for the High Yield Fund includes, among other things, consideration of relative values, based on such factors as: anticipated cash flow; interest coverage; asset coverage; earnings prospects; the experience and managerial strength of the issuer; responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; and the issuer's changing financial condition and public recognition thereof. Because the High Yield Fund's portfolio will consist of debt securities, changes in the level of interest rates, among other things, will likely affect the value of the Fund's holdings and thus the value of a shareholder's investment. Certain of the high yield, fixed-income securities in which this Fund may invest may be purchased at a discount. The High Yield Fund does not intend to purchase securities for the purpose of achieving capital gains, but generally will hold them as long as current yields on such securities remain attractive. Capital losses may be realized when securities purchased at a premium are held to maturity or are called or redeemed at a price lower than their purchase price. Capital gains or losses also may be realized upon the sale of securities. Although the High Yield Fund is not limited with respect to the maturity of its portfolio securities, generally the majority of that Fund's investments will be intermediate to long-term investments that mature in ten years or more. Because of the High Yield Fund's policy of seeking high current yield and its ability to invest in lower grade debt securities, a higher degree of risk (including the risk of bankruptcy or default by the issuer of a high yield, lower rated security) may accom- 10 pany an investment in this Fund than would be the case in a more conservative income-type investment company. In addition, this Fund will be more dependent on the investment manager's judgment, analysis and experience in achieving its investment objective than is the case for funds that invest in higher quality bonds. As in any other investment, there is no assurance that the Fund's objectives will be obtained. On December 31, 1993, fiscal year end, the High Yield Fund held no defaulted securities. FOR ADDITIONAL RISK FACTORS, SEE THE SECTION CAPTIONED "RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES." FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND The primary investment objective of the International Bond Fund is to seek current income by investing in readily marketable bonds and debentures of non-U.S. issuers and foreign currency denominated bonds and debentures of U.S. issuers. Under normal conditions, this Fund attempts to invest 100%, and will invest at least 65%, of its total assets in these securities, and the domiciles of the issuers or the currency denominations will include at least three different countries. The International Bond Fund intends to limit its investments to issuers domiciled in, and instruments denominated in the currencies of, developed countries. To produce income that is not subject to U.S. tax or withholding, this Fund limits its investments generally to either debt securities issued after July 18, 1984 in registered form which, if giving rise to U.S. source interest, will generate "qualifying portfolio interest" income, or debt securities of foreign issuers not engaged in a U.S. trade or business, which will generate "non-U.S. source" income. To protect against losses resulting from changes in foreign currency exchange rates, the International Bond Fund may engage in various strategies to hedge its portfolio against these risks. These strategies include use of foreign currency options, foreign currency futures, options on such futures and forward foreign exchange contracts. While the International Bond Fund's use of hedging strategies is intended to reduce the volatility of the net asset value of its shares, this Fund's net asset value will still fluctuate and there can be no assurance that such hedging transactions will be effective. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts and movements in the price of the securities and currencies which are the subject of the hedge, as well as imperfect correlation due to the difference in maturities of the hedged position. These strategies also involve the risk that the International Bond Fund may not be able to close an options or futures position, or that this Fund could lose its margin deposit or collateral in the event of bankruptcy of the broker with whom it has an open position. The International Bond Fund may also, for hedging purposes, purchase foreign currencies in the form of bank deposits as well as other foreign money market instruments, including but not limited to banker's acceptances, certificates of deposits, commercial paper, short-term government and corporate obligations and repurchase agreements, subject to certain tax restrictions. In addition, this Fund may invest the cash balances which it may be required (for operational purposes) to hold outside of the U.S. in foreign currency-denominated instruments (generally bank accounts). Under current tax laws, certain foreign exchange gains realized by the International Bond Fund from its hedging activities may be subject to U.S. 11 federal income tax and withholding requirements. See "The Investment Objectives and Policies of the Funds" in the SAI for a more detailed discussion of the International Bond Fund's authorized hedging activities. In addition to the risks resulting from fluctuations in currency exchange rates and the attendant risks involved in using hedging techniques, there are certain risks involved in a U.S. investment company's investment in the securities of non-U.S. issuers. These risks include devaluation of currencies, imposition of non-U.S. withholding taxes on Fund income, reduced availability in the U.S. of public information concerning non-U.S. issuers, future political and economic developments and the imposition of currency exchange regulations or other foreign governmental laws or restrictions, and the fact that non-U.S. companies are not generally subject to the same type of accounting, auditing and financial reporting standards or other regulatory practices and requirements that are applicable to U.S. domestic companies. Moreover, securities of many non-U.S. issuers may be less liquid than the securities of comparable U.S. issuers and their prices more volatile, and the International Bond Fund will incur transaction costs in converting assets from one currency to another. In addition, with respect to certain foreign countries, there is the possibility of expropriation or the nationalization of issuers of securities held by the International Bond Fund, confiscatory taxation and limitations on the use or removal of monies (e.g., currency blockages) or other Fund assets. Although the International Bond Fund is not limited with respect to the maturity of its portfolio securities, it is anticipated that the majority of the Fund's investments will be intermediate to long-term investments that mature in ten years or more. Although certain risks are involved in forward foreign exchange contracts, foreign currency options, foreign currency futures and related options on such futures (as discussed above and in the SAI), the investment manager believes that, because the International Bond Fund will only engage in these transactions for hedging purposes, the use of these strategies will not subject the Fund to the risks frequently associated with the speculative use of forward contracts, options and futures transactions. In addition, the International Bond Fund will not invest funds in foreign currency positions, the principal amount of which taken through options on foreign currencies, foreign currency futures contracts, forward foreign currency contracts and options on foreign currency futures contracts with respect to any particular foreign currency would exceed the sum of the principal amount of securities denominated in such foreign currency owned or committed to be purchased by the Fund. Tax requirements may further limit the International Bond Fund's ability to engage in these hedging transactions and strategies. There were no securities in the portfolio of the International Bond Fund which were in default on their contractual provisions at fiscal year end. In order to comply with guidelines concerning each Fund's investment activities and to strengthen its position that it is not engaged in a U.S. trade or business, a Fund may have to refrain from the sale or purchase of particular securities under circumstances in which such securities would otherwise have been sold or purchased. Conversely, in order to protect the value of its investments, a Fund may have to take actions which are not consistent with the guidelines and may weaken its tax position. The effect of the guidelines is more pronounced for the High Yield Fund and the International Bond Fund because of the nature of their investments. See the tax section of this Prospectus for further information. 12 FURTHER RISK DISCUSSION IS INCLUDED UNDER THE CAPTION "RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES." SOME OF THE FUNDS' OTHER INVESTMENT POLICIES Long-Term Investments. It is not the policy of any Fund to purchase or sell securities for trading purposes as such activity may cause the Fund to be deemed to be engaged in a trade or business in the U.S. for U.S. federal income tax purposes. Rather, it is the policy of each Fund to purchase securities for long-term investment to generate income. To the extent consistent with guidelines each Fund follows in order not to be deemed to be engaged in a trade or business in the U.S., however, each Fund may make changes in its investments in accordance with management's appraisal of the factors affecting the market and the national economy in order to protect the Fund from losses in the value of its investments. Repurchase Agreements. Each Fund, individually or together with other funds in the Franklin Group of Funds, may engage in repurchase transactions, in which the Fund purchases a U.S. government security subject to resale to a bank or dealer at an agreed-upon price and date. The transaction requires the collateralization of the seller's obligation by the transfer of securities with an initial market value, including accrued interest, equal to at least 102% of the dollar amount invested by the Fund in each agreement, with the value of the underlying security marked to market daily to maintain coverage of at least 100%. A default by the seller might cause such Fund to experience a loss or delay in the liquidation of the collateral securing the repurchase agreement. Each Fund might also incur disposition costs in liquidating the collateral. Each Fund, however, intends to enter into repurchase agreements only with financial institutions such as broker-dealers and banks which are deemed creditworthy by the Fund's investment manager. A repurchase agreement is deemed to be a loan by a Fund under the 1940 Act. The U.S. government security subject to resale (the collateral) will be held on behalf of the Fund by a custodian approved by the Fund's Managing General Partners and will be held pursuant to a written agreement. Illiquid Investments. It is the policy of each Fund that illiquid securities (securities that cannot be disposed of within seven days in the normal course of business at approximately the amount at which such Fund has valued the securities) may not constitute, at the time of purchase, more than 10% of the value of the total net assets of the Fund. Borrowing. The Funds do not borrow money or mortgage or pledge any of their assets except that the Funds may borrow for temporary or emergency purposes, and pledge their assets therefor, in an amount up to 5% of total asset value of each Fund, and subject to certain tax requirements. Securities of Non-U.S. Issuers. Securities of non-U.S. issuers cannot be purchased by the Government Fund. There are no restrictions on investment of assets of the High Yield Fund or the International Bond Fund in non-U.S. securities, provided such investments are consistent with the investment objectives and policies of such Funds. The High Yield Fund, however, presently has no intention of investing more than 10% of its net assets in securities of non-U.S. issuers not publicly traded in the U.S. Interest income from non-U.S. securities will generally be exempt from U.S. federal income tax and U.S. tax withholding. There are certain risks involved in a U.S. investment company's investment in the securities of non-U.S. issuers. These risks include: fluctuations in currency exchange rates, devaluation of curren- 13 cies, imposition of withholding taxes on Fund income, reduced availability in the U.S. of public information concerning non-U.S. issuers, future political and economic developments and the imposition of currency exchange regulations or other governmental laws or restrictions, and the fact that non-U.S. companies are not generally subject to the same type of accounting, auditing and financial reporting standards or other regulatory practices and requirements that are applicable to U.S. companies. Moreover, securities of many non-U.S. issuers may be less liquid than the securities of comparable U.S. issuers and their prices more volatile, and the Fund will incur transaction costs in converting assets from one currency to another. Brokerage commissions and custody fees for non-U.S. securities are also generally higher than those in the U.S. In addition, with respect to certain countries, there is the possibility of expropriation or the nationalization of issuers of securities held by a Fund, confiscatory taxation, and limitations on the use or removal of monies (e.g., currency blockages) or other Fund assets. The High Yield Fund will ordinarily purchase securities of non-U.S. issuers which are traded in the U.S. or purchase American Depositary Receipts ("ADRs"), which are certificates issued by U.S. banks representing the right to receive securities of a non-U.S. issuer deposited with that bank or a correspondent bank. ADRs purchased by the High Yield Fund will be "sponsored," that is, establishment of the issuing facility is brought about by the participation of the issuer and the depositary institution pursuant to a deposit agreement which sets out the rights and responsibilities of the issuer, the depositary and the ADR holder. The Fund may purchase the securities of non-U.S. issuers, located in developed countries only, directly in non-U.S. markets. Investments in non-U.S. securities, where delivery takes place outside the U.S., will have to be made in compliance with any applicable currency restrictions and other tax laws and laws limiting the amount and types of such investments. Securities which are acquired by the High Yield Fund or the International Bond Fund outside the U.S. and which are publicly traded in the U.S. or on a recognized non-U.S. securities exchange or securities market are not considered by the Fund to be illiquid assets so long as (i) the securities, if resold, may be sold in one or more such trading markets, (ii) the Fund reasonably believes it can readily dispose of the securities for cash in one or more of such markets, and (iii) current market quotations are readily available. Consistent with each Fund's intention to produce income that is not subject to U.S. federal income tax or U.S. withholding tax for qualifying non-U.S. investors, each Fund will generally invest in debt securities of U.S. issuers that are issued after July 18, 1984 in registered form or in debt securities of non-U.S. issuers that are not engaged in U.S. trade or business so that the income generated by such investments may be treated as "portfolio interest" or "non-U.S. source" income, respectively. (See "Taxation of the Funds and Their Shareholders.") The Funds are subject to a number of additional investment restrictions, some of which may be changed only with the approval of shareholders, which further limit their activities to some extent. A list of these restrictions and more information concerning the policies discussed herein are included in the SAI. Each Fund's total return, as calculated pursuant to the formula prescribed by the SEC, for the one- 14 and five-year periods ended on December 31, 1993 and since inception was as follows:
ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION -------- --------- --------- Government Fund ....................... 3.85% 9.45% 9.25%* High Yield Fund........................ 12.06% 11.08% 9.59%* International Bond Fund ............... 7.67% n/a 8.69%**
*Inception May 4, 1987 **From change of investment manager on June 9, 1990 Further information regarding performance is contained in the "Performance" section of this Prospectus. RISK CONSIDERATIONS HIGH YIELDING, FIXED-INCOME SECURITIES Because of the High Yield Fund's policy of investing in higher yielding, higher risk securities, an investment in the High Yield Fund is accompanied by a higher degree of risk than is present with an investment in higher rated, lower yielding securities. Accordingly, an investment in the High Yield Fund should not be considered a complete investment program, and should be carefully evaluated for its appropriateness in light of the investor's overall investment needs and goals. Persons on fixed incomes, such as retired persons, should also consider the increased risk of loss to principal which is present with an investment in higher risk securities such as those in which the High Yield Fund invests. The International Bond Fund may also invest a portion of its assets in comparable securities, although the International Bond Fund currently does not intend to invest more than 5% of its assets in such securities. The market values of lower rated, fixed-income securities and unrated securities of comparable quality (sometimes referred to as "junk bonds") tend to reflect individual corporate developments to a greater extent than do values of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Such lower rated securities also tend to be more sensitive to economic conditions than higher rated securities. These lower rated, fixed-income securities are considered by S&P and Moody's, on balance, to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the higher rating categories. Even securities rated BBB by S&P or Baa by Moody's, ratings which are considered investment grade, possess some speculative characteristics. Companies that issue high yielding, fixed-income securities are often highly leveraged and may not have more traditional methods of financing available to them. Therefore, the risk associated with acquiring the securities of such issuers is generally greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of high yielding securities may experience financial stress. During these periods, such issuers may not have sufficient cash flow to meet their interest payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. To date the International Bond Fund has not held any securities which have defaulted. As of December 31, 1993, none of the High Yield Fund's portfolio was in default. No issues held by the High Yield Fund defaulted in the past fiscal year and a total of five issues de- 15 faulted over the prior three years. In general, securities which default lose much of their value in the time period prior to the actual default so that a Fund's net assets are impacted prior to the default. The High Yield and International Bond Funds may retain an issue which has defaulted because such issue may present an opportunity for subsequent price recovery. The high yield bond market is relatively new and much of its growth prior to 1990 paralleled a long economic expansion. The recent recession disrupted the market for high yield bonds and adversely affected the value of outstanding bonds and the ability of issuers of such bonds to repay principal and interest. Those adverse effects may continue even as the economy recovers. High yielding, fixed-income securities frequently have call or buy-back features which permit an issuer to call or repurchase the securities from a Fund. Although such securities are typically not callable for a period from three to five years after their issuance, if a call were exercised by the issuer during periods of declining interest rates, a Fund would likely have to replace such called securities with lower yielding securities, thus decreasing the net investment income to such Fund and distributions to shareholders. The premature disposition of a high yielding security due to a call or buy-back feature, the deterioration of the issuer's creditworthiness, or a default may also make it more difficult for a Fund to manage the timing of its receipt of income, which may have tax implications. A Fund's investment in deferred interest bonds or bonds that provide for payment of interest-in-kind, if any, may cause the Fund to recognize and allocate income to shareholders prior to the receipt of cash payments. The Fund may also be required under the Code and Treasury regulations to accrue income for income tax purposes on defaulted obligations and allocate such income to the Fund's shareholders even though the Fund is not currently receiving interest or principal payments on such obligations. The High Yield and International Bond Funds may have difficulty disposing of certain high yielding securities because there may be a thin trading market for a particular security at any given time. The market for lower rated, fixed-income securities generally tends to be concentrated among a smaller number of dealers than is the case for securities which trade in a broader secondary retail market. Generally, purchasers of these securities are predominantly dealers and other institutional buyers, rather than individuals. To the extent a secondary trading market for a particular high yielding, fixed-income security does exist, it is generally not as liquid as the secondary market for higher-rated securities. Reduced liquidity in the secondary market may have an adverse impact on market price and such Fund's ability to dispose of particular issues, when necessary, to meet the Fund's liquidity needs or in response to a specific economic event, such as the deterioration in the creditworthiness of the issuer. Reduced liquidity in the secondary market for certain securities may also make it more difficult for the Funds to obtain market quotations based on actual trades for purposes of valuing each Fund's portfolio. Current values for these high yield issues are obtained from pricing services and/or a limited number of dealers and may be based upon factors other than actual sales. (See "Valuation of Fund Shares.") The High Yield Fund and the International Bond Fund are authorized to acquire high yielding, fixed-income securities that are sold without registration under the federal securities laws and therefore carry restrictions on resale. While many recent high yielding securities have been sold with registration rights, covenants and penalty provisions for 16 delayed registration, if a Fund is required to sell such restricted securities before the securities have been registered, it may be deemed an underwriter of such securities as defined in the Securities Act of 1933, which entails special responsibilities and liabilities. The Funds may incur special costs in disposing of such securities; however, the Funds will generally incur no costs when the issuer is responsible for registering the securities. The High Yield and International Bond Funds may acquire high yielding, fixed-income securities during an initial underwriting. Such securities involve special risks because they are new issues. The Funds have no arrangement with their underwriters or any other person concerning the acquisition of such securities, and the investment manager will carefully review the credit and other characteristics pertinent to such new issues. Factors adversely impacting the market value of high yielding securities will adversely impact the net asset value of the High Yield Fund and the International Bond Fund. For example, adverse publicity regarding lower rated bonds, which appeared during 1989 and 1990, along with highly publicized defaults of some high yield issuers, and concerns regarding a sluggish economy which continued in 1993, depressed the prices for many such securities. In addition, each Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The Funds will rely on the investment manager's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, the investment manager will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, de- ferred interest and pay-in-kind bonds. Such bonds carry an additional risk in that, unlike bonds which pay interest throughout the period to maturity, the Funds will realize no cash until the cash payment date and, if the issuer defaults, the Funds may obtain no return at all on their investment. Zero coupon, deferred interest and pay-in-kind bonds involve additional special considerations. Zero coupon or deferred interest securities are debt obligations which do not entitle the holder to any periodic payments of interest prior to maturity or a specified date when the securities begin paying current interest (the "cash payment date") and therefore are generally issued and traded at a discount from their face amounts or par value. The discount varies depending on the time remaining until maturity or the cash payment date, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity or cash payment date of the security approaches. The market prices of zero coupon securities are generally more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non-zero coupon or deferred interest securities having similar maturities and credit quality. Pay-in-kind bonds are securities which pay interest through the issuance of additional bonds. The Funds will be deemed to receive interest over the life of such bonds and be taxed as if interest were paid on a current basis, although no cash interest payments are received by the Funds until the cash payment date or until the bonds mature. 17 For tax imposed restrictions on trading, see "U.S. Tax Treatment of Non-U.S. Investors" under "Taxation of the Funds and Their Shareholders." ASSET COMPOSITION TABLE As stated earlier, ratings published by ratings services, such as Moody's, will be considered in connection with the investment of the assets of the High Yield Fund, although such ratings will not be determinative. As of the end of the fiscal year, December 31, 1993, the High Yield Fund's investments contained the following percentage amounts of Moody's rated and unrated bonds:
HIGH YIELD FUND ---------- Aaa.......................... Aa........................... A............................ Baa.......................... 1.23% Ba........................... 23.11% B............................ 68.95% Caa.......................... Ca........................... Unrated...................... .01%
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUNDS' ACTIVITIES The assets of each Fund are invested in portfolio securities. If the securities owned by such Fund increase in value, the value of the shares which the shareholder owns will increase. If the securities owned by such Fund decrease in value, the value of the shareholder's shares will also decline. In this way, shareholders participate in any change in the value of the securities owned by the Fund. In addition to the factors which affect the value of individual securities, as described in the preceding sections, a shareholder may anticipate that the value of a Fund's shares will fluctuate with movements in the broader equity and bond markets as well. In particular, changes in interest rates, including changes in the prevailing rates of interest in any of the countries in which the International Bond and High Yield Funds invest, will affect the value of a Fund's portfolio and thus its share price. Increased rates of interest which frequently accompany inflation and/or a growing economy are likely to have a negative effect on the value of Fund shares. In addition, with respect to the High Yield and International Bond Funds, changes in currency valuations will impact the price of Fund shares. History reflects both increases and decreases in interest rates in individual countries and throughout the world, and in currency valuations, which may reoccur unpredictably in the future. MANAGEMENT OF THE FUNDS Each Fund, as a limited partnership, is managed by its Managing General Partners, who establish the Fund's policies and supervise and review the operations and management of the Fund pursuant to an Agreement of Limited Partnership (the "Partnership Agreement"). The provisions of each Partnership Agreement are summarized herein under the heading "Summary of Partnership Agreements," and a copy of each Fund's Partnership Agreement is reproduced in its entirety in the SAI. The Managing General Partners of each Fund have been elected for an indefinite term. The day-to-day operations of each Fund are administered by officers appointed by the Managing General Partners. Each Fund has a corporate Non-Managing General Partner who does not participate in the management of the Fund, but who is obligated to maintain (together with the Managing General Partners) a minimum 1% investment in each Fund. Franklin Partners, Inc., a California corporation, is the Non-Managing General Partner for each Fund. All of the outstanding stock of Franklin Partners, Inc. is owned by Franklin Resources, Inc. ("Resources"), 18 a publicly owned holding company, the principal shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of Resources' outstanding shares. Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each Fund's investment manager. Advisers is a wholly-owned subsidiary of Resources. Through its subsidiaries, Resources is engaged in various aspects of the financial services industry. Advisers acts as investment manager or administrator to 34 U.S. registered investment companies (112 separate series) with aggregate assets of over $75 billion. Pursuant to a management agreement with each Fund, the Manager supervises and implements each Fund's investment activities and provides certain administrative services and facilities which are necessary to conduct each Fund's business. The "Expense Table" at the front of this Prospectus includes the management fees and total operating expenses (expressed as a percentage of average monthly net assets) which were paid, or which would have otherwise been payable, by each of the Funds during the fiscal year ended December 31, 1993. As noted in the Expense Table, the International Bond Fund paid no management fees and only a portion of its operating expenses, the balance of which was assumed by Advisers. This action by Advisers to limit its management fees and assume responsibility for payment of certain operating expenses related to the operations of the International Bond Fund may be terminated by Advisers at any time. Among the responsibilities of the Manager under each management agreement is the selection of brokers and dealers through whom transactions in each Fund's portfolio securities will be effected. The Manager tries to obtain the best execution on all such transactions. If it is felt that more than one broker is able to provide the best execution, the Manager will consider the furnishing of quotations and of other market services, research, statistical and other data for the Manager and its affiliates, as well as the sale of shares of each Fund, as factors in selecting a broker. Further information is included under "The Funds' Policies Regarding Brokers Used on Portfolio Transactions" in the SAI. Shareholder accounting and many of the clerical functions for each Fund are performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder Services Agent") in its capacity as transfer agent and dividend-paying agent. Investor Services is a wholly-owned subsidiary of Resources. SUBADVISORY AGREEMENT Pursuant to a subadvisory agreement between Advisers and Templeton Investment Counsel, Inc. ("TICI"), a Florida corporation with offices at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394-3091, an indirect wholly-owned subsidiary of Resources, TICI provides certain investment services with respect to the assets of the International Bond Fund. TICI is registered as an investment adviser under the Investment Advisers Act of 1940. TICI and its Templeton affiliates currently manage approximately $26.2 billion for U.S. registered management investment companies. Under the subadvisory agreement, TICI will provide, subject to the Manager's discretion, a portion of the investment advisory services for which the Manager is responsible pursuant to its management agreement relating to the International Bond Fund. For its services, TICI will receive from Advisers a monthly fee computed at an annual rate equal to 1/2 of 5/96 of 1% of the average daily net assets of the Fund up to and including $100 million; 1/2 of 5/10 of 1% of the average daily net assets over $100 million up to and including $250 million; and 1/2 of 1/5 of 1% of average daily net assets in excess of $250 19 million. This will not be a separate expense of the Fund but will be paid from the investment advisory fees received by Advisers. PLANS OF DISTRIBUTION Effective July 1, 1994 (the "Effective Date"), each Fund adopted a distribution plan (the "Plan" or "Plans") pursuant to Rule 12b-1 under the 1940 Act, as approved by shareholders of the Government and High Yield Funds on June 6, 1994 and the International Bond Fund on June 28, 1994. Under the Plans, each Fund may reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the Fund's shares. Such expenses may include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with a Fund, Distributors or its affiliates. The maximum amount which each Fund may pay to Distributors or others for such distribution expenses is 0.15% per annum of the average daily net assets of the Fund, payable on a quarterly basis. All expenses of distribution and marketing in excess of 0.15% per annum will be borne by Distributors, or others who have incurred them, without reimbursement from the Fund. The Plan for each Fund also covers any payments to or by the Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers or Distributors, to the extent such payments are deemed to be for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1. The payments under the Plans are included in the maximum operating expenses which may be borne by each Fund. In implementing each Plan, the Managing General Partners have determined that initially the annual fees payable thereunder will be equal to the sum of: (i) the amount obtained by multiplying 0.15% by the average daily net assets represented by shares of a Fund that were acquired by investors on or after the Effective Date of each Plan ("New Assets"), and (ii) the amount obtained by multiplying 0.05% by the average daily net assets represented by shares of each Fund that were acquired before the Effective Date of each Plan ("Old Assets"). Such fees will be paid to the current securities dealers of record on the shareholder's account. In addition, until such time as the maximum payment of 0.15% is reached on a yearly basis, up to an additional 0.02% will be paid to Distributors under each Plan. The payments to be made to Distributors will be used by Distributors to defray other marketing expenses that have been incurred in accordance with each Plan, such as advertising. The fees are a Fund expense so that all shareholders regardless of when they purchased their shares will bear expenses under the Plans at the same rate. That rate initially will be at least 0.07% (0.05% plus 0.02%) of average daily net assets and, as Fund shares are sold on or after the Effective Date, will increase over time. Thus, as the proportion of Fund shares purchased on or after the Effective Date to outstanding Fund shares increases, the expenses attributable to payments under each Plan will also increase (but will not exceed 0.15% of average daily net assets). While this is the currently anticipated method for calculating fees payable under each Plan, the Plans permit each Fund's Managing General Partners to allow the respective Fund to pay a full 0.15% on all assets at any time. 20 The approval of the Managing General Partners would be required to change the method of calculating the payments to be made under each Plan. DISTRIBUTIONS TO SHAREHOLDERS A proportionate share of each Fund's net investment income is allocated to shareholders daily and distributed monthly on or about the last business day of that month. The amount of such distributions may vary from month to month and is not guaranteed in any way. Daily allocations of net investment income will commence on the day following receipt of an investor's money or settlement of a wire order trade. Increases and decreases in the value of a Fund's portfolio securities are reflected in the value of a shareholder's shares in the Fund without regard to whether the increases or decreases have been realized through a sale or other disposition of the securities. Net capital gains (or losses) realized by each Fund on transactions in their respective portfolio securities are allocated among the shareholders for tax purposes in accordance with the tax allocation methods described below and any net capital gains (or losses) are allocated as described below. Net capital gains and losses realized by a Fund on transactions in its investment portfolio are allocated among the shareholders of a Fund under a formula designed generally to allocate realized gains to shareholders to whom net unrealized gains have been credited previously and to allocate realized losses to shareholders to whom net unrealized losses have been debited previously. Realized gains or losses in excess of the amounts allocated under the formula are allocated among all shareholders in proportion to the number of shares owned on the day the gain or loss is realized. Since Treasury regulations do not specify a particular method of allocating gains and losses for tax purposes in these circumstances, it is possible that the IRS could challenge the Funds' method of allocating capital gains and losses. After each calendar year, each Fund is required to send shareholders (regardless of whether they are or are not U.S. taxpayers) a U.S. Federal and State of California tax form (Form K-1) which identifies their share of net income, gains and losses for the taxable year and (for non-U.S. taxpayers) a U.S. Federal Form 1042S. Copies of these forms will be filed with the IRS and the California Franchise Tax Board. REINVESTMENT OF DISTRIBUTIONS Unless requested otherwise in writing or on the Application, distributions of income will be automatically reinvested in the shareholder's account in the form of additional shares on the reinvestment date. Shareholders have the right to change their election with respect to the receipt of distributions by notifying the Fund, but any such change will be effective only as to distributions for which the record date is seven or more business days after the Fund has been notified. All distributions are authorized by the Managing General Partners who, at any time, have the right to modify the amount of the distributions to reflect each Fund's financial situation. See the SAI for more information. Many of the Funds' shareholders receive their distributions in the form of additional shares. This is a convenient way to accumulate additional shares and maintain or increase the shareholder's earnings base. Of course, any shares so acquired remain at market risk. DISTRIBUTIONS IN CASH A shareholder may elect to receive distributions of income in cash. By completing the "Special Payment Instructions for Distributions" section of the Application, included with this Prospectus, a shareholder may direct the selected distributions to another fund 21 in the Franklin Group of Funds(R) or the Templeton Group, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. Distributions which may be paid in the interim will be sent to the address of record. Additional information regarding automated fund transfers may be obtained from Franklin's Shareholder Services Department. Income distributions are eligible for investment in another fund in the Franklin Group of Funds or the Templeton Group at net asset value. TAXATION OF THE FUNDS AND THEIR SHAREHOLDERS The following summary of U.S. federal income tax law applicable to the Funds and their shareholders is based on statutes, regulations, rulings, case law and other authorities in effect as of the date of this Prospectus. Additional information on tax matters relating to the Funds and their shareholders is included in the section entitled, "Additional Information on Distributions and Taxation" in the SAI. U.S. Tax Status of the Funds. Each Fund has obtained a ruling from the IRS to the effect that the Fund will be classified as a partnership and that its general and limited partners will be treated as partners for tax purposes. The rulings are conditioned on maintenance by the general partners at all times of a minimum 1% aggregate investment in each item of partnership income, gain, loss, deduction or credit. The general partners intend to comply with this requirement, which is contained in each Fund's Partnership Agreement. As limited partnerships, the Funds are not subject to U.S. federal income tax or, as a general rule, to state income tax. Although federal tax legislation enacted in 1987 will cause publicly traded partnerships, including partnerships such as the Funds, to be taxed as corporations, this legislation will not apply to the Funds until after 1997, provided that the Funds do not add a "substantial new line of business" prior to that time. The Managing General Partners of the Funds intend to avoid changes in Fund activities which might constitute the addition of a "substantial new line of business" and will determine at the appropriate time whether the Funds may be continued in the same or modified form after 1997. In a limited partnership, the character of any income earned or capital gains realized by each Fund flows through directly to its shareholders and is taxed at that level. Shareholders generally are liable for payment of taxes on their allocated share of Fund income and realized capital gains. To the extent, however, that a Fund earns income or realizes capital gains in a form that is exempt from U.S. federal income tax for non-U.S. investors (as discussed below), qualifying non-U.S. shareholders are likewise not subject to the payment of U.S. federal income tax or U.S. withholding tax on their allocated share of these types of income from the Funds, subject to the conditions stated below. U.S. withholding tax refers to the withholding requirements under Sections 1441 and 1442 of the Code (which impose withholding at the rate of 30%, subject to reductions pursuant to tax treaties) and, if applicable, Section 3406 of the Code (which imposes back-up withholding at the rate of 31%). 22 To the extent the High Yield Fund and the International Bond Fund generate income or capital gains from debt obligations purchased or issued outside of the U.S., such Funds may be required to pay taxes in foreign countries on such income or gains. Non-U.S. investors in those Funds may be able to obtain a credit or other relief from such taxes under the tax laws of their own countries or under treaties between their countries and the countries imposing such taxes on the Funds. U.S. Tax Treatment of Non-U.S. Investors. A non-U.S. investor (i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust as defined in the Code) investing in a Fund who was deemed to be engaged in a trade or business in the U.S. would be subject to U.S. federal income tax on any ordinary income and capital gains realized by the Fund to the extent such income and gains were deemed to be effectively connected with the conduct of such trade or business. (U.S. taxation of such income and gains would not be avoided under the terms of an applicable U.S. income tax treaty because such investor would be deemed to have a permanent establishment in the U.S.) Each Fund, however, has obtained an opinion of its counsel to the effect that neither the Funds, nor their shareholders solely by virtue of their investment in the Funds, should be deemed to be engaged in a trade or business in the U.S. if the Funds adhere to their stated investment objectives, policies and restrictions and to certain guidelines concerning their investment activities. Each Fund intends to comply with these restrictions and guidelines. Assuming that the Funds comply with the guidelines, any non-U.S. investor of a Fund should not be deemed to be engaged in a trade or business in the U.S. solely by virtue of an investment in the Fund. Investors should also note that their investments in other funds in the Franklin Group of Funds(R) or in other U.S. investments generally would not, by themselves, cause them to be deemed to be engaged in a trade or business in the U.S.; however, it is possible that an investor could be deemed to be engaged in a trade or business in the U.S. if the investor engages in frequent trading (as opposed to investment) activity and generally does not hold U.S. investments for any substantial period of time. If a Fund were deemed to be engaged in a U.S. trade or business by the IRS or a court of law, then its non-U.S. shareholders would be subject to U.S. federal income tax and the Fund would be obligated to withhold tax at the highest rate applicable to a particular class of shareholders on effectively connected taxable income allocable to each non-U.S. shareholder within that class (see the SAI). Assuming that a non-U.S. investor is not engaged in a trade or business in the U.S., ordinary income realized by each Fund will not be subject to U.S. federal income tax (including "Non-Resident Alien" withholding taxes), if (i) the ordinary income consists of interest income which qualifies for the "portfolio interest" exemption under Sections 871(h) and 881(c) of the Code (or is otherwise exempt from U.S. tax withholding), (ii) the investor has furnished a valid and effective original or certified copy of an original Form W-8 (or substitute) to the Funds and has renewed the Form W-8 as required, (iii) the Funds have no actual knowledge that the investor is in fact a U.S. person and (iv) the investor is not (a) a "10-percent shareholder," as defined in Section 871(h)(3) of the Code, of the issuer of a security held by the Fund which generates the portfolio interest income, (b) a controlled foreign corporation related to such issuer, or (c) a bank deemed to be receiving such interest (other than interest on an obligation of the U.S.) on an extension of credit made 23 pursuant to a loan agreement entered into in the ordinary course of its trade or business. The Funds have been advised that interest income will qualify for the "portfolio interest" exemption if it is paid with respect to a debt obligation issued after July 18, 1984 in registered form with respect to which the U.S. person who would otherwise be required to withhold U.S. federal income tax from such interest under Section 1441 or 1442 of the Code (i.e., the Fund) has received a valid and effective statement (such as that contained in the Application) that the beneficial owner of the obligation (i.e., the shareholder) is not a U.S. person. A Fund's investments in zero coupon or deferred interest securities or in pay-in-kind bonds are subject to special tax rules concerning the amount, timing and character of the income allocations made to shareholders by causing the Fund to recognize income prior to the receipt of cash payments. This income will qualify for the "portfolio interest" exemption, provided that the other requirements relating to the exemption are satisfied. Certain foreign exchange gains and losses realized by the High Yield Fund and the International Bond Fund may be treated as ordinary income and losses rather than capital gains and losses. Such ordinary income does not appear to be subject to U.S. federal income tax (including withholding taxes) for a non-U.S. investor who is not engaged in a trade or business in the U.S. With respect to the High Yield Fund and the International Bond Fund, a non-U.S. investor who is not engaged in a trade or business in the U.S. will also not be subject to U.S. federal income tax (including withholding taxes) on ordinary income realized by the Fund which constitutes "non-U.S. source" income. The Fund has been advised that interest income will be deemed to be "non-U.S. source" income if it is received with respect to securities issued by governments other than the U.S. or by a non-U.S. corporation unless the corporation is engaged in a trade or business in the U.S. Interest on securities of all non-U.S. corporations engaged in a trade or business in the U.S. is generally treated at least in part as U.S. source income, although such interest may be exempt from U.S. withholding taxes by virtue of qualifying for the portfolio interest exemption. A non-U.S. investor who is not engaged in a U.S. trade or business will generally not be subject to U.S. federal income tax (including withholding taxes) on the allocated share of net short-term or long-term capital gains realized by a Fund or on proceeds from the redemption of Fund shares, provided that the investor is not treated as a U.S. resident under the Code. In the case of an individual, a non-U.S. investor is one who has been physically present in the U.S. for less than 31 days during the current calendar year. An individual who is physically present in the U.S. for at least 31 but less than 183 days during the current calendar year will still be treated as a non-U.S. investor, provided that the total number of days physically present in the current calendar year and the two preceding calendar years does not exceed 183 days (counting all of the days in the current calendar year, only one-third of the days in the first preceding calendar year and only one-sixth of the days in the second preceding calendar year). An individual who is physically present in the U.S. for 183 days or more during the current calendar year is generally not treated as a non-U.S. investor. In addition, lawful permanent residents or green card holders may not be treated as non-U.S. investors. Investors should contact their tax advisors for more specific information regarding the determination of U.S. residency status for tax purposes. 24 Redemption proceeds will also not be subject to U.S. tax if they constitute non-U.S. source income by virtue of the investor's non-U.S. status. Even if proceeds of redemptions are not subject to U.S. tax under the rules just described, the Funds may still be required to withhold on the portion of such proceeds which represents the investor's allocable share of income or gains of the Funds which would otherwise be subject to withholding. Non-U.S. investors who do not furnish a valid and effective Form W-8 (or substitute) may be subject to U.S. withholding taxes on their allocated shares of income and gains realized by the Funds and on proceeds from redemptions of their shares. Regardless of whether a valid and effective Form W-8 (or substitute) is furnished, non-U.S. investors will be subject to U.S. withholding taxes on their allocated shares of income realized by the Funds from sources other than (i) "portfolio interest," (ii) "U.S. source" income otherwise exempt from withholding, (iii) "non-U.S. source" income, and (iv) net realized capital gains, unless such withholding taxes are reduced or eliminated under the terms of an applicable U.S. income tax treaty and the investor complies with all procedures for claiming the benefits of such a treaty. It is the intention of each Fund to withhold amounts required by the Code with respect to non-qualifying income and/or non-qualifying investors either at the time of distribution or by subsequent redemption of shares in the investor's account. Investors may also be subject to taxation on income and gain earned from their investment in the Fund imposed by state and local jurisdictions or by their country of residence for tax purposes. In addition, the value of shares owned by a U.S. or non-U.S. shareholder may be subject to U.S. federal estate tax (and state inheritance tax) upon the death of the shareholder. The foregoing discussion is only a summary and does not address potential tax liability under the tax laws of any country other than the U.S. A complete discussion will depend on the jurisdiction in which the investor resides for tax purposes. The foregoing discussion also assumes the investor is generally not subject to U.S. tax or withholding with respect to other income or activities unrelated to an investment in the Funds or to U.S. state tax or withholding. Should an investor become subject to U.S. or state tax or withholding, the tax consequences of owning, exchanging, or redeeming shares of the Funds will be significantly different and an investor in this circumstance should consult a tax adviser. U.S. Tax Treatment of U.S. Investors. Each shareholder of a Fund who is treated under the Code as a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust will be subject to U.S. federal income tax on such shareholder's distributive share of each item of income, deduction, credit, gain or loss realized by the Fund, notwithstanding the fact that such income may not have been distributed and that a portion of such income may consist of "portfolio interest" or other income which would be exempt from U.S. tax if allocated to a non-U.S. person. Fund shareholders may not use Fund losses to offset "passive activity income" from other investments or "passive activity losses" from other investments to offset Fund income. State Tax Considerations. As a general rule, partnerships are not considered to be separate taxable entities under state law. Title 31 of the U.S. Code exempts U.S. government obligations and the interest they pay from taxation under state, municipal or local authority. To the extent the Government Fund earns 25 interest income on obligations of the U.S., its agencies or instrumentalities (other than GNMAs and other indirect obligations of the U.S.), such income is generally exempt from state and local income tax. Income generated from investment in GNMAs, however, is subject to state and local income tax in most states. It is possible that certain states such as California could take the position that nonresident shareholders of the Funds (including shareholders who are not subject to U.S. federal income taxation) are subject to tax in such states on their shares of Fund income derived from sources within the respective states as a result of Fund activities conducted in the state. The Funds intend to file a partnership tax return and Forms K-1 in the state of California, but to take the position with respect to other states that they are under no obligation to file any other tax or information returns in such states because their activities in any such state would not be extensive enough to support the exercise of taxing jurisdiction by such state. The Funds believe that shareholders who are not residents of California should not be subject to income tax in California because the activities of the Funds would not rise to the level of conduct of a trade or business in California. If a Fund were determined to be conducting a trade or business (rather than merely investing), however, the Fund would be required to withhold California income tax at the rate of 11% of the income amounts allocable to non-U.S. shareholders and 7% of income amounts allocable to U.S. shareholders who reside outside California. Prospective investors in the Funds may wish to consult their own tax advisers about the risks of taxation of their distributive shares of Fund income and gains in states other than their states or countries of residence and the availability of tax credits in their own states or countries for taxes paid to such states. In the event non-U.S. investors in the Funds are subject to state taxation of their distributive shares of Fund income and gains, such income may be exempt from state taxation to the extent it consists of interest on direct obligations of the U.S. See the SAI for more information concerning taxation of shareholders. HOW TO INVEST IN A FUND Partnership interests (referred to herein as "shares") of the Funds are continuously offered through securities dealers which execute an agreement with Distributors, the principal underwriter of the shares of the Funds. The use of the term "securities dealer" shall include other financial institutions which, pursuant to an agreement with Distributors (directly or through affiliates), handle customer orders and accounts with each Fund. Such reference, however, is for convenience only and does not indicate a legal conclusion of capacity. The minimum initial investment is $2,500 and subsequent investments must be $100 or more. These minimums may be waived when the shares are being purchased through plans established at Franklin. The Funds and Distributors reserve the right to refuse any order for the purchase of shares, and all orders must be paid for in U.S. dollars. PURCHASE PRICE OF FUND SHARES Shares of each Fund are offered at the public offering price which is the net asset value per share, plus a sales charge, next computed (1) after the shareholder's securities dealer receives the order which is promptly transmitted to the Fund, or (2) after receipt of an order by mail from the shareholder directly in proper form (which generally means a 26 completed Application accompanied by a negotiable check in U.S. funds). The sales charge is a variable percentage of the offering price depending upon the amount of the sale. On orders for 100,000 shares or more, the offering price will be calculated to four decimal places. On orders for less than 100,000 shares, the offering price will be calculated to two decimal places using standard rounding criteria. A description of the method of calculating net asset value per share is included under the caption "Valuation of Fund Shares." Set forth below is a table of total sales charges or underwriting commissions and dealer concessions.
- --------------------------------------------------------------------------------------------------------- Total Sales Charge --------------------------------------------------------- As a Percentage Dealer Concession Size of Transaction As a Percentage of Net Amount As a Percentage at Offering Price of Offering Price Invested of Offering Price* - --------------------------------------------------------------------------------------------------------- Less than $100,000 4.25% 4.44% 4.00% $100,000 but less than $250,000 3.50% 3.63% 3.25% $250,000 but less than $500,000 2.75% 2.83% 2.50% $500,000 but less than $1,000,000 2.15% 2.20% 2.00% $1,000,000 through $2,500,000** 1.00% 1.01% 1.00% - ---------------------------------------------------------------------------------------------------------
*Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages set forth above. **Prior to November 1, 1993, purchases of shares by accounts valued at $1,000,000 or more (including the shares to be purchased and calculated at the greater of cost or market) were processed at net asset value (without sales charge). Accordingly, investors whose accounts were valued at $1,000,000 or more at November 1, 1993, or who signed a Letter of Intent for at least $1,000,000 prior to November 1, 1993, will continue to be permitted to make purchases of Fund shares at net asset value. On purchases in excess of $2,500,000, the sales charge is 1% of the offering price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on the excess over $5,000,000. All sales charges on purchases of $1,000,000 or more are paid to the securities dealer, if any, involved in the trade, who may therefore be deemed an "underwriter" under the Securities Act of 1933, as amended. The size of a transaction which determines the applicable sales charge on the purchase of Fund shares is determined by adding the amount of the shareholder's current purchase plus the cost or current value (whichever is higher) of a shareholder's existing investment in one or more of many of the funds in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these purposes are (a) the open-end investment companies in the Franklin Group (except Franklin Valuemark Funds and Franklin Government Securities Trust) (the "Franklin Group of Funds"), (b) other investment products in the Franklin Group underwritten by Distributors or its affiliates (although certain investments may not have the same schedule of sales charges and/or may not be subject to reduction) (hereinafter the products in subparagraphs (a) and (b) are referred to as the "Franklin Group"), and (c) the open-end U.S. registered investment companies in the Templeton Group of Funds except Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a Letter of Intent for more than $2,500,000 will be at a 1% sales charge until cumulative purchases reach $2,500,000 and at the incremental sales charge on the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation will be at the applicable sales charge 27 of 1% or more until the additional purchase, plus the value of the account or the amount previously invested, less redemptions, exceeds $2,500,000, in which event the sales charge on the excess will be calculated as stated above. Sales charge reductions based upon purchases in more than one of the funds in the Franklin Group or Templeton Group (the "Franklin/Templeton Group") may be effective only after notification to Distributors that the investment qualifies for a discount. Distributors, or its affiliates, at their expense, may also provide additional compensation to dealers in connection with sales of shares of the Funds and other funds in the Franklin Group of Funds or the Templeton Group. Compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising, sales campaigns and/or shareholder services and programs regarding one or more of the funds in the Franklin Group of Funds or the Templeton Group, and other dealer-sponsored programs or events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell significant amounts of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the U.S. for meetings or seminars of a business nature. Dealers may not use sales of the Funds' shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned additional compensation is paid for by the Funds or their shareholders. Certain officers and Managing General Partners of the Funds are also affiliated with Distributors. A detailed description is included in the SAI. All investors should complete the Application included with this Prospectus and submit a signed (or duly certified copy thereof) Form W-8 (or substitute) or W-9, as applicable. For joint accounts, each joint owner must furnish a separate Form W-8 (or substitute). BY PURCHASING FUND SHARES, THE INVESTOR AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF THE PARTNERSHIP AGREEMENT AND SPECIAL POWER OF ATTORNEY AND ACCEPTS ALL THE TERMS, REPRESENTATIONS AND WARRANTIES CONTAINED IN THE APPLICATION. QUANTITY DISCOUNTS IN SALES CHARGES Shares may be purchased under a variety of plans which provide for a reduced sales charge. To be certain to obtain the reduction of the sales charge, the investor or the dealer should notify Distributors at the time of each purchase of shares which qualifies for the reduction. In determining whether a purchase qualifies for any of the discounts, investments in any of the Franklin/Templeton Group may be combined with those of the investor's spouse and children under the age of 21. In addition, the aggregate investments of a trustee or other fiduciary account (for an account under exclusive investment authority) may be considered in determining whether a reduced sales charge is available, even though there may be a number of beneficiaries of the account. In addition, an investment in the Funds may qualify for a reduction in the sales charge under the following programs: 1. Rights of Accumulation. The cost or current value (whichever is higher) of an existing investment in the Franklin/Templeton Group may be combined with the amount of the current purchase in determining the sales charge to be paid. 28 2. Letter of Intent. An investor may immediately qualify for a reduced sales charge on a purchase of shares of a Fund by completing the Letter of Intent section of the Application (the "Letter of Intent" or "Letter"). By completing the Letter, the investor expresses an intention to invest during the next 13 months a specified amount which if made at one time would qualify for a reduced sales charge. At any time within 90 days after the first investment which the investor wants to qualify for the reduced sales charge, a signed Application, with the Letter of Intent section completed, may be filed with the Fund. After the Letter of Intent is filed, each additional investment made, including the reinvestment of income distributions, will be entitled to the sales charge applicable to the level of investment indicated on the Letter of Intent as described above. Sales charge reductions based upon purchases in more than one company in the Franklin/Templeton Group will be effective only after notification to Distributors that the investment qualifies for a discount. The shareholder's holdings in the Franklin/Templeton Group acquired more than 90 days before the Letter of Intent is filed will be counted towards completion of the Letter of Intent but will not be entitled to a retroactive downward adjustment of sales charge. Any redemptions made by the shareholder during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the Letter of Intent have been completed. If the Letter of Intent is not completed within the 13-month period, there will be an upward adjustment of the sales charge as specified below, depending upon the amount actually purchased (less redemptions) during the period. An investor who executes a Letter of Intent prior to a change in the sales charge structure for the Funds will be entitled to complete the Letter at the lower of (i) the new sales charge structure or (ii) the sales charge structure in effect at the time the Letter was filed with the Fund. AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE APPLICATION: Five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund being purchased registered in the investor's name, to assure that the full applicable sales charge will be paid if the intended purchase is not completed. The reserved shares will be included in the total shares owned as reflected on periodic statements; distributions of income on the reserved shares will be paid as directed by the investor. The reserved shares will not be available for disposal by the investor until the Letter of Intent has been completed, or the higher sales charge paid. If the total purchases, less redemptions, equal the amount specified under the Letter, the reserved shares will be deposited to an account in the name of the investor or delivered to the investor or the investor's order. If the total purchases, less redemptions, exceed the amount specified under the Letter and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by Distributors and the dealer through whom purchases were made pursuant to the Letter of Intent (to reflect such further quantity discount) on purchases made within 90 days before, and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the offering price applicable to a single purchase or the dollar amount of the total purchases. If the total purchases, less redemptions, are less than the amount specified under the Letter, the investor will remit to Distributors an amount equal to the difference in the dollar 29 amount of sales charge actually paid and the amount of sales charge which would have applied to the aggregate purchases if the total of such purchases had been made at a single time. Upon such remittance, the reserved shares held for the investor's account will be deposited to an account in the name of the investor or delivered to the investor or to the investor's order. If within 20 days after written request such difference in sales charge is not paid, the redemption of an appropriate number of reserved shares to realize such difference will be made. In the event of a total redemption of the account prior to fulfillment of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption and the balance will be forwarded to the investor. By completing the Letter of Intent section of the Application, an investor grants to Distributors a security interest in the reserved shares and irrevocably appoints Distributors as the attorney-in-fact with full power of substitution to surrender for redemption any or all shares for the purpose of paying any additional sales charge due. Purchases under the Letter of Intent will conform with the requirements of Rule 22d-1 under the 1940 Act. The investor or the investor's securities dealer must inform Investor Services or Distributors that this Letter is in effect each time a purchase is made. Additional terms concerning the offering of the Funds' shares are included in the SAI. GROUP PURCHASES An individual who is a member of a qualified group may also purchase shares of the Funds at the reduced sales charge applicable to the group as a whole. The sales charge is based upon the aggregate dollar value of shares previously purchased and still owned by the group, plus the amount of the current purchase. For example, if members of the group had previously invested and still held $80,000 of a Fund's shares and now were investing $25,000, the sales charge would be 3.50%. Information concerning the current sales charge applicable to a group may be obtained by contacting Distributors. A "qualified group" is one which (i) has been in existence for more than six months; (ii) has a purpose other than acquiring shares of the Funds at a discount; and (iii) satisfies uniform criteria which enable Distributors to realize economies of scale in its costs of distributing shares. A qualified group must have more than 10 members, be available to arrange for group meetings between representatives of the Funds or Distributors and the members, agree to include sales and other materials related to the Funds in its publications and mailings to members at reduced or no cost to Distributors, and seek to arrange for payroll deduction or other bulk transmission of investments to the Funds. If an investor selects a payroll deduction plan, subsequent investments will be automatic and will continue until such time as the investor notifies the Funds and the investor's employer to discontinue further investments. Due to the varying procedures used to prepare, process and forward the payroll deduction information to the Funds, there may be a delay between the time of the payroll deduction and the time the money reaches the Funds. The investment in the Funds will be made at the offering price per share determined on the day that both the check and payroll deduction data are received in required form by the Funds. PURCHASES AT NET ASSET VALUE Shares of the Funds may be purchased at net asset value by trust companies and bank trust departments for funds over which they exercise exclusive discretionary investment authority and which 30 are held in a fiduciary, agency, advisory, custodial or similar capacity for qualifying investors. (In such case, the beneficial owner, if a non-U.S. person, may still be required to submit an executed Form W-8 [or substitute.]) Such purchases are subject to minimum requirements with respect to the amount of purchase, which may be established by Distributors. Currently, those criteria require that the amount invested or to be invested during the subsequent 13-month period in any of the Funds or another company or companies in the Franklin/Templeton Group total at least $1,000,000. Orders for such accounts will be accepted by mail accompanied by a check, or by telephone or other means of electronic data transfer directly from the bank or trust company, with payment by federal funds received by the close of business on the next business day following such order. If an investment by a trust company or bank trust department at net asset value is made through a dealer who has executed a dealer agreement with respect to the Franklin Group of Funds or the Templeton Group, Distributors or one of its affiliates may make a payment, out of their own resources, to such dealer in an amount not to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales Department for additional information. For a further description of investors eligible to purchase at net asset value, please see the SAI. Shares of the Funds may be purchased at net asset value by persons who have redeemed, within the previous 120 days, their shares of a Fund or another fund in the Franklin Group of Funds or the Templeton Group which were purchased with a sales charge. An investor may reinvest an amount not exceeding the redemption proceeds. Shares of the Funds redeemed in connection with an exchange into another fund (see "Exchange Privilege") are not considered "redeemed" for this privilege. In order to exercise this privilege, a written order for the purchase of shares of the Fund must be received by such Fund or the Fund's Shareholder Services Agent within 120 days after the redemption. The 120 days, however, do not begin to run on redemption proceeds placed immediately after redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at net asset value may also be handled by a securities dealer who may charge the shareholder a fee for this service. Dealers may place trades to purchase shares of the Funds at net asset value on behalf of investors who have, within the past 60 days, redeemed an investment in a registered management investment company which charges a contingent deferred sales charge and which has investment objectives similar to those of the respective Fund. GENERAL Securities laws of states in which the Funds' shares are offered for sale may differ from the interpretations of federal law, and banks and financial institutions selling Fund shares may be required to register as dealers pursuant to state law. If the purchase or sale of shares of a Fund with the assistance of certain banks, as described herein, were deemed to be an impermissible activity for such bank(s) under the Glass-Steagall Act, or other federal laws, such activities would be discontinued by such bank(s). Investors utilizing such bank assistance would then be able to seek other avenues to invest in the Fund shares, such as broker-dealers registered with the SEC. OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION ARE NOT AVAILABLE DIRECTLY FROM THE FUNDS TO SHAREHOLDERS WHOSE SHARES 31 ARE HELD, OF RECORD, BY A FINANCIAL INSTITUTION OR NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS). SHARES EVIDENCING PARTNERSHIP INTEREST IN THE FUNDS The Funds do not issue certificates of partnership interest. Shares for an initial investment as well as subsequent investments, including the reinvestment of income, are generally credited to an account in the name of an investor on the books of the Funds and are reflected in periodic confirmation statements. Maintaining shares in uncertificated form (also known as "plan balance") minimizes the risk of loss or theft of a share certificate. CONFIRMATIONS A shareholder will receive a confirmation statement quarterly to confirm the distributions reinvested during that period and after each other transaction which affects the account. This statement will also show the total number of a Fund's shares owned by the shareholder. AUTOMATIC INVESTMENT PLAN Under the Automatic Investment Plan, a shareholder may be able to arrange to make additional purchases of shares automatically on a monthly basis by electronic funds transfer from a checking account, if the bank which maintains the account is a member of the Automated Clearing House, or by preauthorized checks drawn on the shareholder's bank account. A shareholder may, of course, terminate the program at any time. The Application contains the requirements applicable to this program. In addition, shareholders may obtain more information concerning this program from their securities dealer or from Distributors. The market value of each Fund's shares is subject to fluctuation. Before undertaking any plan for systematic investment, the investor should keep in mind that such a program does not assure a profit or protect against a loss. SYSTEMATIC WITHDRAWAL PLAN A shareholder may establish a Systematic Withdrawal Plan and receive regular periodic payments from the shareholder's account provided that the net asset value of the shares held by the shareholder is at least $5,000. There are no service charges for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount which the shareholder may withdraw is $50 per transaction, although this is merely the minimum amount allowed under the plan and should not be mistaken for a recommended amount. The plan may be established on a monthly, quarterly, semi-annual or annual basis. Income distributions to the shareholder's account are received in additional shares at net asset value. Payments will then be made from the liquidation of shares at net asset value on the day of the withdrawal transaction (which is generally the first business day of the month in which the payment is scheduled) with payment generally received by the shareholder three to five days after the date of liquidation. By completing the "Special Payment Instructions for Distributions" section of the Application included with this Prospectus, a shareholder may direct the selected withdrawals to another fund in the Franklin Group of Funds(R) or the Templeton Group, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. Withdrawals 32 which may be paid in the interim will be sent to the address of record. Liquidation of shares may reduce or possibly exhaust the shares in the shareholder's account, to the extent withdrawals exceed shares earned through income distributions, particularly in the event of a market decline. If the withdrawal amount exceeds the total plan balance, the account will be closed and the remaining balance will be sent to the shareholder. As with other redemptions, if the investor is subject to U.S. tax, a liquidation to make a withdrawal payment is a sale for federal income tax purposes. Because the amount withdrawn under the plan may be more than the shareholder's actual income, part of the payment may be a return of the shareholder's investment. The maintenance of a Systematic Withdrawal Plan concurrently with purchases of additional shares of the Funds would be disadvantageous because of the sales charge on the additional purchases. The shareholder should ordinarily not make additional investments of less than $5,000 or three times the annual withdrawals under the plan during the time such a plan is in effect. A Systematic Withdrawal Plan may be terminated on written notice by the shareholder or the Funds, and it will terminate automatically if all shares are liquidated or withdrawn from the account, or upon the Funds' receipt of notification of the death or incapacity of the shareholder. Shareholders may change the amount (but not below the specified minimum) and schedule of withdrawal payments, or suspend one such payment by giving written notice to Investor Services at least seven business days prior to the end of the month preceding a scheduled payment. INSTITUTIONAL ACCOUNTS There may be additional methods of purchasing, redeeming or exchanging shares of the Funds available to institutional accounts. For further information, contact Franklin's Institutional Services Department at 1-800/321-8563. EXCHANGE PRIVILEGE NON-U.S. INVESTORS SHOULD NOTE THAT INCOME FROM OTHER FUNDS IN THE FRANKLIN GROUP OF FUNDS(R) OR THE TEMPLETON GROUP MAY BE SUBJECT TO U.S. TAX AND WITHHOLDING REQUIREMENTS AND THAT FREQUENT USE OF THIS EXCHANGE PROCEDURE, TOGETHER WITH OTHER TRADING ACTIVITIES, COULD CAUSE THEM TO BE DEEMED TO BE ENGAGED IN A U.S. TRADE OR BUSINESS AND THEREFORE SUBJECT TO U.S. TAXATION. The Franklin Group of Funds and the Templeton Group consist of a number of investment companies with various investment objectives and policies. The shares of most of these investment companies are offered to the public with a sales charge. If the shareholder's investment objective or outlook for the securities markets changes, shares of a Fund may be exchanged for shares of the other Franklin Partners Funds, or other mutual funds in the Franklin Group of Funds or the Templeton Group (as defined under "How to Invest in a Fund") which are eligible for sale in the shareholder's state, or country, of residence and in conformity with such Fund's stated eligibility requirements and investment minimums. Investors should review the prospectuses of the fund they wish to exchange from and the fund they wish to exchange into for all specific requirements or limitations on exercising the exchange privilege, for example, minimum holding periods or applicable sales charges. Exchanges are made on the basis of the net asset values of the funds involved, except as set forth below. Exchanges of shares of a fund which were purchased without a sales charge will be charged a sales charge in accordance with the terms of the prospectus of the fund being purchased, unless 33 the investment on which no sales charge was paid was transferred in from a fund on which the investor paid a sales charge. Exchanges of shares of a Fund which were purchased with a lower sales charge to a fund which has a higher sales charge will be charged the difference, unless the shares were held in the Fund for at least six months prior to executing the exchange. When an investor requests the exchange of the total value of a Fund account, accrued but unpaid income distributions will be reinvested in such Fund at net asset value on the date of the exchange, and then the entire share balance will be exchanged into the new fund in accordance with the procedures set forth above. Because the exchange is considered a redemption and purchase of shares, shareholders who are otherwise subject to U.S. tax may realize a gain or loss for federal income tax purposes. Backup withholding and information reporting may also apply. NON-U.S. INVESTORS MAY BE SUBJECT TO WITHHOLDING ON EXCHANGES UNLESS A FORM W-8 (OR SUBSTITUTE) IS ON FILE. There are differences among the funds in the Franklin Group of Funds and the Templeton Group. Before making an exchange, a shareholder should obtain and review a current prospectus of the fund into which the shareholder wishes to transfer. Exchanges will be effected upon receipt of written instructions signed by all account owners. The use of the exchange program may be discontinued or modified by the Funds at any time upon 60 days' written notice to shareholders. TIMING ACCOUNTS Accounts which are administered by allocation or market timing services to purchase or redeem shares based on predetermined market indicators ("Timing Accounts") will be charged a $5.00 administrative service fee per each such exchange. All other exchanges are without charge. RESTRICTIONS ON EXCHANGES In accordance with the terms of their respective prospectuses, certain funds do not accept or may place differing limitations than those below on exchanges by Timing Accounts. Each Fund reserves the right to temporarily or permanently terminate the exchange privilege or reject any specific purchase order for any Timing Account or any person whose transactions seem to follow a timing pattern who: (i) makes an exchange request out of the Fund within two weeks of an earlier exchange request out of the Fund, or (ii) makes more than two exchanges out of the Fund per calendar quarter, or (iii) exchanges shares equal in value to at least $5 million dollars, or more than 1% of the Fund's net assets. Accounts under common ownership or control, including accounts administered so as to redeem or purchase shares based upon certain predetermined market indicators, will be aggregated for purposes of the exchange limits. In addition, each Fund reserves the right to refuse the purchase side of exchange requests by any Timing Account, person, or group if, in the Manager's judgment, the Fund would be unable to invest effectively in accordance with its investment objectives and policies, or would otherwise potentially be adversely affected. A shareholder's purchase exchanges may be restricted or refused if the Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to the Fund and therefore may be refused. Finally, as indicated under "How to Invest in a Fund," each Fund and Distributors reserve the right to refuse any order for the purchase of shares. 34 EXCHANGES THROUGH SECURITIES DEALERS As is the case with all purchases and redemptions of each Fund's shares, Investor Services will accept exchange orders by telephone or other means of electronic transmission from securities dealers who execute a dealer or similar agreement with Distributors. A securities dealer may charge a fee for handling an exchange. Use of the exchange privilege in conjunction with market timing services offered through numerous securities dealers has become increasingly popular as a means of capital management. In the event that a substantial portion of a Fund's shareholders should, within a short period, elect to redeem their shares of the Fund pursuant to the exchange privilege, the Fund might have to liquidate portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this should occur, it is the general policy of the Funds to initially invest this money in short-term, interest-bearing money market instruments, unless it is felt that attractive investment opportunities consistent with a Fund's investment objective exist immediately. Subsequently, this money will be withdrawn from such short-term money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. HOW TO SELL SHARES OF THE FUNDS A shareholder may at any time liquidate shares owned and receive from that Fund the value of the shares by forwarding a written request, signed by all registered owners, to Investor Services at the address shown on the back cover of this Prospectus. The shareholder will then receive from the Fund the value of the shares based upon the net asset value per share next computed after the written request in proper form is received by Investor Services. Redemption requests received after the time at which the net asset value is calculated (at 1:00 p.m. Pacific time) each day that the New York Stock Exchange (the "Exchange") is open for business, will receive the price calculated on the following business day. Shareholders are advised to provide a telephone number(s) where they may be reached during business hours, or in the evening if preferred. Investor Services' ability to contact a shareholder promptly when necessary will speed the processing of the redemption. TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING: (1) the proceeds of the redemption are over $50,000; (2) the proceeds (in any amount) are to be paid to someone other than the registered owner(s) of the account; (3) the proceeds (in any amount) are to be sent to any address other than the shareholder's address of record, preauthorized bank account or brokerage firm account; (4) the Fund or Investor Services believes that a signature guarantee would protect against potential claims based on the transfer instructions, including, for example, when (a) the current address of one or more joint owners of an account cannot be confirmed, (b) multiple owners have a dispute or give inconsistent instructions to the Fund, (c) the Fund has been notified of an adverse claim, (d) the instructions received by the Fund are given by an agent, not the actual registered owner, (e) the Fund determines that joint owners who are married to each other are separated or may be the subject of divorce proceedings, or 35 (f) the authority of a representative of a corporation, partnership, association, or other entity has not been established to the satisfaction of the Fund. Signature(s) must be guaranteed by an "eligible guarantor institution" as defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally, eligible guarantor institutions include (1) national or state banks, savings associations, savings and loan associations, trust companies, savings banks, industrial loan companies and credit unions; (2) national securities exchanges, registered securities associations and clearing agencies; (3) securities dealers which are members of a national securities exchange or a clearing agency or which have minimum net capital of $100,000; or (4) institutions that participate in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized signature guarantee medallion program. A notarized signature will not be sufficient for the request to be in proper form. Liquidation requests of corporate, partnership, trust and custodianship accounts, and accounts under court jurisdiction require the following documentation to be in proper form: Corporation - (1) Signature guaranteed letter of instruction from the authorized officer(s) of the corporation and (2) a corporate resolution. Partnership - (1) Signature guaranteed letter of instruction from a general partner and (2) pertinent pages from the partnership agreement identifying the general partners or a certification for a partnership agreement. Trust - (1) Signature guaranteed letter of instruction from the trustee(s), and (2) a copy of the pertinent pages of the trust document listing the trustee(s) or a Certification for Trust if the trustee(s) are not listed on the account registration. Custodial (other than a retirement account) - Signature guaranteed letter of instruction from the custodian. Accounts under court jurisdiction - Check court documents and the applicable law of the state or country of residence since these accounts have varying requirements, depending upon the state or country of residence. For any information required about a proposed liquidation, a shareholder may call Franklin's Shareholder Services Department or the securities dealer may call Franklin's Dealer Services Department. Payment for redeemed shares will be sent to the shareholder within seven days after receipt of the request in proper form, except that a Fund may delay the mailing of the redemption check, or a portion thereof, until clearance of the check used to purchase Fund shares, which may take up to 15 days or more. Although the use of a certified or cashier's check will generally reduce this delay, shares purchased with these checks will also be held pending clearance. Shares purchased by federal funds wire are available for immediate redemption. In addition, the right of redemption may be suspended or the date of payment postponed if the Exchange is closed (other than customary closing) or upon the determination of the SEC that trading on the Exchange is restricted or an emergency exists, or if the SEC permits it, by order, for the protection of shareholders. Of course, the amount received may be more or less than the amount invested by the shareholder, depending on fluctuations in the market value of securities owned by the Funds. Payments by the Funds will be made only in U.S. dollars. REDEMPTIONS BY TELEPHONE Shareholders who complete the Franklin/Templeton Telephone Redemption Authorization Agreement (the "Agreement"), included with this 36 Prospectus, may redeem shares of the Funds by telephone. THE AGREEMENT AND ADDITIONAL INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUNDS AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES." For shareholder accounts with a completed Agreement on file, redemptions of shares may be made for up to $50,000 per day per Fund account. Telephone redemption requests received before 1:00 p.m. Pacific time on any business day will be processed that same day. The redemption check will be sent within seven days, made payable to all the registered owners on the account, and will be sent only to the address of record. Redemption requests by telephone will not be accepted within 30 days following an address change by telephone. In that case, a shareholder should follow the other redemption procedures set forth in this Prospectus. Institutional accounts (certain corporations, bank trust departments, and government entities which qualify to purchase shares at net asset value pursuant to the terms of this Prospectus) which wish to execute redemptions in excess of $50,000 must complete an Institutional Telephone Privileges Agreement which is available from Franklin's Institutional Services Department by telephoning 1-800/321-8563. REDEEMING SHARES THROUGH SECURITIES DEALERS The Funds will accept redemption orders by telephone or other means of electronic transmission from securities dealers who have entered into a dealer or similar agreement with Distributors. This is known as a repurchase. The only difference between a normal redemption and a repurchase is that if the shareholder redeems shares through a dealer, the redemption price will be the net asset value next calculated after the shareholder's dealer receives the order which is promptly transmitted to the Fund, rather than on the day the Fund receives the shareholder's written request in proper form. These documents, as described in the preceding section, are required even if the shareholder's securities dealer has placed the repurchase order. After receipt of a repurchase order from the dealer, the Fund will still require a signed letter of instruction and all other documents set forth above. A shareholder's letter should reference the Fund, the account number, the fact that the repurchase was ordered by a dealer and the dealer's name. Details of the dealer-ordered trade, such as trade date, confirmation number, and the amount of shares or dollars, will help speed processing of the redemption. The seven-day period within which the proceeds of the shareholder's redemption will be sent will begin when the Fund receives all documents required to complete ("settle") the repurchase in proper form. The redemption proceeds will not earn distributions or interest during the time between receipt of the dealer's repurchase order and the date the redemption is processed upon receipt of all documents necessary to settle the repurchase. Thus, it is in a shareholder's best interest to have the required documentation completed and forwarded to the Fund as soon as possible. The shareholder's securities dealer may charge a fee for handling the order. The SAI contains more information on the redemption of shares. TELEPHONE TRANSACTIONS Shareholders of each Fund and their investment representative of record, if any, will be able to execute 37 various transactions by calling Investor Services at 1-800/632-2301. All shareholders will be able to: (i) effect a change in address, (ii) change a distribution option and (iii) transfer Fund shares in one account to another identically registered account in the Fund. Shareholders who complete and file an Agreement will be able to redeem shares of a Fund, as more fully set forth under "How to Sell Shares of the Funds - Redemptions by Telephone." VERIFICATION PROCEDURES Each Fund and Investor Services will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These will include: recording all telephone calls requesting account activity by telephone, requiring that the caller provide certain personal and/or account information requested by the telephone service agent at the time of the call for the purpose of establishing the caller's indentification, and sending a confirmation statement on redemptions to the address of record each time account activity is initiated by telephone. So long as the Funds and Investor Services follow instructions communicated by telephone which were reasonably believed to be genuine at the time of their receipt, neither they nor their affiliates will be liable for any loss to the shareholder caused by an unauthorized transaction. Shareholders are, of course, under no obligation to apply for telephone transaction privileges. In any instance where a Fund or Investor Services is not reasonably satisfied that instructions received by telephone are genuine, the requested transaction will not be executed, and neither the Fund nor Investor Services will be liable for any loss which may occur because of a delay in implementing a transaction. GENERAL During periods of drastic economic or market changes, it is possible that the telephone transaction privileges will be difficult to execute because of heavy telephone volume. In such situations, shareholders may wish to contact their investment representative for assistance or send written instructions to the Fund as detailed elsewhere in this Prospectus. Neither the Funds nor Investor Services will be liable for any loss resulting from the inability of a shareholder to execute a telephone transaction. The telephone transaction privilege may be modified or discontinued by the Funds at any time upon 60 days' written notice to shareholders. VALUATION OF FUND SHARES The net asset value per share of each Fund is determined separately as of 1:00 p.m. Pacific time each day that the Exchange is open for trading. Many newspapers carry daily quotations of the prior trading day's closing "bid" (net asset value) and "ask" (offering price, which includes the maximum sales charge of the Fund). The net asset value per share of each Fund is determined in the following manner: The aggregate of all liabilities, accrued expenses and taxes and any necessary reserves are deducted from the aggregate gross value of all assets, and the difference is divided by the number of shares of the Fund outstanding. As discussed under "How to Invest in a Fund," the offering price is the net asset value plus a sales charge, which varies with the amount of money being invested. To determine the aggregate net assets of a Fund, cash and receivables are valued at their realizable amounts. Interest is recorded as accrued. Portfolio securities listed on a securities exchange or on the NASDAQ National Market System for which market quotations are readily available are valued at the last quoted sale price of the day or, if there is no such reported sale, within the range of the most recent quoted 38 bid and ask prices. Over-the-counter portfolio securities for which market quotations are readily available are valued within the range of the most recent bid and ask prices as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market as determined by the Manager. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors, including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the Managing General Partners of each Fund. All money market instruments with a maturity of more than 60 days are valued at current market, as discussed above. All money market instruments with a maturity of 60 days or less are valued at their amortized cost, which the Managing General Partners have determined in good faith constitutes fair value for purposes of complying with the 1940 Act. This valuation method will continue to be used until such time as the Managing General Partners determine that it does not constitute fair value for such purposes. With the approval of the Managing General Partners, a Fund may utilize a pricing service, bank or securities dealer to perform any of the above described functions. HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUNDS Any questions or communications regarding a shareholder's account should be directed to Investor Services at the address shown on the back cover of this Prospectus. From a touch-tone phone, shareholders may obtain current price, yield or performance information specific to a fund in the Franklin Group of Funds(R) by calling the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753 (in the U.S. only). Information about the Funds may be accessed by entering Fund Code 54 for the International Bond Fund, 55 for the Government Fund or 56 for the High Yield Fund followed by the # sign, when requested to do so by the automated operator. To assist shareholders and securities dealers wishing to speak directly with a representative, the following is a list of the various Franklin departments, telephone numbers and hours of operation to call. The same numbers may be used when calling from a rotary phone:
HOURS OF OPERATION (PACIFIC TIME) DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY) - --------------- ------------- --------------------------------- Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m. Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m. Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m. 8:30 a.m. to 5:00 p.m. (Saturday) Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m. TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
39 In order to ensure that the highest quality of service is being provided, telephone calls placed to or by representatives in all of Franklin's service departments may be accessed, recorded and monitored. These calls may be determined by the presence of a regular beeping tone. PERFORMANCE Advertisements, sales literature and communications to shareholders may contain various measures of the Funds' performance, including current yield, various expressions of total return and current distribution rate. They may occasionally cite statistics to reflect volatility or risk. Average annual total return figures as prescribed by the SEC represent the average annual percentage change in value of $1,000 invested at the maximum public offering price (offering price includes sales charge) for one-, five- and ten-year periods, or portion thereof, to the extent applicable, through the end of the most recent calendar quarter, assuming reinvestment of all distributions. The Funds may also furnish total return quotations for other periods, or based on investments at various sales charge levels or at net asset value. For such purposes total return equals the total of all distributions paid to shareholders, assuming reinvestment of all distributions, plus (or minus) the change in the value of the original investment, expressed as a percentage of the purchase price. Current yield reflects the income per share earned by each Fund's portfolio investments; it is calculated by dividing each Fund's net investment income per share during a recent 30-day period by the maximum public offering price on the last day of that period and annualizing the result. Yield, which is calculated according to a formula prescribed by the SEC (see the SAI), is not indicative of the distributions which were or will be paid to the Funds' shareholders. Distributions paid to shareholders are reflected in the current distribution rate which may be quoted to shareholders. The current distribution rate is computed by dividing the total amount of income per share paid by each Fund during the past 12 months by the current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of distribution payout or a fundamental change in investment policies, it might be appropriate to annualize the distributions paid during the period such policies were in effect, rather than using the distributions during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than interest, such as short-term capital gains, and is calculated over a different period of time. In each case, performance figures are based upon past performance and will reflect all recurring charges against the Funds' income and will assume the payment of the maximum sales charge on the purchase of shares. When there has been a change in the sales charge structure, the historical performance figures will be restated to reflect the new rate. The investment results of the Funds, like all other investment companies, will fluctuate over time; thus, performance figures should not be considered to represent what an investment may earn in the future or what the Funds' yield, distribution rate or total return may be in any future period. GENERAL INFORMATION The Funds reserve the right to redeem, at net asset value, shares of any shareholder whose account has been in existence for at least 12 months and has a value of less than $2,000, but only where the val- 40 ue of such account has been reduced by the shareholder's prior voluntary redemption of shares and has been inactive (except for the reinvestment of distributions) for a period of at least six months, provided advance notice is given to the shareholder. More information is included in the SAI. Although each Fund is offering only its own shares, it is possible that one Fund might become liable for any misstatements in this Prospectus about one of the other Funds. The Managing General Partners of each Fund have considered this factor in approving the use of a single, combined Prospectus. Prior to June 9, 1990, the International Bond Fund was managed by Pilgrim Management Corporation ("PMC") and was one of the three mutual funds constituting the Pilgrim Foreign Investors Funds. At a special meeting of shareholders held on June 7, 1990, shareholders of the International Bond Fund voted to approve a change in management which resulted in the appointment of Advisers as investment manager of such Fund, which then changed its name from Pilgrim International Bond Fund. Distribution or redemption checks sent to shareholders do not earn interest or any other income during the time such checks remain uncashed and neither the Funds nor their affiliates will be liable for any loss to the shareholder caused by the shareholder's failure to cash such check(s). "Cash" payments to or from a Fund may be made by check, draft or wire. The Funds have no facility to receive, or pay out, cash in the form of currency. ACCOUNT REGISTRATIONS An account registration should reflect the investor's intentions as to ownership. Where there are two co-owners on the account, the account will be registered as "Owner 1" and "Owner 2"; the "or" designation is not used except for money market fund accounts. If co-owners wish to have the ability to redeem or convert on the signature of only one owner, a limited power of attorney may be used. Accounts should not be registered in the name of a minor either as sole or co-owner of the account. Transfer or redemption for such an account may require court action to obtain release of the funds until the minor reaches the legal age of majority. The account should be registered in the name of one "Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to Minors Act. A trust designation such as "trustee" or "in trust for" should only be used if the account is being established pursuant to a legal, valid trust document. Use of such a designation in the absence of a legal trust document may cause difficulties and require court action for transfer or redemption of the funds. Shares, whether in certificate form or not, registered as joint tenants or "Jt Ten" shall mean "as joint tenants with rights of survivorship" and not "as tenants in common." Except as indicated, a shareholder may transfer an account in one of the Funds carried in "nominee" name by the shareholder's securities dealer to a comparably registered Fund account maintained by another securities dealer. Both the delivering and receiving securities dealers must have executed dealer agreements on file with Distributors. Unless a dealer agreement has been executed and is on file with Distributors, the Fund will not process the transfer and will so inform the shareholder's delivering securities dealer. To effect the transfer, a shareholder should instruct the securities dealer to transfer the account to a receiving securities dealer and sign any documents required by the securities dealer(s) to evidence consent to the transfer. Under 41 current procedures the account transfer may be processed by the delivering securities dealer and the Fund after the Fund receives authorization in proper form from the shareholder's delivering securities dealer. In the future it may be possible to effect such transfers electronically through the services of the NSCC. The Fund may conclusively accept instructions from an owner or the owner's nominee listed in publicly available nominee lists, regardless of whether the account was initially registered in the name of or by the owner, the nominee, or both. If a securities dealer or other representative is of record on an investor's account, the investor will be deemed to have authorized the use of electronic instructions on the account, including, without limitation, those initiated through the services of the NSCC, to have adopted as instruction and signature any such electronic instructions received by the Funds and the Shareholder Services Agent, and to have authorized them to execute the instructions without further inquiry. At the present time, such services which are available, or which are anticipated to be made available in the near future, include the "NSCC's Networking," "Fund/SERV," and "ACATS" systems. Any questions regarding an intended registration should be answered by the securities dealer handling the investment, or by calling Franklin's Fund Information Department. SUMMARY OF PARTNERSHIP AGREEMENTS Each Fund is a California limited partnership. The Government Fund and the High Yield Fund were organized on January 27, 1987 and the International Bond Fund was organized on September 4, 1986. As limited partnerships, the Funds are not required to hold annual meetings and do not intend to do so. Each Fund, however, will hold meetings of partners for such purposes as electing new or additional general partners, changing fundamental investment policies, approving an investment management agreement or a distribution plan and, at the request of shareholders owning 10% or more of the shares of a Fund, replacing its general partners. All shares of each Fund are of one class, have one vote and, when issued, are fully paid, nonassessable and redeemable. All shares of each Fund have equal voting, distribution and liquidation rights but have no subscription, preemptive or conversion rights. There is no cumulative voting. The full text of the Partnership Agreement of each Fund is set forth in the SAI. The following statements summarize and explain certain provisions of each Partnership Agreement and are qualified in their entirety by the terms of each Fund's respective Partnership Agreement. Voting Rights of Partners. Each Fund's shareholders, or limited partners, have the voting, approval, consent or similar rights required under the 1940 Act for voting security holders. Shareholders of each Fund have the exclusive right to vote on matters affecting that Fund as set forth in the Partnership Agreement. A meeting of the shareholders may be called by the Managing General Partners or by limited partners holding 10% or more of the outstanding shares. Shareholders on the record date of a meeting will be entitled to vote at that meeting if they are admitted as limited partners prior to the meeting date. General Partners. The general partners of each Fund consist of a number of individuals, referred to as Managing General Partners, and one corporate general partner, referred to as the Non- Managing General Partner (together, the "General 42 Partners"). The Managing General Partners have complete and exclusive control over the management, conduct and operation of each Fund. The General Partners have been elected for an indefinite term by the initial shareholders of each Fund. If at any time the number of Managing General Partners is reduced to less than three, the remaining Managing General Partners shall, within 120 days, call a meeting for the purpose of electing an additional Managing General Partner(s) so as to restore their number to at least three. Each Partnership Agreement provides that the General Partners are not personally liable to any shareholder of the Fund for the repayment of any amounts standing in the account of any shareholder, and that any such payment shall be solely from the assets of each respective Fund, except liability incurred by reason of the General Partners' willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office. Each Partnership Agreement also provides that the General Partners will not be liable to any shareholder by reason of any failure to withhold income tax or any change in any federal or state tax laws applicable to the Fund or its shareholders as long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the shareholders. A General Partner is generally entitled to indemnification from each Fund against liabilities and expenses to which the General Partner may become subject in the capacity of a General Partner of that Fund, including any liability resulting from failure to withhold income tax or any change in applicable income tax laws, provided the General Partner has acted in good faith and for a purpose which such partner reasonably believed to be in the best interests of the Fund or its shareholders. Such indemnification is limited to the assets of that respective Fund. Liability of Limited Partners. Generally, limited partners are not personally liable for obligations of the partnership of which they are shareholders unless they participate in the control of the partnership's activities. Under the terms of each Partnership Agreement, each Fund's limited partners do not have the right to participate in the control of the Fund's activities, but they may exercise the right to vote on matters affecting the basic structure of the Fund, including matters requiring shareholder approval under the 1940 Act. Under California law, the liability of each limited partner (in the capacity of a limited partner) for the losses, debts and obligations of the Fund is generally limited to the partner's capital contribution (which is the price of such partner's shares net of all sales charges) and the partner's share of any undistributed income or assets of the Fund. A limited partner may, however, under certain circumstances, be required to return amounts previously distributed for the benefit of the Fund's creditors. Each Fund intends to include in its contracts a provision limiting the claims of creditors to the Fund's assets and may carry insurance in such amounts as the Managing General Partners, in their judgment, consider reasonable to cover potential liabilities of the Fund. In addition, the Partnership Agreement for each Fund provides for indemnification out of the Fund's property for any shareholder held personally liable for any obligation of the Fund. Each Partnership Agreement also provides that the Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of liability as a limited partner is limited to circumstances in which the Fund itself would be unable to meet its obligations. The Manager believes that, in view of the above and in view of the 43 character of the operations of each Fund as an investment company, the risk of personal liability to shareholders is extremely remote. Admission of Limited Partners. In order to be admitted as a limited partner, a purchaser of shares is either required to complete a partnership subscription agreement, including a special power of attorney, in the form set forth in the Application, or to take action indicating acceptance thereof. Admission of a purchaser as a limited partner also requires the consent of the Managing General Partners and the addition of the purchaser to the Partnership List of the Fund. The Partnership List is a current list of all shareholders who are partners, their addresses and the amount of their contributions and current share ownership. The Managing General Partners of each Fund, while recognizing that they have the right to withhold their consent, have stated that they intend to give such consent as a matter of course to eligible investors and the Partnership List will be updated daily on each business day. Prohibition of Assignment of Shares. A limited partner of any Fund does not have the right to voluntarily transfer or assign shares to any other person other than to secure a loan. In the event that any person who is holding shares as collateral becomes the owner of such shares due to foreclosure or otherwise, such person shall not have the right to be substituted as a limited partner but shall have the right (upon presentation of satisfactory evidence to the Managing General Partners of the right to succeed to the interests of the Limited Partner): (1) to redeem the shares and (2) to receive distributions with respect to such shares. Under limited circumstances, a successor in interest of a limited partner shall have the right to be substituted as a limited partner. Term of Existence - Dissolution. The Government Fund and the High Yield Fund will continue until December 31, 2050, and the International Bond Fund will continue until December 31, 2036 but shall be dissolved before such date if and when: (1) the shareholders of a Fund approve the prior dissolution of the Fund; (2) a Fund disposes of all of its assets; (3) a General Partner withdraws and the remaining General Partners do not elect to continue the operations of the Partnership; or (4) there are no remaining General Partners (unless the shareholders agree by unanimous vote to continue the Fund in circumstances where the last remaining General Partner was not removed by them, and new General Partners are promptly elected by the shareholders). Except by requiring a Fund to redeem outstanding shares as described under "How to Sell Shares of a Fund," limited partners have no right to the return of any part of their contributions to any Fund until dissolution of the Fund. Distributions by each Fund, whether upon redemption, dissolution or otherwise, will be in proportion to the number of outstanding shares held without regard to the dollar amount contributed to the Fund or the amount of any profits of the Fund received. Other Provisions. Each Partnership Agreement also provides procedures for the pricing, purchase and redemption of shares of each Fund as described in this Prospectus, as well as procedures relating to the giving of notices, the calling of meetings and the solicitation of shareholder consents. In addition, each Partnership Agreement contains provisions relating to the maintenance of books and records by each Fund, the allocation for U.S. tax purposes of items of income, gain, loss, deduction and credit, and the procedures by which amendments to a Partnership Agreement may be effected. Limited partners have the right to obtain 44 current copies of the Partnership List, the Partnership Agreement and certain other records of each Fund of which they are shareholders for their personal use only. The Partnership List and other records of each Fund, although available to other limited partners upon request and to certain other persons in connection with Fund matters, are not matters of public record. PORTFOLIO OPERATIONS The following persons are primarily responsible for the day-to-day management of the Funds' portfolios: GOVERNMENT FUND Jack Lemein Roger Bayston Anthony Coffey HIGH YIELD FUND Chris Molumphy Betsy Hofman-Schwab Martin Wiskemann INTERNATIONAL BOND FUND Serena Perin Edward B. Jamieson BIOGRAPHICAL INFORMATION Roger Bayston Portfolio Manager Franklin Advisers, Inc. Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business Administration degree from the University of California at Los Angeles. He earned his Bachelor of Science degree from the University of Virginia. Prior to joining Franklin, Mr. Bayston was an Assistant Treasurer for Bankers Trust Company. Following completion of the Masters degree program, Mr. Bayston joined Franklin in 1991. Mr. Bayston has managed the Government Fund since 1991. Anthony Coffey Portfolio Manager Franklin Advisers, Inc. Mr. Coffey holds a Master of Business Administration degree from the University of California at Los Angeles. He earned his Bachelor of Arts degree from Harvard University. Prior to joining Franklin in 1989, Mr. Coffey was an associate with the Analysis Group. He is a member of several securities industry committees and has managed the Government Fund since 1989. Betsy Hofman-Schwab Portfolio Manager Franklin Advisers, Inc. Ms. Hofman-Schwab holds a Master of Business Administration degree from the College of Notre Dame in California. She earned her Bachelor of Science degree in finance at the College of Notre Dame in California. She has been with Franklin since 1981 and has managed the High Yield Fund since its inception. Edward B. Jamieson Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Jamieson holds a bachelor of arts degree from Bucknell University and a master's degree in accounting and finance from the University of Chicago Graduate School of Business. Mr. Jamieson has been with Advisers since 1987 and for the year prior thereto, he was treasurer of Beatrice Consumer Products, Inc. From 1981 to 1985 he was an executive with Pepsico, Inc.'s Corporate Treasury where he served as Director of International Treasury. He has managed the International Bond Fund since its inception. 45 Jack Lemein Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Lemein holds a bachelor of science degree in finance from the University of Illinois. Mr. Lemein has been in the securities industry since 1967. He is a member of several securities industry-related committees and associations. Mr. Lemein joined Franklin in 1984 and has managed the Government Fund since its inception. Chris Molumphy Portfolio Manager Franklin Advisers, Inc. Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business Administration degree in finance from the University of Chicago. He earned his Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a member of several securities industry associations. He has managed the High Yield Fund since joining Franklin in 1988. Serena Perin Portfolio Manager Franklin Advisers, Inc. Ms. Perin holds a Bachelor of Arts degree in business economics from Brown University. She served as a research assistant to a member of Parliament in London, England. Ms. Perin is a member of several securities industry associations. She has managed the International Bond Fund since joining Franklin in November 1991. R. Martin Wiskemann Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Wiskemann holds a degree in business administration from the Handelsschule of the State of Zurich, Switzerland. He has been in the securities business for more than 30 years, managing mutual fund equity and fixed-income portfolios, and private investment accounts. He is a member of several securities industry associations. He joined Franklin in 1972 and has managed the High Yield Fund since its inception. APPENDIX DESCRIPTION OF BOND RATINGS* MOODY'S Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make long-term risks appear somewhat larger than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. 46 Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba: Bonds which are rated Ba are judged to have predominantly speculative elements and their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. S&P AAA: Bonds rated AAA are the highest grade debt obligations. This rating indicates an extremely strong capacity to pay principal and interest. AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A: Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. *Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so. 47 SUPPLEMENT DATED FEBRUARY 1, 1995 TO THE STATEMENT OF ADDITIONAL INFORMATION OF FRANKLIN PARTNERS FUNDS(R) FRANKLIN TAX-ADVANGED U.S. GOVERNMENT SECURITIES FUND FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND DATED MAY 1, 1994 THE STATEMENT OF ADDITIONAL INFORMATION IS AMENDED AS FOLLOWS: a) Delete the sixth, seventh and eighth paragraphs under "The Funds' Underwriter". b) The "Proposed Plan of Distribution" as described on page 17 was approved by shareholders and was effective May 1, 1994. c) The following substitutes subsection "Purchases at Net Asset Value" under "Additional Information Regarding Fund Shares": ADDITIONAL INFORMATION REGARDING PURCHASES Special Net Asset Value Purchases. As discussed in the Prospectus under "How to Buy Shares of the Funds - Description of Special Net Asset Value Purchases," certain categories of investors may purchase shares of the Funds without a front-end sales charge ("net asset value") or a contingent deferred sales charge. Distributors or one of its affiliates may make payments, out of its own resources, to securities dealers who initiate and are responsible for such purchases, as indicated below. As a condition for these payments, Distributors or its affiliates may require reimbursement from the securities dealers with respect to certain redemptions made within 12 months of the calendar month following purchase, as well as other conditions, all of which may be imposed by an agreement between Distributors, or its affiliates, and the securities dealer. The following amounts may be paid by Distributors or one of its affiliates, out of its own resources, to securities dealers who initiate and are responsible for (i) purchases of most equity and taxable-income Franklin Templeton Funds made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most taxable income Franklin Templeton Funds made at net asset value by non-designated retirement plans: 0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These payment breakpoints are reset every 12 months for purposes of additional purchases. With respect to purchases made at net asset value by certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $10 million or more, Distributors, or one of its affiliates, out of its own resources, may pay up to 1% of the amount invested. Letter of Intent. An investor may qualify for a reduced sales charge on the purchase of shares of the Fund, as described in the prospectus. At any time within 90 days after the first investment which the investor wants to qualify for the reduced sales charge, a signed Shareholder Application, with the Letter of Intent section completed, may be filed with the Fund. After the Letter of Intent is filed, each additional investment will be entitled to the sales charge applicable to the level of investment indicated on the Letter. Sales charge reductions based upon purchases in more than one of the Franklin Templeton Funds will be effective only after notification to Distributors that the investment qualifies for a discount. The shareholder's holdings in the Franklin Templeton Funds acquired more than 90 days before the Letter of Intent is filed will be counted towards completion of the Letter of Intent but will not be entitled to a retroactive downward adjustment in the sales charge. Any redemptions made by the shareholder, other than by a designated benefit plan during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the Letter of Intent have been completed. If the Letter of Intent is not completed within the 13-month period, there will be an upward adjustment of the sales charge, depending upon the amount actually purchased (less redemptions) during the period. The upward adjustment does not apply to designated benefit plans. An investor who executes a Letter of Intent prior to a change in the sales charge structure for the Fund will be entitled to complete the Letter of Intent at the lower of (i) the new sales charge structure; or (ii) the sales charge structure in effect at the time the Letter of Intent was filed with the Fund. As mentioned in the Prospectus, five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund registered in the investor's name, unless the investor is a designated benefit plan. If the total purchases, less redemptions, equal the amount specified under the Letter, the reserved shares will be deposited to an account in the name of the investor or delivered to the investor or the investor's order. If the total purchases, less redemptions, exceed the amount specified under the Letter of Intent and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by Distributors and the securities dealer through whom purchases were made pursuant to the Letter of Intent (to reflect such further quantity discount) on purchases made within 90 days before and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the offering price applicable to a single purchase or the dollar amount of the total purchases. If the total purchases, less redemptions, are less than the amount specified under the Letter, the investor will remit to Distributors an amount equal to the difference in the dollar amount of sales charge actually paid and the amount of sales charge which would have applied to the aggregate purchases if the total of such purchases had been made at a single time. Upon such remittance the reserved shares held for the investor's account will be deposited to an account in the name of the investor or delivered to the investor or to the investor's order. If within 20 days after written request such difference in sales charge is not paid, the redemption of an appropriate number of reserved shares to realize such difference will be made. In the event of a total redemption of the account prior to fulfillment of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption, and the balance will be forwarded to the investor. If a Letter of Intent is executed on behalf of a benefit plan (such plans are described under "Purchases at Net Asset Value" in the Prospectus), the level and any reduction in sales charge for these designated benefit plans will be based on actual plan participation and the projected investments in the Franklin Templeton Funds under the Letter of Intent. Benefit plans are not subject to the requirement to reserve 5% of the total intended purchase, or to any penalty as a result of the early termination of a plan, nor are benefit plans entitled to receive retroactive adjustments in price for investments made before executing the Letter of Intent. FRANKLIN PARTNERS [FRANKLIN LOGO] FUNDS(R) FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND STATEMENT OF ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777 MAY 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE About the Funds (See also the Prospectus "About the Franklin Partners Funds" ) 2 The Investment Objectives and Policies of the Funds (See also the Prospectus "Investment Objective and Policies of Each Fund")...................... 2 Additional Information on Distributions and Taxation....... 7 Officers and Managing General Partners 8 Investment Advisory and Other Services (See also the Prospectus "Management of the Funds")................... 11 The Funds' Policies Regarding Brokers Used on Portfolio Transactions... 12 Additional Information Regarding Fund Shares (See also the Prospectus "How to Invest in a Fund," "How to Sell Shares of a Fund," "Valuation of Fund Shares") 13 The Funds' Underwriter............ 15 General Information............... 18 Financial Statements.............. 23 Appendix A........................ A-1 Appendix B........................ B-1 Appendix C........................ C-1
The Franklin Partners Funds(R) (collectively, the "Funds" or separately, the "Fund") consist of three separate and distinct funds: Franklin Tax-Advantaged U.S. Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged High Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged International Bond Fund (the "International Bond Fund"), each a California limited partnership. A Prospectus for the Funds dated May 1, 1994, as may be amended from time to time, which provides the basic information a prospective investor should know before investing in the Funds, may be obtained without charge from the Funds or from the Funds' principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address shown above. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION IS INTENDED TO PROVIDE A PROSPECTIVE INVESTOR WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUNDS, AND SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' PROSPECTUS. 1 ABOUT THE FUNDS Each Fund is a separate and distinct management investment company, registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (the "1940 Act"). Each Fund issues only one class of shares, in the form of partnership interests, and purchasers of shares of a Fund are required to become limited partners of such Fund. THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS As noted in the Prospectus, each Fund has its own investment objective, which is a fundamental policy, and follows policies designed to achieve that objective. In addition, unless otherwise noted, the following restrictions have been adopted as fundamental policies for the Funds, which means that they may not be changed without the approval of a majority of the shares of the applicable Fund. The Government Fund and the High Yield Fund MAY NOT: 1. Borrow money or mortgage or pledge any of the assets of the Fund, except that the Funds may borrow from banks for temporary or emergency purposes in an amount up to 5% of total asset value. 2. Buy any securities on "margin" or sell any securities "short." 3. Lend any funds or other assets, except by the purchase of publicly distributed bonds, debentures, notes or other debt securities and except that both Funds may enter into repurchase agreements. 4. Act as underwriter of securities issued by other persons except insofar as a Fund may be technically deemed an underwriter under the federal securities laws in connection with the disposition of portfolio securities. 5. Invest more than 5% of the value of its gross assets in the securities of any one issuer, except that this limitation does not apply to investments in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. 6. Purchase the securities of any issuer, if, as a result, a Fund would own more than 10% of any class of the outstanding voting securities of such issuer. 7. Purchase from or sell to its officers and general partner, or any firm of which any officer or general partners is a member, as principal, any securities, except that a Fund may deal with such persons or firms as brokers and pay a customary brokerage commission; retain securities of any issuer, if to the knowledge of a Fund, one or more of its officers, general partners or investment adviser, own beneficially more than one-half of 1% of the securities of such issuer and all such officers and general partners together own beneficially more than 5% of such securities. 8. Purchase any securities issued by a corporation which has not been in continuous operation for three years, but such period may include the operation of a predecessor. This is not a fundamental policy and may be changed by a Fund's Managing General Partners without shareholder approval. 9. Acquire, lease or hold real estate (except such as may be necessary or advisable for the maintenance of its offices) or interests in oil, gas or other mineral exploration or development programs (does not preclude investment in marketable securities of companies engaged in such activities, provided that such securities do not constitute "United States ("U.S.") real property interests" for U.S. federal income tax purposes). 10. Invest in commodities and commodity contracts, puts, calls, straddles, spreads or any combination thereof. (Does not preclude authorized transactions in foreign currencies.) 11. Invest in companies for the purpose of exercising control or management. 12. Concentrate more than 25% of the market value of its assets in the securities of companies engaged in any one industry (does not apply to investment in the securities of the U.S. government, its agencies or instrumentalities). 13. Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit a Fund from (a) making any permitted borrowing, mortgages or pledges, or (b) entering into repurchase transactions. This is not a fundamental policy of the Funds and may be changed by the Funds' Managing General Partners without shareholder approval. The International Bond Fund MAY NOT: 1. With respect to at least 75% of its total assets, invest in the securities of any one issuer (other than the U.S. government and its agencies and instrumentalities), if immediately after and as a result of such investment (a) more than 5% of the total assets of the Fund would be invested in such issuer or (b) more than 10% of the outstanding voting securities of such issuer would be owned by the Fund. 2 2. Make loans to others, except through the purchase of debt securities in accordance with its investment objectives and policies or to the extent the entry into a repurchase agreement is deemed to be a loan. 3. (a) Borrow money, except temporarily for extraordinary or emergency purposes from a bank and then not in excess of 25% of its total assets (at the lower of cost or fair market value). Any such borrowing will be made only if immediately thereafter there is an asset coverage of at least 300% of all borrowings, and no additional investments may be made while any such borrowings are in excess of 5% of total assets. (b) Mortgage, pledge or hypothecate any of its assets except in connection with any such borrowings. 4. Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite securities. (Does not preclude the Fund from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. Does not preclude permissible foreign currency hedging transactions.) 5. Buy or sell interests in oil, gas or mineral exploration or development programs, or real estate. (Does not preclude investments in marketable securities of companies engaged in such activities to the extent such securities do not constitute U.S. real property interests for U.S. federal income tax purposes.) 6. Purchase or hold securities of any issuer, if, at the time of purchase or thereafter, any of the Managing General Partners or officers of the Fund or its investment adviser own beneficially more than 1/2 of 1%, and such Managing General Partners or officers holding more than 1/2 of 1% together own beneficially more than 5% of the issuer's securities. 7. Invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with predecessors, of at least three years of continuous operation. This is not a fundamental policy and may be changed by the Fund's Managing General Partners without prior shareholder approval. 8. Purchase or sell commodities or commodity contracts or invest in put, call, straddle or spread options. (Does not preclude transactions in foreign exchange for hedging purposes, including forward foreign exchange transactions, the purchase or sale of foreign currency options, foreign currency futures transactions and the purchase or sale of options on foreign currency futures, or transactions in foreign exchange in connection with the investment of cash balances held outside of the U.S.) 9. Invest more than 10% of its assets in securities with legal or contractual restrictions on resale, securities which are not readily marketable, and repurchase agreements with more than seven days to maturity. 10. Invest in any issuer for purposes of exercising control or management. 11. Concentrate more than 25% of the market value of its assets in the securities of companies engaged in any one industry. (Does not apply to investment in the securities of the U.S. government, its agencies or instrumentalities.) 12. Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Fund from (a) making any permitted borrowings, mortgages or pledges, or (b) entering into repurchase transactions. In order to change any of the foregoing fundamental restrictions, approval must be obtained by the applicable Fund's shareholders. Such approval requires the affirmative vote of the lesser of (i) 67% or more of voting securities present at a meeting if the holders of more than 50% of voting securities are represented at that meeting or (ii) holders of more than 50% of the outstanding voting securities. RISK FACTORS PERTAINING TO THE HIGH YIELD FUND AND THE INTERNATIONAL BOND FUND Securities of Non-U.S. Issuers. The Government Fund will not acquire the securities of non-U.S. issuers under any circumstances. The High Yield Fund and the International Bond Fund will not acquire outside of the U.S. the securities of non-U.S. issuers under circumstances where, at the time of acquisition, such Funds have reason to believe that they could not resell the securities in a public market. (Investors should recognize, however, that securities of non-U.S. issuers are often bought or sold with less frequency and volume, and therefore may have greater price volatility than is the case with many U.S. securities.) Notwithstanding the fact that such Funds intend to acquire the securities of non-U.S. issuers only where there are public markets, investments by the Funds in the securities of such issuers may be considered as tending to increase the risks with respect to the liquidity of the Funds' portfolios and their ability to meet a large number of shareholder's redemption requests should there be economic or political turmoil in a country in which such Funds had a sub- 3 stantial portion of their assets invested or should relations between the United States and other countries deteriorate markedly. The interest payable on the securities of non-U.S. issuers held by the High Yield Fund and the International Bond Fund may be subject to withholding taxes in countries other than the U.S. and, while individual investors may be able to claim some credit or deduction for such taxes with respect to their allocated shares of such tax payments, the general effect of these taxes will be to reduce the Funds' income. In addition the expense ratio of the High Yield Fund and the International Bond Fund may also be slightly higher than the expenses of the Government Fund due to special costs associated with maintaining custody of foreign securities, the higher commission rates charged on many foreign exchanges, and other factors. Special Considerations Relating to Foreign Exchange. The value in U.S. dollars of the assets of the High Yield Fund and the International Bond Fund that are invested in securities of non-U.S. issuers may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations, and each Fund may incur costs in connection with conversions between various currencies. The Funds may conduct their currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in a particular currency exchange market or through forward foreign currency exchange contracts and currency futures contracts entered into for hedging purposes as explained below. Hedging and Foreign Currency Transactions. The High Yield Fund and the International Bond Fund may engage in the following strategies to hedge their portfolios against risk associated with currency fluctuations. Use of these strategies may be limited by requirements of the Funds to purchase and hold their securities for long-term investment and to meet other tax requirements imposed by the Internal Revenue Code and U.S. Treasury regulations. These strategies include the use of currency options, currency futures, options on such futures and forward foreign currency exchange contracts. While such strategies' intention would be to reduce the volatility of the net asset value of the Funds' shares, the Funds' net asset value would still fluctuate and no assurance could be given of the effectiveness of such transactions. Hedging against currency fluctuations does not eliminate price fluctuations in the hedged securities that are attributable to interest rate changes and other factors. The use of futures transactions involves the risk of imperfect correlation between movements in the price of futures contracts and movements in the price of the currencies which are the subject of the hedge. These strategies also involve the risk that a Fund may not be able to close an option or futures position, or that a Fund could lose its margin deposit or collateral in the event of bankruptcy of the broker with whom the Fund has an open position. Although certain risks are involved in forward foreign currency exchange contracts, currency options, currency futures and options on such futures, the Funds' investment manager believes that, because the Funds will only engage in these transactions for hedging purposes, the use of these strategies will not subject the Funds to the risks frequently associated with the speculative use of forward contracts, options and futures transactions. Moreover, the High Yield Fund and the International Bond Fund may not purchase or sell foreign currency futures or options on such futures if the sum of the initial margin deposits on all of the Funds' futures positions and the premiums paid for related options would exceed 5% of a Fund's total assets. Each Fund is also required to maintain in a segregated account cash and high quality liquid debt securities in an amount equal to the currency to be purchased by the Fund under a forward, futures or option on a futures contract providing for such purchase. Foreign exchange gains and gains realized by each Fund from its hedging activities may be subject to U.S. tax and withholding requirements. The following is a description of the hedging instruments the High Yield Fund and the International Bond Fund may utilize with respect to foreign currency exchange rate fluctuation risks: A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties at a price set at the time of the contract. These contracts are individually negotiated and privately traded directly between currency traders (usually large commercial banks) and their customers. The High Yield Fund and the International Bond Fund are authorized to deal in forward contracts with respect to the currencies in which their portfolio securities are (or will be) denominated as a hedge against contractual agreements to purchase or sell a specified security at a specified future date (up to one year) and price at the time of the contract. Each Fund's dealings in forward contracts will be limited to 4 hedging involving either specific transactions or portfolio positions. Transaction hedging is the forward purchase or sale of currency with respect to receivables or payables of a Fund accruing in connection with the purchase and sale of its portfolio securities denominated in a particular currency. Position hedging is the forward sale of currency with respect to portfolio security positions denominated or quoted in such currency. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the High Yield Fund or the International Bond Fund to hedge against a devaluation that is so generally anticipated that neither Fund is able to contract to sell the currency at a price above the devaluation level it anticipates. Listed currency options give the purchaser of such options the right to buy or sell a particular currency at a fixed price on a future date. Listed options are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) which are issued by a clearing corporation and have standardized strike prices and expiration dates. By way of illustration, a Fund may use currency options to hedge the stated value in U.S. dollars of an investment in a Japanese yen-denominated security. In such circumstances, for example, the Fund may purchase a currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a "straddle"). By selling the call option in this illustration, the Fund relinquishes the opportunity to profit from increases in the relative value of the yen to the dollar. Each Fund will cover currency call options which it has written by maintaining in a segregated account cash or securities denominated in the currency that is the subject of the call option, in an amount equal to the value of the optioned currency. The High Yield Fund and the International Bond Fund will cover currency put options which they have written by maintaining in a segregated account cash or high quality liquid debt securities in an amount equal to the value of currency which such Fund is required to purchase under the put option. The exchanges on which options on currencies are traded have generally established limitations governing the maximum number of call or put options on the same underlying currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). "Trading limits" are imposed on the maximum number of contracts which any person may trade on a particular trading day. The Funds' investment manager does not believe that these trading and position limits will have any adverse impact on the portfolio strategies for hedging the portfolio of either the High Yield Fund or the International Bond Fund. Currency futures are standardized contracts traded on commodities exchanges which involve an obligation to purchase or sell a predetermined amount of currency at a predetermined date at a specified price. The High Yield Fund and the International Bond Fund would incur brokerage costs and would be required to make and maintain "margin" deposits in connection with transactions in futures contracts, as described below. The Funds would also be required to segregate assets to cover futures contracts requiring the purchase of foreign currencies. Options on currency futures entitle the Funds to assume a position in an underlying currency futures contract. Futures contracts and options for futures contracts are traded on boards of trades or futures exchanges regulated by the Commodity Futures Trading Commission, a U.S. government agency. At the time a futures contract or related futures option transaction is entered into, cash or U.S. government securities equal to the market value of the Fund's obligation under the contract or option transaction (less any related margin deposits) is deposited in a segregated account with the Fund's custodian bank to collateralize the position and thereby ensure that such position is unleveraged. The segregated account is marked to market daily. The Funds will not engage in such hedging transactions if the sum of the initial margin deposits on all of the Fund's futures positions and premiums paid for related futures options would exceed 5% of the Fund's total assets. The use of futures and options contracts by the High Yield Fund and the International Bond Fund 5 involve the risk of imperfect correlation between movements in the price of such contracts and movements in the price of securities and currencies which are the subject of the hedge. If the price of the contract moves more or less than the price of the security or currency, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the securities which are the subject of the hedge. Neither the High Yield Fund nor the International Bond Fund will speculate in forward foreign currency exchange contracts, currency options, currency futures or options on such futures and will engage in transactions in such contracts and options solely for the purpose of hedging against currency risk, as described herein. Accordingly, the aggregate value of the currency which is the subject of such contracts and options will not exceed the market value of the securities it owns and which are denominated in such currency, or the expected acquisition price of securities which it has committed or anticipates to purchase and which are denominated in such currency. In the case of securities which have been sold by the High Yield Fund or the International Bond Fund but not yet delivered, the aggregate value of the currency which is the subject of such contracts and options will not exceed the proceeds of such sale denominated in such currency. The Funds intend to enter into options and futures transactions only if there appears to be a liquid secondary market for such options or futures. There can be no assurance, however, that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an option or futures position. The inability to close options and futures positions also could have an adverse impact on a Fund's ability to hedge its portfolio effectively. In addition, there is the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom a Fund has an open position in a foreign currency option, a futures contract or a futures option. The High Yield Fund and the International Bond Fund may also, for hedging purposes, purchase currencies in the form of bank deposits as well as other non-U.S. dollar denominated money market instruments, including, but not limited to, banker's acceptances, certificates of deposits, commercial paper, short-term government and corporate obligations and repurchase agreements. Each Fund's dealing in foreign exchange transactions will be limited to the transactions described above and may be further limited by tax restrictions. Neither Fund is required to enter into such transactions with regard to its positions and transactions in the securities of non-U.S. issuers, and will not do so unless deemed appropriate by each Fund's investment manager. In addition, while these transactions may minimize the risk to the value of each Fund's portfolio securities resulting from adverse currency movements with respect to the U.S. dollar, they do not eliminate fluctuations in the underlying prices of the securities. Such transactions may limit potential gain from a favorable change in the relationship between the U.S. dollar and other currencies. Unanticipated changes in currency exchange rates may result in poorer overall performance for the High Yield Fund and the International Bond Fund than if they had not engaged in such foreign exchange transactions. Other Policies. There are no restrictions or limitations on investments in obligations of the U.S., or of corporations chartered by Congress as federal government instrumentalities for any of the Funds. The underlying assets of each Fund may be retained in cash, including cash equivalents which are Treasury bills, commercial paper and short-term bank obligations such as certificates of deposit, banker's acceptances and repurchase agreements, subject to certain tax restrictions. It is intended, however, that only so much of the underlying assets of each Fund be retained in cash as is deemed necessary for normal operation of such Fund. Each Fund may invest in securities that cannot be offered to the public for sale without first being registered under the Securities Act of 1933 ("restricted securities"), or in other securities which, in the opinion of the Managing General Partners, may be otherwise illiquid. It is the policy of each Fund, however, that illiquid securities may not constitute, at the time of purchase or at any time, more than 10% of the value of the total net assets of the Fund in which they are held. Generally, an "illiquid" security is any security that cannot be disposed of promptly and in the ordinary course of business at approximately the amount at which the Fund has valued the security. Notwithstanding this limitation, the Funds' Managing General Partners have authorized each Fund to invest in restricted securities where such investment is consistent with such Fund's investment objective and has authorized such securities to be considered to be liquid to the extent the Manager determines that there is a liquid institutional or other market for such securities. For example, restricted securities which may be freely transferred among qualified institutional buyers pursuant to Rule 6 144A under the Securities Act of 1933, as amended, and for which a liquid institutional market has developed will be considered liquid even though such securities have not been registered pursuant to the Securities Act of 1933. The Managing General Partners will review any determination by the Manager to treat a restricted security as a liquid security on an ongoing basis, including the Manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the Manager and the Managing General Partners will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent a Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in that Fund may be increased if qualified institutional buyers become uninterested in purchasing these securities or the market for these securities contracts. SECURITIES TRANSACTIONS It is intended that portfolio changes in each Fund will be made as infrequently as possible. Such changes will be based on market and economic factors generally, and special considerations affecting any particular security such as the limitation of loss or realization of price appreciation at a time believed to be opportune. Subject to the policy of each Fund not to purchase or sell securities for trading purposes and to certain tax restrictions, however, changes in particular portfolio holdings may be made if a security has reached its anticipated level of performance or when required for operational or other reasons. The sale of securities held for relatively short periods and reinvestment of the proceeds will result in increased brokerage and transaction costs to the Funds. ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXATION DISTRIBUTIONS As explained more fully in the following paragraphs, the daily allocation of income by each Fund will be in a "defined amount" equal to the daily distributable net investment income of such Fund for that day. The daily distributable net investment income for a particular day will be equal to the interest income for that day, less the daily expenses for that day. For the purpose of computing its book net income, each Fund will account for net investment income in accordance with generally accepted accounting principles (see "Significant Accounting Policies" in the Notes to the Financial Statements). ADDITIONAL INFORMATION REGARDING U.S. TAX TREATMENT OF U.S. INVESTORS A shareholder's adjusted basis in his partnership interest in a Fund (i.e., his aggregate shares in the Fund) will be the aggregate prices paid for such shares (including sales charges), increased by the amounts of such shareholder's distributive share of items of income and gain of the Fund and reduced, but not below zero, by the amounts of such shareholder's distributive share of Fund losses and the amount of any cash distributions (including distributions upon redemption of shares) received by such shareholder. Subject to the limitations discussed below, each shareholder will be permitted to deduct his distributive share of Fund losses to the extent of his adjusted basis in his Fund shares. For purposes of the "passive activity loss" rules, an individual shareholder's share of the Fund's income or loss will be treated as "portfolio" income or loss. Thus, income from the Fund may not be offset by losses from "passive activities" of the shareholder, and losses from the Fund will not reduce the shareholder's income from "passive activities." An individual shareholder's share of certain expenses of the Fund will be treated as a "miscellaneous itemized deduction" and will be deductible only by a shareholder who itemizes deductions and only to the extent that the shareholder's total miscellaneous itemized deductions from all sources exceed 2% of the shareholder's adjusted gross income. An individual shareholder whose adjusted gross income exceeds a specified amount (generally $111,800 in 1994) must reduce the otherwise allowable itemized deductions by an amount equal to 3% of the excess adjusted gross income. U.S. shareholders of a Fund will not be subject to federal income tax on cash distributions received in redemption of Fund shares to the extent such distributions do not exceed the shareholders' adjusted basis in their Fund shares. Redemptions of shares may be subject to 31% back-up withholding in the case of non-exempt U.S. shareholders who have failed to furnish the Fund with their correct taxpayer identification numbers on Form W-9. 7 Each item of partnership income or gain will retain its character for tax purposes when allocated to the shareholders. TAX CONSEQUENCES OF BEING DEEMED ENGAGED IN A U.S. TRADE OR BUSINESS As stated in the Prospectus, each Fund has obtained an opinion of its counsel, Thelen, Marrin, Johnson & Bridges, to the effect that neither the Fund nor its non-U.S. shareholders solely by virtue of their investment in the Fund should be deemed to be engaged in a trade or business in the U.S. if the Fund adheres to its stated investment objectives, policies and restrictions and to certain guidelines and operating procedures concerning its investment activities. These opinions are based upon case law and other authorities in effect as of the date of this Statement of Additional Information. In the event this position is challenged, it is the intention of each Fund to contest the challenge. A final determination by a court of law, however, to the effect that a Fund is engaged in a U.S. trade or business would have material tax consequences for the Fund's shareholders. Such a determination would nullify the applicability of the "portfolio interest" exemption and cause all income of the Fund to be deemed to be effectively connected with such trade or business (including such "portfolio interest" and capital gains realized by the Fund or the shareholders) and therefore subject to U.S. federal income tax and U.S. tax withholding requirements. OFFICERS AND MANAGING GENERAL PARTNERS The Managing General Partners of each Fund have the responsibility for the overall management of that Fund, including general supervision and review of its investment activities. The Managing General Partners, in turn, elect the officers of each Fund who are responsible for administering the day-to-day operations. The affiliations of the officers and Managing General Partners of each Fund and their principal occupations for the past five years are listed below. Managing General Partners who are deemed to be "interested persons" of a Fund, as defined in the 1940 Act, are indicated by an asterisk (*).
Positions and Offices with Name and Address the Fund Principal Occupations During Past Five Years - --------------------------------------------------------------------------------------------------------------------------------- Frank H. Abbott, III Managing General President and Director, Abbott Corporation (an investment company); 1045 Sansome St. Partner Director, Vacu-Dry Co. (a food processing company) and Mother Lode Gold Mines San Francisco, CA 94111 Consolidated; and director, trustee or managing general partner, as the case may be, of most of the investment companies in the Franklin Group of Funds.(R) - --------------------------------------------------------------------------------------------------------------------------------- Harris J. Ashton Managing General President, Chief Executive Officer and Chairman of the Board, General Host General Host Corporation Partner Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank Metro Center, 1 Station Place holding company), Bar-S Foods and Sunbelt Nursery Group, Inc.; director of Stamford, CT 06904-2045 certain of the investment companies in the Templeton Group of Funds; and director, trustee or managing general partner, as the case may be, of most of the investment companies in the Franklin Group of Funds. - --------------------------------------------------------------------------------------------------------------------------------- S. Joseph Fortunato Managing General Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Park Avenue at Morris County Partner Host Corporation; director of certain of the investment companies in the P. O. Box 1945 Templeton Group of Funds; and director, trustee or managing general partner, as Morristown, NJ 07962-1945 the case may be, of most of the investment companies in the Franklin Group of Funds. - ---------------------------------------------------------------------------------------------------------------------------------
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Positions and Offices with Name and Address the Fund Principal Occupations During Past Five Years - --------------------------------------------------------------------------------------------------------------------------------- David W. Garbellano Managing General Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science 111 New Montgomery St., #402 Partner Corporation (a venture capital company); and director, trustee or managing San Francisco, CA 94105 general partner, as the case may be, of most of the investment companies in the Franklin Group of Funds. - --------------------------------------------------------------------------------------------------------------------------------- *Charles B. Johnson Chairman of the President and Director, Franklin Resources, Inc. and Franklin/Templeton 777 Mariners Island Blvd. Board and Distributors, Inc.; Chairman of the Board and Director, Franklin Advisers, San Mateo, CA 94404 Managing General Inc.; Director, Franklin/Templeton Investor Services, Inc. and General Host Partner Corporation; director of certain of the investment companies in the Templeton Group of Funds; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of most of the investment companies in the Franklin Group of Funds. - --------------------------------------------------------------------------------------------------------------------------------- *Rupert H. Johnson, Jr. President and Executive Vice President and Director, Franklin Resources, Inc. and 777 Mariners Island Blvd. Managing General Franklin/Templeton Distributors, Inc.; President and Director, Franklin San Mateo, CA 94404 Partner Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; director of certain of the investment companies in the Templeton Group of Funds; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of most of the investment companies in the Franklin Group of Funds. - --------------------------------------------------------------------------------------------------------------------------------- Gordon S. Macklin Managing General Chairman, White River Corporation (financial services); Director, Fundamerican 8212 Burning Tree Road Partner Enterprises Holdings, Inc., Martin Marietta Corporation, and MCI Communications Bethesda, MD 20817 Corporation; director of certain of the investment companies in the Templeton Group of Funds; and director, trustee or managing general partner, as the case may be, of most of the investment companies in the Franklin Group of Funds; formerly, Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President, National Association of Securities Dealers, Inc. - --------------------------------------------------------------------------------------------------------------------------------- Edward V. McVey Vice President Senior Vice President/National Sales Manager, Franklin/Templeton Distributors, 777 Mariners Island Blvd. Inc.; and officer of many of the investment companies in the Franklin Group of San Mateo, CA 94404 Funds. - ---------------------------------------------------------------------------------------------------------------------------------
9
Positions and Offices with Name and Address the Fund Principal Occupations During Past Five Years - -------------------------------------------------------------------------------------------------------------------------------- Harmon E. Burns Vice President Executive Vice President, Secretary and Director, Franklin Resources, Inc.; 777 Mariners Island Blvd. Executive Vice President and Director, Franklin/Templeton Distributors, Inc.; San Mateo, CA 94404 Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; director of certain of the investment companies in the Templeton Group of Funds; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee of all the investment companies in the Franklin Group of Funds. - -------------------------------------------------------------------------------------------------------------------------------- R. Martin Wiskemann Vice President Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.; 777 Mariners Island Blvd. Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and San Mateo, CA 94404 Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of America; and officer and/or director, as the case may be, of many of the investment companies in the Franklin Group of Funds. - -------------------------------------------------------------------------------------------------------------------------------- Andrew R. Johnson Vice President Senior Vice President, Franklin Advisers, Inc.; employee of Franklin Resources, 777 Mariners Island Blvd. Inc. and its subsidiaries in administrative and portfolio management San Mateo, CA 94404 capacities; and officer of some of the investment companies in the Franklin Group of Funds. - -------------------------------------------------------------------------------------------------------------------------------- Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources, Inc. and Franklin Advisers, Inc.; 777 Mariners Island Blvd. and Treasurer Vice President, Franklin/Templeton Distributors, Inc.; officer and/or director, San Mateo, CA 94404 and Managing as the case may be, of other subsidiaries of Franklin Resources, Inc.; and General Partner officer and/or managing general partner, as the case may be, of all the investment companies in the Franklin Group of Funds. - -------------------------------------------------------------------------------------------------------------------------------- Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin Resources, Inc. and Franklin/Templeton 777 Mariners Island Blvd. and Secretary Distributors, Inc.; Vice President, Franklin Advisers, Inc.; and officer of all San Mateo, CA 94404 the investment companies in the Franklin Group of Funds. - --------------------------------------------------------------------------------------------------------------------------------
As indicated above, certain of the Managing General Partners and officers hold positions with other companies in the Franklin Group of Funds. Managing General Partners of the Government Fund and the High Yield Fund not affiliated with the investment manager are paid fees of $150 per quarter and $150 per meeting attended, from each Fund. They are also reimbursed for expenses incurred in connection with attending such meetings. During the fiscal year ended December 31, 1993, such fees and reimbursement of expenses paid by the Government Fund totaled $8,515 and $8,281 by the High Yield Fund. Managing General Partners of the International Fund are not currently, but may in the future, be paid fees and receive reimbursement of expenses for attending meetings. No officer or Managing General Partner received any other compensation directly from the Funds. As of January 31, 1994, the Managing General Partners and officers, as a group, together with Franklin Partners, Inc. as the Non-Managing General Partner, owned 523,864 or 0.97% of the total outstanding shares of the Government Fund, 111,200 or 1.37% of the outstanding shares of the High Yield 10 Fund and 32,314 or 1.74% of the outstanding shares of the International Bond Fund. Officers and Managing General Partners, as a group, owned of record and beneficially approximately 47 shares of the High Yield Fund, 88 shares of the International Bond Fund and 37 shares of the Government Fund or less than 1% of each Fund's outstanding shares. Certain officers or Managing General Partners who are shareholders of Franklin Resources, Inc. may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. Charles B. Johnson, Rupert H. Johnson, Jr. and Andrew R. Johnson are brothers. INVESTMENT ADVISORY AND OTHER SERVICES The investment manager of each Fund is Franklin Advisers, Inc. ("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a publicly owned holding company whose shares are listed on the New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries which are involved in investment management and shareholder services. The Manager and other subsidiary companies of Resources currently manage over $112 billion in assets for over 3.4 million shareholders. The preceding table indicates those officers and Managing General Partners who are also affiliated persons of Distributors and Advisers. Pursuant to a management agreement with each Fund, the Manager provides investment research and portfolio management services, including the selection of securities for each Fund to purchase, hold or sell and the selection of brokers through whom each Fund's portfolio transactions are executed. The Manager's activities are subject to the review and supervision of each Fund's Managing General Partners to whom the Manager renders periodic reports of each Fund's investment activities. The Manager, at its own expense, furnishes each Fund with office space and office furnishings, facilities and equipment required for managing the business affairs of each Fund; maintains all internal bookkeeping, clerical, secretarial and administrative personnel and services; and provides certain telephone and other mechanical services. The Manager is covered by fidelity insurance on its officers, directors and employees for the protection of each Fund. Each Fund bears all of the expenses not assumed by the Manager. See the Statement of Operations in the financial statements at the end of this Statement of Additional Information for additional details of these expenses. Pursuant to the management agreements, each Fund is obligated to pay the Manager a fee computed at the close of business on the last business day of each month equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the first $100 million of net assets of each Fund; 1/24 of 1% (approximately 1/2 of 1% per year) of net assets of each Fund in excess of $100 million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of each Fund in excess of $250 million. Advisers, however, has limited its management fees and has assumed responsibility for making payments to offset certain operating expenses otherwise payable by each Fund. This action by Advisers to limit its management fees and to assume responsibility for payment of the expenses related to the operations of each Fund may be terminated by Advisers at any time. The management agreements specify that the management fee will also be reduced to the extent necessary to comply with the most stringent limits on the expenses which will be borne by a Fund prescribed by any state in which a Fund's shares are offered for sale. The most stringent current limit requires the Manager to reduce or eliminate such fee to the extent that aggregate operating expenses of each Fund (excluding interest, taxes, brokerage commissions and extraordinary expenses such as litigation costs) would otherwise exceed in any fiscal year 2 1/2% of the first $30 million of net assets of each Fund, 2% of the next $70 million of net assets of each Fund and 1 1/2% of average annual net assets of each Fund in excess of $100 million. Expense reductions have not been necessary based on state requirements. For fiscal years ended December 31, 1991, 1992, and 1993, the High Yield Fund paid $222,969, $249,995 and $340,356, in management fees and the Government Fund paid $603,330, $1,185,915 and $2,331,382 for the respective years. For the fiscal years ended December 31, 1991, 1992 and 1993, the management fees which would have been accrued by Advisers for the International Bond Fund were $27,682, $59,203 and $100,033, respectively. Advisers, however, waived its management fees, and the International Bond Fund paid no management fees for those periods. The Management Agreements are in effect until April 30, 1995, and may continue in effect thereafter for successive annual periods providing such continuance is specifically approved at least annually by a vote of each such Fund's Managing General Partners or by a vote of the holders of a majority of each Fund's outstanding voting securi- 11 ties, and in either event by a majority of each Fund's Managing General Partners who are not parties to the management agreements or interested persons of any such party (other than as Managing General Partners of the Funds), cast in person at a meeting called for that purpose. Each Management Agreement may be terminated without penalty at any time by the Fund or by the Manager on 60 days' written notice and will automatically terminate in the event of their assignment, as defined in the 1940 Act. Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder servicing agent for each Fund and acts as each Fund's transfer agent and distribution-paying agent. Investor Services is compensated by each Fund on the basis of a fixed fee per account. Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco, California 94104, acts as custodian of the securities and other assets of each Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as custodian in connection with transfer services through bank automated clearing houses. The custodians do not participate in decisions relating to the purchase and sale of portfolio securities. Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the independent auditors for each Fund. During the fiscal year ended December 31, 1993, their auditing services consisted of rendering an opinion on the financial statements included in each Fund's Annual Report and this Statement of Additional Information. THE FUNDS' POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS Under the current management agreements with Advisers, the selection of brokers and dealers to execute transactions in each Fund's portfolios is made by the Manager in accordance with criteria set forth in the management agreements and any directions which each Fund's Managing General Partners may give. When placing a portfolio transaction, the Manager attempts to obtain the best net price and execution of the transaction. On portfolio transactions which are done on a securities exchange, the amount of commission paid by a Fund is negotiated between the Manager and the broker executing the transaction. The Manager seeks to obtain the lowest commission rate available from brokers which are felt to be capable of efficient execution of the transactions. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions are based to a large degree on the professional opinions of the persons responsible for the placement and review of such transactions. These opinions are formed on the basis of, among other things, the experience of these individuals in the securities industry and information available to them concerning the level of commissions being paid by other institutional investors of comparable size. The Manager will ordinarily place orders for the purchase and sale of over-the-counter securities on a principal rather than agency basis with a principal market maker unless, in the opinion of the Manager, a better price and execution can otherwise be obtained. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. As a general rule, the Funds do not purchase bonds in underwritings where they are not given any choice, or only limited choice, in the designation of dealers to receive the commission.The Funds will seek to obtain prompt execution of orders at the most favorable net price. The amount of commission is not the only relevant factor to be considered in the selection of a broker to execute a trade. If it is felt to be in a Fund's best interests, the Manager may place portfolio transactions with brokers who provide the types of services described below, even if it means the Fund will have to pay a higher commission than would be the case if no weight were given to the broker's furnishing of these services. This will be done only if, in the opinion of the Manager, the amount of any additional commission is reasonable in relation to the value of the services. Higher commissions will be paid only when the brokerage and research services received are bona fide and produce a direct benefit to the Fund or assist the Manager in carrying out its responsibilities to the Fund, or when it is otherwise in the best interest of the Fund to do so, whether or not such data may also be useful to the Manager in advising other clients. When it is felt that several brokers are equally able to provide the best net price and execution, the Manager may decide to execute transactions through brokers who provide quotations and other services to each Fund, specifically including the quotations necessary to determine the value of each Fund's net assets, in such amount of total brokerage as may reasonably be required in light 12 of such services, and through brokers who supply research, statistical and other data to each Fund and Manager in such amount of total brokerage as may reasonably be required. It is not possible to place a dollar value on the special executions or on the research services received by Advisers from dealers effecting transactions in portfolio securities. The allocation of transactions in order to obtain additional research services permits Advisers to supplement its own research and analysis activities and to receive the views and information of individuals and research staff of other securities firms. As long as it is lawful and appropriate to do so, the Manager and its affiliates may use this research and data in their investment advisory capacities with other clients. Provided that each Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares may also be considered as a factor in the selection of securities dealers to execute a Fund's portfolio transactions. Because Distributors is a member of the National Association of Securities Dealers, it is sometimes entitled to obtain certain fees when the Funds tender portfolio securities pursuant to a tender-offer solicitation. As a means of recapturing brokerage for the benefit of the Funds, any portfolio securities tendered by a Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to Advisers under the management agreements will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection therewith. If purchases or sales of securities of each Fund and one or more other investment companies or clients supervised by the Manager are considered at or about the same time, transactions in such securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the Manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. It is recognized that in some cases this procedure could possibly have a detrimental effect on the price or volume of the security so far as each Fund is concerned. In other instances it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Funds. The High Yield Fund and the International Bond Fund anticipate that brokerage transactions involving the securities of non-U.S. issuers will be conducted primarily on the principal stock exchange of such countries. Most foreign stock exchange transactions are executed at fixed commission rates. Fixed commissions on foreign stock exchange transactions are generally higher than negotiated commissions on United States transactions, although the Funds will endeavor to achieve the best net results in effecting their portfolio transactions. There is generally less government supervision and regulation of stock exchanges and brokers outside the United States. During the fiscal years ended December 31, 1991 and 1993, the Funds paid no brokerage commissions. For fiscal year 1992, the High Yield Fund paid $594 in brokerage commissions while the Government Fund and the International Bond Fund paid none. As of December 31, 1993, the Funds did not own securities of their regular broker-dealers. ADDITIONAL INFORMATION REGARDING FUND SHARES All checks, drafts, wires and other payment mediums used for purchasing or redeeming shares of the Fund must be denominated in U.S. dollars. The Fund reserves the right, in its sole discretion, to either (a) reject any order for the purchase or sale of shares denominated in any other currency, or (b) to honor the transaction or make adjustments to a shareholder's account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. Shares are eligible to receive distributions beginning on the first business day following settlement of the purchase transaction, through the date on which the Fund writes a check or sends a wire on redemption transactions. All shares will be redeemed in cash (paid by check in U.S. dollars). The value of shares on redemption or repurchase may be more or less than the investor's cost or capital contribution, depending upon the market value of the respective Fund's portfolio securities at the time of redemption or repurchase. Distribution checks which are returned to a Fund marked "unable to forward" by the postal service will be deemed to be a request by the shareholder to change the distribution option and the proceeds will be reinvested in additional shares at the public offering price (or net asset value if a capital gain distribution) until new instructions are received. Each Fund may deduct from a shareholder's account the costs of its efforts to locate the shareholder if the shareholder's mail is returned as 13 undeliverable or the Fund is otherwise unable to locate the shareholder or verify the current mailing address. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for their location services. Under agreements with certain banks in Taiwan, Republic of China, the Funds' shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to Distributors, or an affiliate of Distributors, to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. Shares of the Funds may be offered to investors in Taiwan through securities firms known locally as Securities Investment Consulting Enterprises. In conformity with local business practices in Taiwan, shares of each Fund will be offered with the following schedule of sales charges:
SALES SIZE OF PURCHASE CHARGE - ---------------- ------ Up to U.S. $100,000............ 3% U.S. $100,000 to U.S. $400,000. 2% Over U.S. $400,000............. 0%
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS Orders for the purchase of shares of a Fund received in proper form prior to 1:00 p.m. Pacific time any business day that the Exchange is open for trading and promptly transmitted to the Fund will be based upon the public offering price determined that day. Purchase orders received by securities dealers or other financial institutions after 1:00 p.m. Pacific time will be effected at each Fund's public offering price on the day it is next calculated. The use of the term "securities dealers" herein shall include other financial institutions which, pursuant to an agreement with Distributors (directly or through affiliates), handle customer orders and accounts with the Fund. Such reference, however, is for convenience only and does not indicate a legal conclusion of capacity. Orders for the redemption of shares are effected at net asset value subject to the same conditions concerning time of receipt in proper form. It is the securities dealer's responsibility to transmit the order in a timely fashion and any loss to the customer resulting from failure to do so must be settled between the customer and his dealer. PURCHASES AT NET ASSET VALUE As discussed below and in the Prospectus, certain categories of investors may purchase shares of each Fund at net asset value (without a sales charge) or at a reduced sales charge. The reason for this is that there is minimal or no sales effort required with respect to these investors. If certain investments at net asset value are made through a dealer who has executed a dealer or similar agreement with Distributors, Distributors or its affiliates may make a payment, out of their own resources, to such dealer in an amount not to exceed 0.25% of the amount invested, paid pro rata on a quarterly basis on average quarterly balances for a period of one year. In addition to the categories of investors set forth in the Prospectus, shares of each Fund may also be purchased at net asset value (1) by officers, Managing General Partners, directors, trustees and full-time employees of each Fund or any fund in the Franklin Group of Funds or the Templeton Group, the Manager and Distributors, and affiliates of such companies, if they have been such for at least 90 days and by their spouses and immediate family members, (2) by registered securities dealers and their affiliates, for their investment account only, and (3) by registered personnel and employees of securities dealers and of financial institutions which have signed an agreement (directly or through affiliates) and by their spouses and immediate family members in accordance with the internal policies and procedures of the employing securities dealer or financial institution. Such sales are made upon the written assurance of the purchaser that the purchase is made for investment purposes and that the securities will not be transferred or resold except through redemption or repurchase by or on behalf of each Fund. Employees of securities dealers or financial institutions must obtain a special application form from their employer or from Franklin's Sales Department in order to qualify. Shares of the Government Fund may also be purchased at net asset value, without sales charge, by any state, county, or city, or any instrumentality, department, authority or agency thereof, which has determined that the Fund is a legal permissible investment and which is prohibited by applicable investment laws from paying a sales charge or commission in connection with the purchase of shares of any registered management investment company (hereinafter "an eligible governmental authority" ). If an investment by an eligible governmental authority at net asset value is made through a securities dealer who has 14 executed a dealer agreement with Distributors, Distributors may make a payment, out of its own resources, to such dealer in an amount not to exceed 0.25% of the amount invested. Please contact Franklin's Institutional Sales Department for additional information. REDEMPTIONS IN KIND Each Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of such Fund's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the SEC. In the case of requests for redemption in excess of such amounts, the Managing General Partners reserve the right to make payments in whole or in part in securities or other assets of the Fund from which the shareholder is redeeming, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets. Should the Fund do so, a shareholder may incur brokerage fees in converting the securities to cash. The Funds do not intend to redeem illiquid securities in kind; however, should it happen, shareholders may not be able to timely recover their investment and may also incur brokerage costs in selling such securities. REDEMPTIONS BY THE FUNDS Due to the relatively high cost of handling small investments, each Fund reserves the right to redeem, involuntarily, at net asset value the shares of any shareholder whose account has been in existence for at least 12 months and (i) whose account contains less than $2,000, or such lesser amount to be determined by the Managing General Partners upon notice to all shareholders, and (ii) who has not made an investment (other than the reinvestment of any distributions) within the six months preceding notice of the Fund's intention to take this action. In the event it is determined that such a redemption should be made by a Fund, six months' notice of the Fund's intention to redeem will be given, during which period the shareholder can increase the value of the account to the minimum amount, thereby avoiding redemption. CALCULATION OF NET ASSET VALUE As noted in the Prospectus, each Fund generally calculates net asset value as of 1:00 p.m. Pacific time each day that the Exchange is open for trading. As of the date of this Statement of Additional Information, the Funds are informed that the Exchange observes the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each Fund's portfolio securities are valued as stated in the Prospectus. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times prior to the close of the Exchange. The value of such securities used in computing the net asset value of a Fund's shares are determined as of such times. Occasionally, events affecting the value of such securities may occur between the times at which they are determined and 1:00 p.m. Pacific time which will not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value as determined in good faith by the Managing General Partners. THE FUNDS' UNDERWRITER Pursuant to underwriting agreements in effect until April 30, 1995, Distributors acts as principal underwriter in a continuous public offering for shares of each Fund. Distributors pays the expenses of distribution of each Fund's shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. Each Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders. The underwriting agreements will continue in effect for successive annual periods provided that their continuance is specifically approved at least annually by a vote of each Fund's Managing General Partners, or by a vote of the holders of a majority of each Fund's outstanding voting securities, and in either event by a majority vote of Managing General Partners who are not parties to the underwriting agreement or interested persons of any such party (other than as Managing General Partners), cast in person at a meeting called for that purpose. The underwriting agreements terminate automatically in the event of their assignment and 15 may be terminated by either party on 90 days' written notice. Distributors currently allows the entire underwriting commission on a direct purchase of each Fund's shares and 50% of the underwriting commission on the reinvestment of income distributions to the securities dealer of record, if any, on an account. After July 1, 1994, Distributors will allow a portion of the underwriting commission on the sale of fund shares to the securities dealer of record, if any, on an account. If shareholders approve the proposed plan of distribution, discussed below, it is anticipated that the sales charge on reinvested income distributions will be eliminated as soon as the proposed plans of distribution go into effect. In connection with the offering of the High Yield Fund's shares, aggregate underwriting commissions for the fiscal years ended 1991, 1992 and 1993 were $150,007, $341,120 and $691,683, respectively. After allowances to dealers, Distributors retained $24,825, $22,661 and $32,168, during the respective periods. In connection with the offering of the Government Fund's shares, aggregate underwriting commissions for the fiscal years ended 1991, 1992 and 1993 were $1,443,889, $4,805,768 and $6,282,489, respectively. After allowances to dealers, Distributors retained $60,133, $109,843 and $190,128, during the respective periods. For fiscal years ended December 31, 1991, 1992 and 1993, underwriting commissions for the International Bond Fund were $98,665, $265,867 and $303,473, respectively, of which $5,706, $9,039 and $12,255 was retained by Distributors for the respective periods. Distributors received no other compensation from the Funds for acting as underwriter. Each Fund has adopted a Distribution Plan (the "Current Plan") (as part of their underwriting agreement) pursuant to Rule 12b-1 under the 1940 Act, which do not involve the payment by any of the Funds of any monies in addition to the fees and expenses each is otherwise obligated to make. To the extent, however, any payments by any of the Funds, by or to Distributors, the Manager, the Shareholder Servicing Agent or others pursuant to the respective agreements in effect from time to time, are deemed to be payments for the financing of any activity primarily intended to result in the sale of a Fund's shares within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been made pursuant to the Current Plan. The activities, the payment of which is intended to be within the scope of each Current Plan, include, but are not necessarily limited to, the following: (a) the incremental costs of the printing and mailing or other dissemination of all prospectuses (including statements of additional information), annual reports and other periodic reports for distribution to persons who are not shareholders of the Funds; (b) the costs of preparation and distributing any other supplemental sales literature; (c) the costs of radio, television, newspaper and other advertising; (d) telecommunications expenses, including the costs of telephones, telephone lines and other communications equipment used in the sale of shares of the Funds; (e) all costs of the preparation and mailing of confirmations of shares sold or redeemed, and reports of share balances; (f) all costs of responding to telephone or mail inquiries of investors or prospective investors; and (g) payments to dealers, financial institutions, advisers, or other firms, any one of whom may receive monies in respect to a Fund's shares owned by shareholders for whom such firm is the dealer of record or holder of record in any capacity, or with whom such firm has a servicing, agency, or distribution relationship. Servicing may include, among other things: (i) answering client inquiries regarding a Fund; (ii) assisting clients in changing account designations and addresses; (iii) performing subaccounting; (iv) establishing and maintaining shareholder accounts and records; (v) processing purchase and redemption transactions; (vi) providing periodic statements showing a client's account balance and integrating such statements with those of other transactions and balances in the client's other accounts serviced by such firm; (vii) arranging for bank wire transfers; and (viii) such other services as the Funds may require, to the extent such firms are permitted by applicable statute, rule, or regulation to render such services. (h) a prorated portion of Distributors' overhead expenses attributable to the distribution of each Fund's shares, including leases, communications, salaries, training, supplies, photocopying, and any other category of Distributors' expenses attributable to the distribution of the Fund's shares. In no event shall the aggregate asset-based sales charges which include payments made under the Current Plan, plus any other payments deemed to be made pursuant to the Current Plan, exceed the amount permitted to be paid pursuant to the Rules 16 of Fair Practice of the National Association of Securities Dealers, Inc., Article III, Section 26(d). The terms and provisions of the Current Plans relating to required reports, term, and approval are consistent with Rule 12b-1. No interested person or Managing General Partner of the Funds have a direct or indirect financial interest in the Current Plans or related agreement except as indicated in connection with the discussion of the underwriting agreement. No amounts have been spent by the Funds pursuant to the Current Plans during the last fiscal year and none are anticipated during the forthcoming fiscal year. The Managing General Partners evaluated and considered the Current Plans in connection with the continuation of the current management and underwriting agreements. PROPOSED PLANS OF DISTRIBUTION As stated in the Prospectus, the Managing General Partners have approved for shareholder consideration the adoption of a new plan of distribution (the "Proposed Plan") for each Fund pursuant to Rule 12b-1 under the 1940 Act. If approved, each Fund may pay up to a maximum of 0.15% per annum of its average daily net assets for expenses incurred in the promotion and distribution of its shares. Pursuant to the Proposed Plan, Distributors or others will be entitled to be reimbursed each quarter (up to the maximum as stated above) for actual expenses incurred in the distribution and promotion of each Fund's shares, including, but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparation and distribution of sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. In addition to the payments to which Distributors or others are entitled under the Proposed Plan, the Proposed Plan also provides that to the extent each Fund, the Manager or Distributors or other parties on behalf of the Fund, the Manager or Distributors, make payments that are deemed to be payments for the financing of any activity primarily intended to result in the sale of shares of the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been made pursuant to the Proposed Plan. In no event shall the aggregate asset-based sales charges which include payments made under the Proposed Plan, plus any other payments deemed to be made pursuant to the Proposed Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., Article III, Section 26(d)4. The terms and provisions of the Proposed Plan relating to required reports, term, and approval are consistent with Rule 12b-1. The Proposed Plan does not permit unreimbursed expenses incurred in a particular year to be carried over to or reimbursed in subsequent years. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks will not be entitled to participate in the Proposed Plan as a result of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. Such banking institutions, however, are permitted to receive fees under the Proposed Plan for administrative servicing or for agency transactions. If a bank were prohibited from providing such services, its customers who are shareholders would be permitted to remain shareholders of the Fund, and alternate means for continuing the servicing of such shareholders would be sought. In such an event, changes in the services provided might occur and such shareholders might no longer be able to avail themselves of any automatic investment or other services then being provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these changes. Securities laws of states in which the Fund's shares are offered for sale may differ from the interpretations of federal law expressed herein, and banks and financial institutions selling shares of the Fund may be required to register as dealers pursuant to state law. The Managing General Partners has determined that a consistent cash flow resulting from the sale of new shares is necessary and appropriate to meet redemptions and to take advantage of buying opportunities of portfolio securities without having to make unwarranted liquidations of other portfolio securities. The Managing General Partners, therefore, felt that it would benefit each Fund to have monies available for the direct distribution activities of Distributors or others in promoting the sale of its shares. The Managing General Part- 17 ners, including the non-interested Managing General Partners, concluded that, in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Proposed Plan will benefit each Fund and its shareholders. If approved, the Proposed Plan will be effective for one year from date of approval and will be renewable annually by a vote of the Managing General Partners, including a majority vote of the Managing General Partners who are non-interested persons of the Funds and who have no direct or indirect financial interest in the operation of the Proposed Plan, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such Managing General Partners be done by the non-interested Managing General Partners. The Proposed Plan and any related agreement may be terminated at any time, without any penalty, by vote of a majority of the non- interested Managing General Partners on not more than 60 days# written notice, by Distributors on not more than 60 days' written notice, by any act that constitutes an assignment of the Management Agreement with the Manager, or by vote of a majority of each Fund's outstanding shares. Distributors or any dealer or other firm may also terminate their respective distribution or service agreement at any time upon written notice. The Proposed Plan and any related agreements may not be amended to increase materially the amount to be spent for distribution expenses without approval by a majority of each Fund's outstanding shares, and all material amendments to the Proposed Plan or any related agreements shall be approved by a vote of the non-interested Managing General Partners, cast in person at a meeting called for the purpose of voting on any such amendment. Distributors is required to report in writing to the Managing General Partners at least quarterly on the amounts and purpose of any payment made under the Proposed Plan and any related agreements, as well as to furnish the Managing General Partners with such other information as may reasonably be requested in order to enable the Managing General Partners to make an informed determination of whether the Proposed Plan should be continued. GENERAL INFORMATION Each Fund is organized as a California limited partnership pursuant to the California Revised Limited Partnership Act. The full text of the Agreement of Limited Partnership of each Fund is set forth herein as Appendix A (Government Fund), Appendix B (High Yield Fund) and Appendix C (International Bond Fund). The California Revised Limited Partnership Act does not specifically authorize the exercise by limited partners of the voting rights required by the 1940 Act which are specified in each Partnership Agreement. Although there are no authoritative judicial decisions on this matter and no absolute assurances can be given on this point, it is the opinion of counsel to each Fund that the existence or exercise of these voting rights will not subject the limited partners of any Fund to liability as general partners under California laws. There is not, however, specific statutory or other authority for the existence or exercise of some or all these voting rights in most other jurisdictions. As a result, to the extent that a Fund is subject to the jurisdiction of courts in these other jurisdictions, it is possible that these courts may not apply California law, or, if they apply California law, they may nevertheless interpret the law to subject the Funds' limited partners to liability as general partners. Investors in each Fund will be informed of its progress through periodic reports. Financial statements certified by independent auditors will be submitted to shareholders at least annually. PERFORMANCE As noted in the Prospectus, each Fund may from time to time quote various performance figures to illustrate the Fund's past performance. It may occasionally cite statistics to reflect its volatility or risk. Performance quotations by investment companies are subject to rules adopted by the SEC. These rules require the use of standardized perform- ance quotations or, alternatively, that every non- standardized performance quotation furnished by each Fund be accompanied by certain standardized performance information computed as required by the SEC. Current yield and average annual compounded total return quotations used by each Fund are based on the standardized methods of computing performance mandated by the SEC. An explanation of those and other methods used by each Fund to compute or express performance follows. TOTAL RETURN The average annual total return is determined by finding the average annual compounded rates of return over one-, five- and ten-year periods, or fractional portion thereof, that would equate an initial hypothetical $1,000 investment to its ending re- 18 deemable value. The calculation assumes the maximum sales charge is deducted from the initial $1,000 purchase order and all income distributions are reinvested at the maximum public offering price (offering price includes sales charge) on the reinvestment dates during the period. The quotation assumes the account was completely redeemed at the end of each one-, five- and ten-year period, or fractional portion thereof, and the deduction of all applicable charges and fees. If a change is made on the sales charge structure, historical performance information will be restated to reflect the maximum sales charge in effect currently. In considering the quotations set forth below, investors should remember that the 4% maximum sales charge reflected in each quotation is a one-time fee (charged on all direct purchases and reinvested distributions) which will have its greatest impact during the early stages of an investor's investment in a Fund. The actual performance of an investment will be affected less by this charge the longer an investor retains the investment in a Fund. The average annual compounded rates of return for each Fund for the indicated periods ended on the date of the financial statements included herein was as follows:
ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION -------- --------- --------- Government Fund ............................. 3.85% 9.45% 9.25%* High Yield Fund ............................. 12.06% 11.08% 9.59%* International Bond Fund ...................................... 7.67% n/a 8.69%**
*Inception May 4, 1987 **From change of investment manager on June 9, 1990 These figures were calculated according to the SEC formula: P(1+T)(n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year periods at the end of the one-, five-, or ten-year periods (or fractional portion thereof) As discussed in the Prospectus, each Fund may quote total rates of return in addition to its average annual total return. Such quotations are computed in the same manner as each Fund's average annual compounded rate, except that such quotations will be based on each Fund's actual return for a specified period rather than to its average return over one-, five-, and ten-year periods, or fractional portion thereof. The total rates of return for each Fund for the indicated periods ended on the date of the financial statements included herein were as follows:
ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION -------- --------- --------- Government Fund.................. 3.85% 57.04% 80.43%* High Yield Fund.................. 12.06% 69.08% 84.13%* International Bond Fund .......................... 7.67% n/a 34.60%**
*Inception May 4, 1987 **From change of investment manager on June 9, 1990 YIELD Current yield reflects the income per share earned by each Fund's portfolio investments. Current yield is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. The yield for each Fund for the 30-day period ended on the date of the financial statements included herein was as follows: Government Fund............... 5.95% High Yield Fund............... 8.32% International Bond Fund....... 5.92%
These figures were obtained using the following SEC formula: Yield = 2[(a-b + 1)(6) -1] --- cd where: a = dividends earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive income distributions d = the maximum offering price per share on the last day of the period CURRENT DISTRIBUTION RATE Yield which is calculated according to a formula prescribed by the SEC is not indicative of the amounts which were or will be paid to a Fund's shareholders. Amounts paid to shareholders are reflected in the quoted "current distribution rate." 19 The current distribution rate is computed by dividing the total amount of distributions per share paid by a Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of income distribution payout, or a fundamental change in investment policies, it might be appropriate to annualize the distributions paid over the period such policies were in effect, rather than using the distributions during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than interest, such as short-term capital gain, and is calculated over a different period of time. VOLATILITY Occasionally statistics may be used to specify fund volatility or risk. Measures of volatility or risk are generally used to compare fund net asset value or performance relative to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market as represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility greater than the market, and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average, over a specified period of time. The premise is that greater volatility connotes greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS With respect to those categories of investors who are permitted to purchase shares of each Fund at net asset value, sales literature pertaining to the Funds may quote a "Current Distribution for Net Asset Value Investments." This rate is computed by adding the income distributions paid by each Fund during the last 12 months and dividing that sum by the Fund's current net asset value. Figures for yield, total return, and other measures of performance for Net Asset Value Investments may also be quoted. These will be derived as described elsewhere in this Statement of Additional Information with the substitution of net asset value for the public offering price. Regardless of the method used, past performance is not necessarily indicative of future results, but is an indication of the return to shareholders only for the limited historical period used. The Funds may include in their advertising or sales material information relating to investment objectives and performance results of funds belonging to the Templeton Group of Funds. Resources is the parent company of the advisers and underwriter of both the Franklin Group of Funds and Templeton Group of Funds. COMPARISONS To help investors better evaluate how an investment in a Fund may satisfy their investment objective, advertisements and other materials regarding the Funds may discuss various measures of a Fund's performance as reported by various financial publications. Materials may also compare performance (as calculated above) to performance as reported by other investments, indices, and averages. Such comparisons may include, but are not limited to, the following examples: a) Dow Jones Composite Average or its component averages - an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20 transportation company stocks. Comparisons of performance assume reinvestment of distributions. b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of performance assume reinvestment of distributions. c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund Performance Analysis - measure total return and average current yield for the mutual fund industry. Rank individual mutual fund performance over specified time periods, assuming reinvestment of all distributions, exclusive of any applicable sales charges. d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. - analyzes price, current yield, risk, total return, and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. e) Financial publications: The Wall Street Journal and Business Week, Changing Times, Financial World, Forbes, Fortune, and Money magazines - provide performance statistics over specified time periods. f) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of Labor Statistics - a statistical measure of change, over time, in the price of goods and services in major expenditure groups. 20 g) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates - historical measure of yield, price, and total return for common and small company stock, long-term government bonds, Treasury bills, and inflation. h) Savings and Loan Historical Interest Rates - as published in the U.S. Savings & Loan League Fact Book. i) Salomon Brothers Broad Bond Index or its component indices - The Broad Index measures yield, price, and total return for Treasury, Agency, Corporate, and Mortgage bonds. j) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate Bond Index measures yield, price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee bonds. k) International Business Communications Money Fund Report(R) - Industry averages for seven-day annualized and compounded yields of taxable, tax-free, and government money funds. l) Bond Buyers 20-Bond Index - an index of municipal bond yields based upon yields of 20 general obligation bonds maturing in 20 years. m) Bond Buyers 30-Bond Index - an index of municipal bond yields based upon yields of 20 revenue bonds maturing in 30 years. n) Historical data supplied by the research departments of First Boston Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce Fenner & Smith, Lehman Brothers and Bloomberg L.P. From time to time, advertisements or information for each Fund may include a discussion of certain attributes or benefits to be derived by an investment in the Fund. Such advertisements or information may also compare a Fund's performance to the return on certificates of deposit or other investments. Investors should be aware, however, that an investment in a Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a certificate of deposit issued by a bank. For example, as the general level of interest rates rise, the value of the Fund's fixed-income investments, as well as the value of its shares which are based upon the value of such portfolio investments, can be expected to decrease. Conversely, when interest rates decrease, the value of the Fund's shares can be expected to increase. Certificates of deposit are frequently insured by an agency of the U.S. government. An investment in any of the Funds is not insured by any federal, state or private entity. In assessing such comparisons of performance, an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, that the indices and averages are generally unmanaged, and that the items included in the calculations of such averages may not be identical to the formula used by the Fund to calculate its figures. In addition there can be no assurance that the Funds will continue this performance as compared to such other averages. OTHER FEATURES AND BENEFITS Each Fund may help investors achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college costs and/or other long-term goals. The Franklin College Costs Planner may assist an investor in determining how much money must be invested on a monthly basis in order to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Planning Guide leads an investor through the steps to start a retirement savings program. Of course, an investment in a Fund cannot guarantee that such goals will be met. MISCELLANEOUS INFORMATION The Funds are members of the Franklin/Templeton Group, one of the largest mutual fund organizations in the United States and may be considered in a program for diversification of assets. Founded in 1947, Franklin, one of the oldest mutual fund organizations, has managed mutual funds for over 45 years and now services more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer in international investing. Together, the Franklin/Templeton Group has over $112 billion in assets under management for more than 3.4 million shareholder accounts and offers 101 U.S.-based mutual funds. Each Fund may identify itself by its Quotron or CUSIP number. The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of 36 mutual fund groups in service quality for 1993. One other fund group was also ranked number one. Franklin has been ranked number one in service quality by Dalbar for five of the past six years. From time to time, the number of Fund shares held in the "street name" accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% 21 of the total shares outstanding. As of February 8, 1994, the persons known to the Funds to own beneficially or of record more than 5% of the Funds' outstanding shares were as follows:
NAME AND ADDRESS NUMBER OF PERCENT OF OF BENEFICIAL OWNER SHARES OWNED SHARES - ------------------- ------------ ---------- HIGH YIELD FUND Paul W. C. Watt ............... 524,329.968 6.48% 3385 Stagecoach Drive Lafayette CA 94549-1824
OWNERSHIP AND AUTHORITY DISPUTES In the event of disputes involving multiple claims of ownership or authority to control a shareholder's account, each Fund has the right (but has no obligation) to: (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the Internal Revenue Service in response to a Notice of Levy. 22 FRANKLIN PARTNERS FUNDS REPORT OF INDEPENDENT ACCOUNTANTS 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, 1993, 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, except as described below, the financial highlights included under the caption "Financial Highlights" for each of the periods indicated thereon. 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. The financial highlights of the Franklin Tax-Advantaged International Bond Fund for the year ended December 31, 1989 were audited by other auditors, whose report, dated January 26, 1990, expressed an unqualified opinion on such selected per share data and ratios. 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, 1993, 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 the Franklin Partners Funds as of December 31, 1993, 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, except for the Franklin Tax-Advantaged International Bond Fund for the year ended December 31, 1989, the financial highlights for each of the periods indicated thereon, in conformity with generally accepted accounting principles. COOPERS & LYBRAND San Francisco, California February 01, 1994 23 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1993 FACE VALUE COUNTRY* AMOUNT FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (NOTE 1) - ----------------------------------------------------------------------------------------------------------- FOREIGN NOTES, BILLS, BONDS & GOVERNMENT SECURITIES 83.4% AUSTRALIA 13.5% AU 820,000 EIB Global Bond, 10.25%, 10/01/01............................... $ 677,580 AU 1,000,000 Euro FIMA, 9.875%, 01/17/07..................................... 835,229 AU 1,050,000 New Southwales Treasury Corp., Eurobonds, 12.10%, 04/01/95...... 771,302 AU 425,000 Queensland Treasury Corp., notes, 12.00%, 07/15/99.............. 361,466 ----------- 2,645,577 ----------- CANADA 11.9% CA 400,000 Government of Canada, 8.50%, 04/01/02........................... 341,075 CA 945,000 Government of Canada, 10.25%, 02/01/04.......................... 895,004 CA 420,000 Hydro-Quebec, Eurobonds, 11.25%, 10/10/00....................... 395,400 CA 250,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96..................... 210,655 CA 150,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02....................... 127,393 CA 425,000 Province of British Columbia, 9.00%, 01/09/02................... 365,280 ----------- 2,334,807 ----------- DENMARK 5.6% DK 3,750,000 Kingdom of Denmark, 9.00%, 11/15/00............................. 644,325 DK 3,045,000 Nykredit, 9.00%, 10/01/12....................................... 456,421 ----------- 1,100,746 ----------- FRANCE 13.6% FR 4,250,000 Credit Locale de France, 9.875%, 03/04/01....................... 887,623 FR 4,250,000 Credit National, 9.25%, 10/02/01................................ 868,776 FR 2,000,000 Electricite de France, 8.30%, 02/09/99.......................... 381,805 FR 4,250,000 (d)French OAT, Bond, 0.00%, 10/25/15............................... 178,637 FR 510,000 (d)French OAT, Strip, 0.00%, 10/25/16.............................. 20,067 FR 1,500,000 Government of France, OAT, 8.50%, 12/26/12...................... 319,804 ----------- 2,656,712 ----------- GERMANY 2.7% DD 850,000 West Japan Railway Co., 8.70%, 06/25/97......................... 531,647 ----------- ITALY 9.6% IT 2,000,000,000 Certificati di Credito del Tesoro, 12.00%, 01/20/98............. 1,297,408 IT 1,000,000,000 Certificati di Credito del Tesoro, .8%, 01/01/00................ 593,359 ----------- 1,890,767 ----------- NEW ZEALAND 5.0% NZ 1,500,000 New Zealand Government, 8.00%, 04/15/04......................... 977,924 ----------- SPAIN 7.1% ES 73,000,000 Government of Spain, 11.60%, 01/15/97........................... 561,715 ES 100,000,000 Government of Spain, 10.90%, 08/30/03........................... 824,310 ----------- 1,386,025 ----------- SWEDEN 4.8% SE 5,100,000 Staten Bostadiffinansier, 12.50%, 01/23/97...................... 698,886 SE 1,800,000 Staten Bostadiffinansier, 11.00%, 01/21/99...................... 250,180 ----------- 949,066 ----------- UNITED KINGDOM 9.6% GB 300,000 Abbey National Treasury Service, 10.50%, 04/22/97............... 504,196 GB 460,000 Export-Import Bank of Japan, 10.75%, 05/15/01................... 848,287 GB 270,000 Government of Italy, Eurobonds, 10.50%, 04/28/14................ 526,580 ----------- 1,879,063 ----------- TOTAL FOREIGN NOTES, BILLS, BONDS & GOVERNMENT SECURITIES (COST $16,497,166)........................................ 16,352,334 ----------- (d) Zero coupon bonds. Accretion rate may vary. The accompanying notes are an integral part of these financial statements. 24
FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1993 (cont.) FACE VALUE COUNTRY* AMOUNT FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (NOTE 1) - ----------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS 11.7% ITALY .9% IT 290,000,000 Deutschebank Finance, 12.375%, 11/07/94 (Cost $265,635).......... $ 174,439 ----------- TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $16,762,801)......................................... 16,526,773 ----------- (f)RECEIVABLES FROM REPURCHASE AGREEMENTS 10.8% US 850,000 Bank of America, Inc., 3.25%, 01/03/94 (Maturity Value $910,246) Collateral: U.S. Treasury Notes, 12.625%, 08/15/94.............. 910,000 US 520,000 Daiwa Securities of America, Inc., 3.20%, 01/03/94 (Maturity Value $500,133) Collateral: U.S. Treasury Bills, 05/12/94........................................................ 500,000 US 685,000 Kidder, Peabody & Co., Inc., 3.20%, 01/03/94 (Maturity Value $700,187) Collateral: U.S. Treasury Notes, 5.50%, 07/31/97................................................. 700,000 ----------- TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $2,110,000).......................................... 2,110,000 ----------- TOTAL INVESTMENTS (COST $18,872,801) 95.1%.............. 18,636,773 OTHER ASSETS AND LIABILITIES, NET 4.9%.................. 968,779 ----------- NET ASSETS 100.0%....................................... $19,605,552 =========== At December 31, 1993, the net unrealized depreciation based on the cost of investments for income tax purposes of $18,872,801 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost........... $ 587,175 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value........... (823,203) ----------- Net unrealized depreciation.................................... $ (236,028) =========== 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 NZ - New Zealand SE - Sweden US - United States of America (f)Face amount for repurchase agreements is for the underlying collateral. * Securities traded in currency of country indicated. The accompanying notes are an integral part of these financial statements. 25
FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1993 FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (NOTE 1) - --------------------------------------------------------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 94.9% $ 10,165,104 GNMA I, SF, 6.00%, 10/15/23 - 11/15/23........................................................ $ 9,818,862 47,234,546 GNMA I, SF, 6.50%, 05/15/23 - 12/15/23........................................................ 46,909,814 7,973,239 GNMA II, M, 6.50%, 09/20/23................................................................... 7,878,557 6,652,413 GNMA I, PL, 7.00%, 05/15/13 - 06/15/13........................................................ 6,625,391 15,122,253 GNMA I, PL, 7.00%, 05/15/27 - 06/15/28........................................................ 15,060,826 110,173,641 GNMA I, SF, 7.00%, 03/15/22 - 10/15/23........................................................ 112,205,034 1,385,025 GNMA II, C, 7.00%, 11/20/16 - 06/06/23........................................................ 1,403,637 21,255,091 GNMA II, M, 7.00%, 05/20/17 - 11/20/23........................................................ 21,540,719 67,549,971 GNMA I, SF, 7.50%, 01/15/17 - 04/15/23........................................................ 70,209,749 1,292,203 GNMA II, C, 7.50%, 09/20/22................................................................... 1,336,622 65,977,217 GNMA II, M, 7.50%, 09/20/16 - 09/20/23........................................................ 68,245,172 1,168,452 GNMA I, PL, 8.00%, 03/15/32................................................................... 1,205,332 85,486,487 GNMA I, SF, 8.00%, 11/15/06 - 12/15/22........................................................ 90,108,135 7,015,589 GNMA II, C, 8.00%, 11/20/16 - 06/20/22........................................................ 7,351,024 7,662,431 GNMA II, M, 8.00%, 06/20/22 - 08/20/22........................................................ 8,028,795 7,210,863 GNMA I, PL, 8.25%, 07/15/31................................................................... 7,466,625 25,225,690 GNMA I, SF, 8.50%, 06/15/16 - 05/15/22........................................................ 26,786,528 9,742,000 GNMA II, M, 8.50%, 11/20/21 - 03/20/22........................................................ 10,271,722 7,170,772 GNMA I, SF, 9.00%, 05/15/16 - 11/15/21........................................................ 7,681,690 5,838,959 GNMA I, SF, 9.50%, 01/15/17 -10/15/21......................................................... 6,320,672 271,463 GNMA, GPM , 9.75%, 08/15/16................................................................... 290,423 4,196,367 GNMA I, SF, 10.00%, 01/15/16 - 06/15/19....................................................... 4,630,431 556,874 GNMA II, C, 10.00%, 02/20/18.................................................................. 607,515 1,169,352 GNMA II, M, 10.00%, 10/20/16 - 11/20/20....................................................... 1,275,692 674,808 GNMA, GPM, 10.25%, 02/15/16 - 09/15/20........................................................ 734,170 1,916,118 GNMA I, SF, 10.50%, 02/15/16 - 07/15/19....................................................... 2,158,028 210,432 GNMA II, C, 10.50%, 10/20/18 -11/20/18........................................................ 233,842 3,465,855 GNMA II, M, 10.50%, 07/20/17 - 02/20/19....................................................... 3,851,432 435,899 GNMA I, SF, 11.00%, 10/15/13 - 09/15/14....................................................... 488,207 366,468 GNMA II, C, 11.00%, 03/20/18.................................................................. 411,704 1,941,568 GNMA II, M, 11.00%, 07/20/17 - 05/20/19....................................................... 2,181,232 291,622 GNMA I, SF, 11.50%, 08/15/16 - 12/15/17....................................................... 338,191 635,731 GNMA II, M, 11.50%, 08/20/16 - 03/20/19....................................................... 722,946 280,085 GNMA I, SF, 12.00%, 06/15/15.................................................................. 317,896 17,949 GNMA I, SF, 12.50%, 11/15/14.................................................................. 20,574 64,656 GNMA II, C, 12.50%, 02/20/18.................................................................. 74,920 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $533,758,773)........................ 544,792,109 ------------ (f)RECEIVABLES FROM REPURCHASE AGREEMENTS 3.7% 22,080,000 Daiwa Securities of America, Inc., 3.20%, 01/03/94 (Maturity Value $21,400,705) Collateral; U.S. Treasury Bills, 05/12/94 (Cost $21,395,000)................................. 21,395,000 ------------ TOTAL INVESTMENTS (COST $555,153,773) 98.6%........................................... 566,187,109 OTHER ASSETS AND LIABILITIES, NET 1.4%................................................ 7,819,693 ------------ NET ASSETS 100.0%..................................................................... $574,006,802 ============ At December 31, 1993, the net unrealized appreciation based on the cost of investments for income tax purposes of $555,225,941 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost.............................................................. $ 12,949,842 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value.............................................................. (1,988,674) ------------ Net unrealized appreciation................................................................. $ 10,961,168 ============
PORTFOLIO ABBREVIATIONS: M - Multi-Issuers C - Custom PL - Project Loan GPM - Graduated Payment Mortgage SF - Single Family (f)Face amount for repurchase agreements is for the underlying collateral. The accompanying notes are an integral part of these financial statements. 26 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1993 FACE VALUE AMOUNT FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (NOTE 1) - --------------------------------------------------------------------------------------------------------------------------------- BONDS 93.5% CABLE TELEVISION 6.5% $1,900,000 Continental Cablevision, Inc., senior sub. deb., 9.00%, 09/01/08.............................. $ 2,118,500 200,000 Scott Cable Communication, Inc., S.F., sub. deb., 12.25%, 04/15/01............................ 181,000 1,500,000 Time Warner, Inc., 9.125%, 01/15/13........................................................... 1,657,500 500,000 Turner Broadcasting Systems, Inc., senior sub. deb., 12.00%, 10/15/01......................... 541,875 ------------ 4,498,875 ------------ CELLULAR TELEPHONE 5.2% 1,500,000 Comcast Cellular Corp. , senior sub. deb., 9.50%, 01/15/08.................................... 1,635,000 1,000,000 Rogers Cantel Mobil, Inc., senior sub. notes, 10.75%, 11/01/01................................ 1,112,500 800,000 Rogers Communications, Inc., senior sub. notes, 10.875%, 04/15/04............................. 896,000 ------------ 3,643,500 ------------ CHEMICALS 5.8% 1,500,000 Harris Chemical North America, Inc., senior sub. notes, 10.75%, 10/15/03...................... 1,586,250 1,800,000 IMC Fertilizer Group, Inc., senior notes, 10.75%, 06/15/03.................................... 1,908,000 500,000 Indspec Chemical Corp., senior sub. notes, 14.25%, 05/01/99................................... 543,750 ------------ 4,038,000 ------------ CONSUMERS GOODS 1.4% 1,000,000 Revlon Consumer Products Corp., senior sub. notes, 10.50%, 02/15/03........................... 970,000 ------------ FINANCIAL 1.3% 750,000 American Reinsurance Corp., senior sub. notes, 10.875%, 09/15/04.............................. 886,875 ------------ FOOD & BEVERAGES 13.7% 950,000 Beatrice Foods, Inc., senior sub. notes., 12.00%, 12/01/01.................................... 1,073,500 1,500,000 Coca Cola Bottling Group, Inc., 9.00%, 11/15/03............................................... 1,503,750 2,065,000 Dr Pepper Bottling Holdings, S.F., senior disc. notes (zero coupon to 02/15/98), 11.625% thereafter, 02/15/03................................................................. 2,235,362 1,129,000 Dr Pepper Co./ Seven-Up Co., Inc., senior sub. disc. notes (zero coupon to 11/01/97), 11.50% thereafter, 11/01/02.................................................................. 872,153 2,250,000 Specialty Foods Corp., senior notes, 10.25%, 08/15/01......................................... 2,356,875 1,500,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03................................ 1,503,750 ------------ 9,545,390 ------------ FOOD RETAILING 13.4% 1,900,000 Kash N'Karry Food Stores, Inc., S.F., sub. deb, 14.00%, 02/01/01.............................. 1,947,500 2,000,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01................................. 2,237,500 1,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02.................................... 1,093,750 2,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03.................................... 2,000,000 1,000,000 Ralphs Grocery Co., senior sub. deb., 10.25%, 07/15/02........................................ 1,052,500 1,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03.............................................. 1,005,000 ------------ 9,336,250 ------------ FOREST & PAPER PRODUCTS 2.2% 1,500,000 Fort Howard Corp., sub. notes., 10.00%, 03/15/03.............................................. 1,552,500 ------------ GAMING & LEISURE 3.8% 500,000 MGM Grand Hotels Finance Corp., guaranty 1st mortgage, 11.75%, 05/01/99....................... 565,000 2,000,000 Showboat, Inc., 9.25%, 05/01/08............................................................... 2,050,000 ------------ 2,615,000 ------------ HEALTH CARE SERVICES 6.9% 500,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02.............................. 513,125 2,000,000 Healthtrust, Inc., The Hospital Co., sub. notes, 8.75%, 03/15/05.............................. 2,080,000 1,000,000 Orinda Health Corp., S.F., senior sub. deb., 12.25%, 05/15/02................................. 1,127,500 1,000,000 Scherer, (R.P.), Corp., S.F., senior sub. deb., 14.00%, 11/01/99.............................. 1,090,000 ------------ 4,810,625 ------------
The accompanying notes are an integral part of these financial statements. 27 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASETS, DECEMBER 31, 1993 (cont.)
Face Value Amount FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (Note 1) - ------------------------------------------------------------------------------------------------------------------------------- BOND (CONT.) INDUSTRIAL 3.0% $ 600,000 American Standard, Inc., sub. disc. deb., 9.875%, 06/01/01......................................... $ 630,750 341,000 American Standard, Inc., S.F. sub. disc. deb., 14.25%, 06/30/03.................................... 363,591 1,000,000 SnyderGeneral Corp., S.F., senior sub. deb., 14.25%, 11/15/00...................................... 1,070,000 ----------- 2,064,341 ----------- MEDIA AND BROADCASTING 5.4% 1,500,000 News America Holdings, senior notes, 9.125%, 10/15/99.............................................. 1,687,500 2,000,000 (c)SCI Television, senior notes, 11.00%, 06/30/05..................................................... 2,082,500 ----------- 3,770,000 ----------- METAL & MINING .7% 500,000 Horsehead Industries, Inc., S.F., sub. notes, 14.00%, 06/01/99..................................... 457,500 ----------- RESTAURANTS 2.2% 1,500,000 Flagstar Corp., S.F. senior sub. deb., 11.25%, 11/01/04............................................ 1,537,500 ----------- RETAIL 4.4% 3,000,000 Eckerd Jack Corp., senior sub. notes, 9.25%, 02/15/04.............................................. 3,075,000 ----------- TECHNOLOGY & INFORMATION SERVICES 5.9% 2,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03...................................... 2,060,000 1,500,000 Bell & Howell Co., senior sub. notes, 9.25%, 07/15/00.............................................. 1,575,000 400,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02............................................. 439,000 ----------- 4,074,000 ----------- TEXTILES & APPAREL 6.9% 1,030,000 Forstmann Textile, Inc., senior sub. notes, 14.75%, 04/15/99....................................... 1,202,525 2,000,000 (c)Guess, Inc., senior sub. notes, 10.00%, 08/15/03................................................... 2,050,000 500,000 Londontown Corp., senior sub. notes, 13.625%, 06/15/99............................................. 537,500 1,000,000 Westpoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05........................................ 1,013,750 ----------- 4,803,775 ----------- TRANSPORTATION 3.1% 2,000,000 Southern Pacific Rail Corp., senior notes, 9.375%, 08/15/05........................................ 2,140,000 ----------- UTILITIES 1.7% 1,000,000 Midland Funding II, Series B, senior lease obligation, 13.25%, 07/23/06............................ 1,178,338 ----------- TOTAL BONDS (COST $61,565,526)................................................................. 64,997,469 ----------- Warrants WARRANTS --------- 300 (a)Foodmaker, Inc., warrants (Cost $417).............................................................. 7,938 ----------- TOTAL BONDS & WARRANTS (COST $61,565,943) ..................................................... 65,005,407 ----------- Face Amount - -------- (f)RECEIVABLES FROM REPURCHASE AGREEMENTS 4.7% $3,405,000 Daiwa Securities of America, Inc., 3.20%, 01/03/94 (Maturity Value $3,285,876) Collateral: U.S. Treasury Bills, 05/12/94 (Cost $3,285,000)....................................... 3,285,000 ----------- TOTAL INVESTMENTS (COST $64,850,943) 98.2%.................................................... 68,290,407 OTHER ASSETS AND LIABILITIES, NET 1.8%........................................................ 1,254,907 ----------- NET ASSETS 100.0%............................................................................. $69,545,314 ===========
The accompanying notes are an integral part of these finncial statements. 28 FRANKLIN PARTNERS FUNDS STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1993 (Cont.) Face Value Amount FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (Note 1) - ------------------------------------------------------------------------------------------------------------------------ At December 31, 1993, the net unrealized appreciation based on the cost of investments for income tax purposes of $65,023,443 was as follows: Aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost......................................................... $ 3,367,844 Aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value......................................................... (100,880) ----------- Net unrealized appreciation............................................................ $ 3,266,964 ===========
PORTFOLIO ABBREVIATION: S.F. - Sinking Fund (a)a Non-income producing. (c)See Note 5 regarding Rule 144A securities. (f)Face amount for repurchase agreements is for the underlying collateral. The accompanying notes are an integral part of these financial statements. 29 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1993 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............................................... $16,762,801 $533,758,773 $61,565,943 =========== ============ =========== At value......................................................... 16,526,773 544,792,109 65,005,407 Receivables from repurchase agreements, at value and cost........ 2,110,000 21,395,000 3,285,000 Cash............................................................. 275,710 4,803,348 -- Receivables: Interest........................................................ 680,343+ 3,312,937 1,583,262 From affiliates................................................. 20,536 -- -- ----------- ------------ ----------- Total assets................................................. 19,613,362 574,303,394 69,873,669 ----------- ------------ ----------- Liabilities: Payables: Distributions to partners....................................... 260 12,391 27,512 Management fees................................................. -- 233,951 36,316 Partners' servicing costs....................................... 750 7,767 1,500 Bank overdraft................................................... -- -- 254,667 Accrued expenses and other payables.............................. 6,800 42,483 8,360 ----------- ------------ ----------- Total liabilities............................................. 7,810 296,592 328,355 ----------- ------------ ----------- Net assets, at value............................................. $19,605,552 $574,006,802 $69,545,314 =========== ============ =========== Net assets consist of: Undistributed net investment income............................. $ 52,452 $ -- $ -- Unrealized appreciation (depreciation) on investments........... (236,028) 11,033,336 3,439,464 Unrealized depreciation on translation of assets and liabilities in foreign currencies.......................................... (23,850) -- -- Accumulated net realized gain (loss)............................ 632,328 (1,428,458) (4,141,162) Partners' capital............................................... 19,180,650 564,401,924 70,247,012 ----------- ------------ ----------- Net assets, at value............................................ $19,605,552 $574,006,802 $69,545,314 =========== ============ =========== Shares outstanding.............................................. 1,728,969 52,626,766 7,756,335 =========== ============ =========== Net asset value per share....................................... $11.34 $10.91 $8.97 =========== ============ =========== Representative computation of (International Bond Fund) net asset value and offering price per share: Net asset value and redemption price per share ($19,605,552 (/) 1,728,969).................................. $11.34 =========== Maximum offering price (100/96 of $11.34)*.................... $11.81 ===========
*On sales of $100,000 or more the offering price is reduced as stated in the section of the prospectus entitled ``How to Invest in a Fund.'' The accompanying notes are an integral part of these financial statements. 30 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS (CONT.) STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1993 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).............................................................. $1,191,095+ $32,559,891 $5,288,880 ---------- ----------- ---------- Expenses: Management fees (Note 4)....................................................... - 2,331,382 340,356 Partners' servicing costs (Note 4)............................................. 7,334 77,197 14,957 Reports to partners............................................................ 4,667 60,392 9,548 Professional fees.............................................................. 3,421 32,497 6,105 Registration fees.............................................................. 15,620 92,106 13,420 Managing partners' fees and expenses........................................... - 8,515 8,281 Custodian fees................................................................. 15,165 50,568 5,836 Other.......................................................................... 6,536 10,155 5,083 Expense reduction (Note 4)..................................................... (13,562) - - ---------- ----------- ---------- Total expenses.............................................................. 39,181 2,662,812 403,586 ---------- ----------- ---------- Net investment income...................................................... 1,151,914 29,897,079 4,885,294 ---------- ----------- ---------- Realized and unrealized gain (loss) on investments Net realized gain (loss)....................................................... 17,057 (748,210) 827,429 Net unrealized appreciation on: Investments................................................................... 630,513 3,288,640 2,429,269 Translation of assets and liabilities denominated in foreign currencies....... 32,736 - - ---------- ----------- ---------- Net realized and unrealized gain on investments................................ 680,306 2,540,430 3,256,698 ---------- ----------- ---------- Net increase in net assets resulting from operations........................... $1,832,220 $32,437,509 $8,141,992 ========== =========== ==========
+Includes realized loss of $19,835 from foreign currency transactions. The accompanying notes are an integral part of these financial statements. 31 FRANKLIN PARTNERS FUNDS FINANCIAL STATEMENTS (CONT.) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992 FRANKLIN TAX-ADVANTAGED FRANKLIN TAX-ADVANTAGED U.S. FRANKIN TAX-ADVANTAGED INTERNATIONAL BOND FUND GOVERNMENT SECURITIES FUND HIGH YIELD SECURITIES FUND ------------------------- ---------------------------- -------------------------- 1993 1992 1993 1992 1993 1992 ----------- ----------- ------------- ------------ ----------- ------------ Increase (decrease) in net assets: Operations: Net investment income................ $ 1,151,914+ $ 887,182++ $ 29,897,079 $ 14,932,791 $ 4,885,294 $ 4,547,359 Net realized gain (loss) on investments......................... 17,057 13 (748,210) 40,202 827,429 1,167,287 Net unrealized appreciation (depreciation) on investments....... 630,513 (1,107,777) 3,288,640 51,749 2,429,269 1,478,035 Net unrealized appreciation (depreciation) on translation of assets and liabilities denominated in foreign currencies.......................... 32,736 (78,561) _ _ _ _ ----------- ----------- ------------ ------------ ----------- ------------ Net increase (decrease) in net assets resulting from operations........................ 1,832,220 (299,143) 32,437,509 15,024,742 8,141,992 7,192,681 Distributions to partners: From undistributed net investment income.................... (1,151,914) (891,482) (29,897,079) (14,932,791) (4,885,294) (4,547,359) Increase (decrease) in net assets from partnership's capital shares transactions (Note 2)................. 6,262,922 8,793,099 258,821,610 184,916,242 27,157,621 (20,983,561) ----------- ----------- ------------ ------------ ----------- ------------ Net increase (decrease) in net assets........................ 6,943,228 7,602,474 261,362,040 185,008,193 30,414,319 (18,338,239) Net assets: Beginning of year..................... 12,662,324 5,059,850 312,644,762 127,636,569 39,130,995 57,469,234 ----------- ----------- ------------ ------------ ----------- ------------ End of year........................... $19,605,552 $12,662,324 $574,006,802 $312,644,762 $69,545,314 $ 39,130,995 =========== =========== ============ ============ =========== ============ Undistributed net investment income included in net assets: Beginning of year.................... $ 52,452 $ 56,752 $ - $ - $ - $ - =========== =========== ============ ============ =========== ============ End of year.......................... $ 52,452 $ 56,752 $ - $ - $ - $ - =========== =========== ============ ============ =========== ============
+ Includes realized loss of $19,835 from foreign currency transactions. ++Includes realized gain of $155,446 and unrealized loss of $4,300 from foreign currency transactions. The accompanying notes are an integral part of these financial statements. 32 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 a pricing service, 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. 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 denomination 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 policies established by the Managing General Partners. The fair values of securities restricted as to resale, or other securities for which market quotations are not readily available, if any, are determined following procedures approved 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 interest 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. 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. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on 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 as adjustments to investment income when reported by the custodian bank. 33 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 1. SIGNIFICANT ACCOUNTING POLICIES (cont.) g. REPURCHASE AGREEMENTS: The Funds may enter into repurchase agreements with government securities dealers recognized by the Federal Reserve Board and/or member banks of the Federal Reserve System. In a repurchase agreement, the Fund purchases 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 Fund's custodian and held until resold to the dealer or bank. At December 31, 1993, all outstanding repurchase agreements held by the Funds had been entered into on that date. 2. SHARES OF PARTNERSHIP INTEREST At December 31, 1993, the Partners' capital for the International Bond Fund, the Government Fund and the High Yield Fund aggregated $19,180,650, $564,401,924, $70,247,012, 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 --------- ------------ -------------- --------------- ----------- ------------- 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 ======== =========== ========== ============ ========== ============ 1992 Shares sold................................... 734,418 $ 8,589,965 18,783,673 $201,160,755 1,055,455 $ 8,838,808 Shares issued in reinvestment of distributions 58,927 683,867 855,668 9,145,761 312,049 2,591,941 Shares redeemed............................... (219,899) (2,537,516) (2,112,839) (22,503,619) (4,362,380) (36,133,446) Changes from exercise of exchange privilege: Shares sold.................................. 215,531 2,542,591 663,827 7,058,344 815,551 6,739,765 Shares redeemed.............................. (41,746) (485,808) (939,878) (9,944,999) (362,401) (3,020,629) -------- ----------- ---------- ------------ ---------- ------------ Net increase (decrease)....................... 747,231 $ 8,793,099 17,250,451 $184,916,242 (2,541,726) $(20,983,561) ======== =========== ========== ============ ========== ============
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, 1993 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................................... $6,764,599 $311,310,893 $42,023,810 ======================= =============================== ========================== Sales....................................... $ 920,519 $ 64,587,104 $16,062,192 ======================= =============================== ==========================
For income tax purposes, the aggregate cost of securities is higher (and unrealized appreciation is lower) than for financial reporting purposes at December 31, 1993 by $72,168 in the Government Fund and $172,500 in the High Yield Fund. 34 FRANKLIN PARTNERS FUNDS NOTES TO FINANCIAL STATEMENTS (CONT.) 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. Fees incurred by the International Bond Fund, the Government Fund and the High Yield Fund under the agreement aggregated $100,033, $2,331,382, and $340,356, respectively, for the year ended December 31, 1993. 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, 1993, Franklin Advisers reduced its management fees by $100,033 and made payments of other expenses of $13,562 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, 1993, totalling $303,473, $6,282,489 and $691,683, respectively, of which $291,218, $6,092,361 and $659,515, 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, 1993, aggregated $7,334, $77,197 and $14,957 for the International Bond Fund, the Government Fund and the High Yield Fund, respectively. The Distribution Agreement between the Funds and Franklin/Templeton Distributors, Inc., includes a distribution plan pursuant to Rule 12b-1 of the Investment Company Act of 1940 that provides for furnishing of promotion, offering and marketing of the Funds' shares. The Funds did not incur any such distribution plan expenses for the year ended December 31, 1993. 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, 1993, the High Yield Fund held 144A securities with a value aggregating $4,132,500, representing 5.9% 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, the Fund has 93.5% of its net assets 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% in Australian, Canadian, French and Italian Securities. The High Yield Fund has investments equal to or in excess of 10% in the Food & Beverages and Food Retailing Industries. 7. FINANCIAL HIGHLIGHTS Selected data for each share outstanding throughout each period are set forth in the prospectus under the caption ``Financial Highlights.'' 35 This page intentionally left blank. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP Dated May 1, 1987 as amended April 28, 1988 and May 1, 1991 APPENDIX "A" TABLE OF CONTENTS Page 1. GENERAL PROVISIONS 1.1 Formation A-2 1.2 Name and Place of Business A-2 1.3 Term A-2 1.4 Agent for Service of Process A-2 1.5 Certificate of Limited Partnership A-2 1.6 Other Acts/Filings A-2 2. DEFINITIONS A-2 2.1 Affiliate A-2 2.2 Capital Account A-2 2.3 General Partner A-2 2.4 Holder of Record or Holder of a Share A-3 2.5 Limited Partner A-3 2.6 Majority Vote A-3 2.7 Managing General Partner A-3 2.8 Net Asset Value (per Share) A-3 2.9 Non-Managing General Partner A-3 2.10 Officers A-3 2.11 Persons A-3 2.12 Partners A-3 2.13 Partnership A-3 2.14 Partnership Act A-3 2.15 Partnership Group A-3 2.16 Partnership List A-3 2.17 Registration Statement A-3 2.18 Secretary of State A-3 2.19 Share (including fractional Shares) A-3 2.20 Substituted Limited Partner A-3 2.21 Tax Code A-3 2.22 Transfer Agent A-3 2.23 1940 Act A-4 3. ACTIVITIES AND PURPOSE A-4 3.1 Operating Policy A-4 3.2 Investment Objectives A-4 3.3 Investment and Operating Limitations A-4 3.4 Other Authorized Activities A-4 4. GENERAL PARTNERS A-5 4.1 Identity and Number A-5 4.2 Managing and Non-Managing General Partners A-5 4.3 General Partners' Contributions A-5 4.4 Management and Control A-6 4.5 Action by the Managing General Partners A-6 4.6 Limitations of the Authority of the Managing A-6 General Partners 4.7 Right of General Partners to Become Limited A-7 Partners 4.8 Termination of a General Partner A-7 4.9 Additional or Successor General Partners A-7 4.10 Liability to Limited Partners A-8 4.11 Assignment and Substitution A-8 4.12 No Agency A-8 4.13 Reimbursement and Compensation A-8 4.14 Indemnification A-8 5. LIMITED PARTNERS A-9 5.1 Identity of Limited Partners A-9 5.2 Admission of Limited Partners A-9 5.3 Contributions of the Limited Partners A-10 5.4 Additional Contributions of Limited Partners A-10 5.5 Use of Contributions A-10 5.6 Redemption by Limited Partners A-10 5.7 Minimum Contribution and Mandatory Redemption A-10 5.8 Limited Liability A-10 5.9 No Power to Control Operations A-11 5.10 Tax Responsibility A-11 6. SHARES OF PARTNERSHIP INTEREST A-11 7. PURCHASE AND EXCHANGE OF SHARES A-11 7.1 Purchase of Shares A-11 7.2 Net Asset Value A-11 7.3 Exchange of Shares A-12 8. REDEMPTION OR REPURCHASE OF SHARES A-12 8.1 Redemption of Shares A-12 8.2 Payment for Redeemed Shares A-12 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE A-12 9.1 Rights of Limited Partners A-12 9.2 Action of the Partners A-13 9.3 Meeting A-13 9.4 Notices A-13 9.5 Validity of Vote for Certain Matters A-14 9.6 Adjournment A-14 9.7 Waiver of Notice and Consent to Meeting A-14 9.8 Quorum A-14 9.9 Required Vote A-14 9.10 Action by Consent Without a Meeting A-15 9.11 Record Date A-15 9.12 Proxies A-15 9.13 Number of Votes A-15 10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES A-15 10.1 Fees of General Partners A-15 10.2 Distributions of Income and Gains A-16 10.3 Allocation of Income, Gains, Losses, Deductions A-16 and Credits 10.4 Returns of Contributions A-16 10.5 Capital Accounts A-16 10.6 Allocations for Tax Purposes A-17 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; A-18 SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment A-18 11.2 Rights of the Holders of Shares as Collateral or A-18 Judgment Creditor 11.3 Death, Incompetency, Bankruptcy or Termination of A-18 the Existence of a Partner 11.4 Substituted Limited Partners A-19 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP A-19 12.1 Dissolution A-19 12.2 Liquidation A-20 12.3 Termination A-20 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS A-20 13.1 Books and Records A-20 13.2 Limited Partners' Rights to Records A-20 13.3 Accounting Basis and Fiscal Year A-21 13.4 Tax Returns A-21 13.5 Filings with Regulatory Agencies A-21 13.6 Tax Matters and Notice Partner A-21 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS A-22 14.1 Amendments in General A-22 14.2 Amendments Without Consent of Limited Partners A-22 14.3 Amendments Needing Consent of Affected Partners A-22 14.4 Amendments to Certificate of Limited Partnership A-22 14.5 Amendments After Change of Law A-22 15. MISCELLANEOUS PROVISIONS A-23 15.1 Notices A-23 15.2 Section Headings A-23 15.3 Construction A-23 15.4 Severability A-23 15.5 Governing Law A-23 15.6 Counterparts A-23 15.7 Entire Agreement A-23 15.8 Cross-References A-23 15.9 Power of Attorney to the General Partners A-24 15.10 Further Assurances A-24 15.11 Successors and Assigns A-24 15.12 Waiver of Action for Partition A-24 15.13 Creditors A-25 15.14 Remedies A-25 15.15 Custodian A-25 15.16 Use of Name Franklin A-25 15.17 Authority A-25 15.18 Signatures A-25 15.19 Arbitration A-25 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (a California limited partnership) This amended and restated AGREEMENT OF LIMITED PARTNERSHIP ("Partnership Agreement") is entered into as of this 1st day of May, 1987 by and among the undersigned individuals, as Managing General Partners; FRANKLIN PARTNERS, INC., a California corporation, as Non-Managing General Partner (collectively, the "General Partners"); and each of the persons identified on the Partnership List of the Partnership as limited partners (the "Limited Partners"). This Partnership Agreement amends and restates in its entirety the Agreement of Limited Partnership dated as of January 20, 1987. 1. GENERAL PROVISIONS 1.1 Formation. The parties hereby agree to continue the limited partnership (the "Partnership") under the terms and conditions set forth below pursuant to the California Revised Limited Partnership Act (the "Partnership Act"). 1.2 Name and Place of Business. The name of the Partnership is Franklin Tax-Advantaged U.S. Government Securities Fund (a California limited partnership), or such other name as shall be selected from time to time by the Managing General Partners upon notice to the Limited Partners. The principal place of business of the Partnership shall be 777 Mariners Island Boulevard, San Mateo, California 94404, or such other place or places as the Managing General Partners may deem necessary or desirable to the conduct of the Partnership's activities, including places or the conduct of activities relating to its investments, the location and holding of its assets, the execution of its portfolio transactions and other operations. 1.3 Term. The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership with the Secretary of State on January 27, 1987 and shall continue until the 31st day of December, 2050, unless terminated earlier in accordance with the provisions of this Partnership Agreement. 1.4 Agent for Service of Process. The agent for service of process on the Partnership in California is Murray L. Simpson, Esq. or such other eligible California resident individual or corporation qualified to act as an agent for service of process as the Managing General Partners shall designate. 1.5 Certificate of Limited Partnership. The Managing General Partners have caused a Certificate of Limited Partnership to be filed with the Secretary of State in accordance with the terms of the Partnership Act. 1.6 Other Acts/Filings. The Partners shall from time to time execute or cause to be executed all such certificates, fictitious business name statements, and other documents, and do or cause to be done all such filings, recordings, publishings, and other acts as the Managing General Partners may deem necessary or appropriate to comply with the requirements of law for the formation and operation of the Partnership in all jurisdictions in which the Partnership shall desire to conduct its activities. 2. DEFINITIONS When used in this Partnership Agreement the following terms shall have the meanings set forth below: 2.1 Affiliate. "Affiliate" shall mean:(i) any person directly or indirectly controlling, controlled by or under common control with another person; (ii) a person owning or controlling 10% or more of the outstanding securities of that other person; (iii) any officer, director or partner of that other person; and (iv) if that other person is an officer, director or partner, any company for which that person acts in any such capacity (person shall include any natural person, partnership, corporation, association or other legal entity). 2.2 Capital Accounts. The accounts maintained for each Partner in accordance with Section 10.5 hereof. 2.3 General Partner. Each of the initial General Partners designated in the Preamble and any other person or entity who shall hereafter become a General Partner. 2.4 Holder of Record or Holder of a Share. (a) a General Partner; (b) a Limited Partner if he or it has not redeemed or transferred all of his (its) Shares of the Partnership pursuant to Sections 8 or 11; (c) a purchaser of a Share or Shares of the Partnership who has made good payment to the Partnership and who has not redeemed all his Shares; or (d) the successor in interest of a Partner under Section 11. 2.5 Limited Partner. The original Limited Partner and all other persons who shall hereafter be admitted to the Partnership as additional Limited Partners or Substituted Limited Partners, except those persons who: (a) have redeemed all Shares of the Partnership owned by them and such redemption has been reflected in the Partnership List; or (b) have been replaced by a Substituted Limited Partner to the extent of their entire Limited Partnership Interest. Reference to a "Limited Partner" shall mean any one of the Limited Partners. 2.6 Majority Vote. The affirmative vote of the lesser of (i) 67% or more of the Shares represented at a meeting and entitled to vote if more than 50% of the then outstanding shares are present or represented by proxy, or (ii) more than 50% of the then outstanding Shares entitled to vote. 2.7 Managing General Partner. Each General Partner who is an individual. 2.8 Net Asset Value (per Share). The value (in U.S. Dollars) of a Share as determined in accordance with Section 7.2 hereof. 2.9 Non-Managing General Partner. Each General Partner that is not an individual (i.e., any General Partner that is a corporation, association, partnership, joint venture or trust). 2.10 Officers. Those persons designated by the Managing General Partners to perform administrative and operational functions on behalf of the Managing General Partners. 2.11 Person. An individual, partnership, joint venture, association, corporation or trust. 2.12 Partners. Collectively, the General Partners and the Limited Partners. "Partner" means any one of the Partners. 2.13 Partnership. The limited partnership created and continued by this Partnership Agreement. 2.14 Partnership Act. The California Revised Limited Partnership Act (Chapter 3 of Title 2 of the Corporations Code of California) as such Act may be amended from time to time. 2.15 Partnership Group. All other limited partnerships organized under the Partnership Act of which Franklin Resources, Inc. or any parent, subsidiary or affiliate of Franklin Resources, Inc. is a General Partner and which are registered under the 1940 Act as open-end management investment companies. 2.16 Partnership List. A current list of all the Partners containing the information specified in Section 13.1(a)(i) hereof. 2.17 Registration Statement. The Registration Statement on Form N-1A, registering the Shares of the Partnership under the Securities Act of 1933 and the 1940 Act, as such Registration Statement may be amended from time to time. 2.18 Secretary of State. The Secretary of State of the State of California. 2.19 Share (including fractional Shares). A partnership interest in the Partnership. Reference to "Shares" shall be to more than one Share. 2.20 Substituted Limited Partner. A successor in interest of a Limited Partner who has complied with the conditions set forth in Section 11. 2.21 Tax Code. The Internal Revenue Code of 1986 or corresponding provisions of subsequent revenue laws, and all regulations, rulings and other promulgations or judicial decisions thereunder. 2.22 Transfer Agent. The person appointed by the Managing General Partners to be primarily responsible for maintaining the Partnership List and certain other records of the Partnership. 2.23 1940 Act. The Investment Company Act of 1940, as amended, or as it may hereafter be amended, and the Rules and Regulations thereunder. 3. ACTIVITIES AND PURPOSE 3.1 Operating Policy. The Partnership will be authorized and empowered to operate and will operate as an open- end, diversified management investment company registered pursuant to the 1940 Act. 3.2 Investment Objectives. Subject to the limitations set forth in this Partnership Agreement, the investment objective of the Partnership shall be to invest and reinvest its assets in investment securities which shall consist primarily, but not necessarily exclusively, of debt securities. 3.3 Investment and Operating Limitations. The following additional fundamental policies and investment restrictions have been adopted by the Partnership and cannot be changed except by Majority Vote. These investment restrictions provide that the Partnership may not: (a) With respect to at least 75% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment (i) more than 5% of the total assets of the Partnership would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of such issuer would be owned by the Partnership. (b) Make loans to others, except through the purchase of debt securities in accordance with its investment objectives and policies or to the extent the entry into a repurchase agreement is deemed to be a loan. (c) (i) borrow money, except temporarily from a bank for extraordinary or emergency purposes and then not in excess of 5% of its total assets (at the lower of cost or fair market value). Any such borrowing will be made only if immediately thereafter there is an asset coverage of at least 300% of all borrowings. (ii) Mortgage, pledge or hypothecate any of its assets except in connection with any such borrowings. (d) Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite securities.(Does not preclude the Partnership from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.) (e) Buy or sell interests in oil, gas or mineral exploration or development programs, or real estate. (Does not preclude investments in marketable securities of companies engaged in such activities.) (f) Purchase or hold securities of any issuer, if, at the time of purchase or thereafter, any of the General Partners or Officers of the Partnership or its investment adviser(s) own beneficially more than of 1%, and such General Partners or Officers holding more than of 1% together own beneficially more than 5% of the issuer's securities. (g) Invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with predecessors, of at least three years of continuous operation. (h) Purchase or sell commodities or commodity contracts or invest in puts, calls, straddles or spread options. (Does not preclude authorized transactions in foreign currencies.) (i) Invest in securities of other investment companies, except as they may be acquired as part of a merger, consolidation or acquisition of assets. (j) Invest more than 10% of its assets in securities with legal or contractual restrictions or which are not readily marketable (except for permissible transactions in repurchase agreements). (k) Invest in any issuer for purposes of exercising control or management. 3.4 Other Authorized Activities. Subject to the limitations set forth in this Partnership Agreement, the Partnership shall have the power to purchase and sell securities, issue evidences of indebtedness in connection with Partnership business, to join or become a partner in limited or general partnerships and to do any and all other things and acts, and to exercise any and all of the powers that a natural person could do or exercise and which now or hereafter may be lawfully done or exercised by a limited partnership. 4. GENERAL PARTNERS 4.1 Identity and Number. The names of the General Partners and their last known business or residence address shall be set forth in the Certificate of Limited Partnership, as it may be amended from time to time; this same information, together with the amounts of the contributions of each General Partner and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. The General Partners shall be identified as such on the Partnership List and also shall be identified separately as Managing General Partners or Non- Managing General Partners. The Managing General Partners may from time to time recommend to the Partners that additional persons be admitted as General Partners; provided, however, that if at any time following the effective date of the Partnership's Registration Statement the number of Managing General Partners is reduced to less than three, the remaining Managing General Partners shall, within 120 days, call a meeting of Partners for the purpose of electing an additional Managing General Partner or Managing General Partners so as to restore the number of Managing General Partners to at least three. 4.2 Managing and Non-Managing General Partners. Only individuals may act as Managing General Partners, and all General Partners who are individuals shall act as Managing General Partners. Any General Partner that is a corporation, association, partnership, joint venture or trust shall act as a Non-Managing General Partner. Except as provided in Section 4.4 hereof, a Non- Managing General Partner as such shall take no part in the management, conduct or operation of the Partnership's activities and shall have no authority to act on behalf of the Partnership or to bind the Partnership. All General Partners, including Managing and Non-Managing General Partners, shall be subject to election and removal by the Partners as hereinafter provided. 4.3 General Partners' Contributions. (a) Each General Partner, as such, shall make a contribution of cash to the Partnership sufficient to purchase at least one Share and shall continue to own unencumbered at least one such Share at all times while serving as a General Partner. The amount contributed by each General Partner shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges. The amount of such contributions and the number of Shares owned by each General Partner shall be set forth in the Partnership List. (b) The Non-Managing General Partner shall, in its capacity as such Non-Managing General Partner, be obligated to contribute to the Partnership through the purchase of Shares from time to time amounts sufficient to enable the General Partners in the aggregate, to maintain in their capacities as General Partners an interest in each material item of Partnership income, gain, loss, deduction or credit equal to at least 1% of each such item at all times during the existence of the Partnership. If upon termination of the Partnership, the General Partners have a negative balance in their Capital Accounts, they shall in their capacity as General Partners be obligated to make additional capital contributions in cash equal to the lesser of (i) the negative balance in their Capital Accounts or (ii) the amount, if any, by which 1.01% of the total capital contributions of the Limited Partners exceeds the total capital contributions of the General Partners prior to such termination. For as long as the Non-Managing General Partner retains its status as such, it shall not redeem or assign Shares held by it in its capacity as the Non-Managing General Partner or otherwise accept distributions in cash or property if such action would result in the failure of the General Partners to maintain such an interest. In the event that the Non-Managing General Partner is removed or stands for re-election and is not re-elected by the Partners pursuant to Section 9 hereof, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice, redeem its Shares in the same manner as is provided in Section 8 hereof. In the event that the Non-Managing General Partner voluntarily withdraws or declines to stand for re-election, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice following the occurrence of an event described in (i), (ii) or (v) in Section 4.8(a), redeem its Shares in the same manner as provided in Section 8. In the event that the Non- Managing General Partner is removed, stands for re-election and is not re-elected, voluntarily withdraws or declines to stand for re-election, the Managing General Partners shall cause the Certificate of Limited Partnership to be amended as provided in Section 14.4 hereof to reflect such withdrawal. 4.4 Management and Control. Subject to the terms of the Partnership Agreement and the 1940 Act, the Partnership will be managed by the Managing General Partners, who will have complete and exclusive control over the management, conduct and operation of the Partnership's activities, and, except as otherwise specifically provided in this Partnership Agreement, the Managing General Partners shall have the rights, powers and authority, on behalf of the Partnership and in its name, to exercise all of the rights, powers and authority of partners of a partnership without limited partners. The Managing General Partners may contract on behalf of the Partnership in conformity with the 1940 Act with one or more banks, trust companies or investment advisers for the performance of such functions as the Managing General Partners may determine, but subject always to their continuing supervision, including, without limitation, the investment and reinvestment of all or part of the Partnership's assets and execution of portfolio transactions, the distribution of Shares, and any or all administrative functions. The Managing General Partners may appoint officers or agents to perform such duties on behalf of the Partnership and the Managing General Partners as the Managing General Partners deem desirable. Such officers or agents need not be General or Limited Partners. The Managing General Partners may also employ persons to perform various duties on behalf of the Partnership as employees of the Partnership. The Managing General Partners shall devote themselves to the affairs of the Partnership to the extent they may determine necessary for the efficient conduct thereof, which need not, however, occupy their full time. The General Partners may also engage in other activities or businesses, whether or not similar in nature to the activities of the Partnership, subject to the limitations of the 1940 Act. In the event that no Managing General Partner shall remain for the purpose of managing and conducting the operations of the Partnership, the Non-Managing General Partner shall promptly call a meeting of the Limited Partners to be held within sixty (60) days of the date the last Managing General Partner ceases to act in such capacity to elect new Managing General Partners up to a maximum number of Managing General Partners theretofore admitted to the Partnership (but no fewer than three). For the period of time during which no Managing General Partner shall remain, the Non-Managing General Partner, subject to the terms and provisions of this Partnership Agreement, shall be permitted to engage in the management, conduct and operation of the activities of the Partnership. 4.5 Action by the Managing General Partners. Unless otherwise required by the 1940 Act with respect to any particular action, the Managing General Partners shall act only by the vote of a majority of the Managing General Partners at a meeting duly called at which a quorum of the Managing General Partners is present or by unanimous written or telephonic consent of the Managing General Partners without a meeting. At any meeting of the General Partners, a majority of the Managing General Partners shall constitute a quorum. If there shall be more than one Managing General Partner, no single Managing General Partner shall have authority to act on behalf of the Partnership or to bind the Partnership. The Managing General Partners shall appoint one of their number to be Chairman. Meetings of the Managing General Partners may be called orally or in writing by the Chairman or by any two Managing General Partners. Notice of the time, date and place of all meetings of the Managing General Partners shall be given by an Officer or by the party calling the meeting to each Managing General Partner by telephone or telegram sent to his home or business address at least twenty-four hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two hours in advance of the meeting. Notice need not be given to any Managing General Partner who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting. The Chairman, if present, shall preside at all meeting of Partners. 4.6 Limitations of the Authority of the Managing General Partners. The Managing General Partners shall have no authority without the vote or written consent or ratification of the Limited Partners to: (a) do any act in contravention of this Partnership Agreement, as it may be amended from time to time; (b) do any act which would make it impossible to carry on the ordinary operations of the Partnership; (c) confess a judgment against the Partnership; (d) possess Partnership property, or assign their rights in specific property, for other than a partnership purpose; (e) admit a person as a General Partner except in accordance with Section 9 hereof; or (f) admit a person as a Limited Partner, except in accordance with Section 5 hereof. 4.7 Right of General Partners to Become Limited Partners. A General Partner may also own Shares as a Limited Partner without obtaining the consent of the Limited Partners and thereby become entitled to all the rights of a Limited Partner to the extent of the Limited Partnership interest so acquired. Such event shall not, however, be deemed to reduce or otherwise affect any of the General Partners' liability hereunder as a General Partner. If a General Partner shall also become a Limited Partner, the contributions and Share ownership of such General Partner shall be separately designated in the Partnership List to reflect his interest in each capacity. 4.8 Termination of a General Partner. (a) The interest of a General Partner shall terminate and such party shall have no further right or power to act as a General Partner (except to execute any amendment to this Partnership Agreement to evidence his termination): (i) upon death of the General Partner; (ii) upon an adjudication of incompetency of the General Partner; (iii) if such Partner is removed or stands for re-election and is not re-elected by the Partners, as provided in Section 9 below; (iv) in the case of the Non-Managing General Partner, upon the filing of a certificate of dissolution, or its equivalent, or voluntary or involuntary petition in bankruptcy for such Non-Managing General Partner; or (v) if such Partner voluntarily retires upon not less than ninety (90) days' written notice to the other General Partners. (b) Notwithstanding the foregoing, the Non- Managing General Partner shall not voluntarily withdraw or otherwise voluntarily terminate its status as the Non-Managing General Partner until the earliest of (i) 180 days from the date that the Non-Managing General Partner gives the other General Partners its written notice of its intention to withdraw as a Non- Managing General Partner, (ii) the date that a successor Non- Managing General Partner, who has agreed to assume the obligations of Section 4.3(b) hereof, is elected by the Partners pursuant to Section 9 hereof, or (iii) the date that another General Partner assumes the obligations imposed upon the Non- Managing General Partner pursuant to Section 4.3(b) hereof. The failure of the Non-Managing General Partner to seek re-election at any meeting of the Partners called for such purpose shall be deemed to constitute a voluntary withdrawal as of the date of notice of such meeting and shall constitute written notice as at the date of such meeting of its intention to withdraw as a Non- Managing General Partner, unless it has delivered written notice at an earlier date. (c) In the event a General Partner ceases to be a General Partner, the remaining General Partners shall have the right to continue the operations of the Partnership. (d) Termination of a person's status as a General Partner shall not affect his status, if any, as a Limited Partner. A General Partner may retain Shares owned in his capacity as a Limited Partner provided such General Partner has been or is admitted to Partnership as a Limited Partner in accordance with Section 5.2. (e) A person who ceases to be a General Partner shall nevertheless be deemed to be acting as a General Partner with respect to a third party doing business with the Partnership until an amended Certificate of Limited Partnership is filed with the Secretary of State. 4.9 Additional or Successor General Partners. A person may be added or substituted as a General Partner only upon his admission by the Partners at a meeting of Partners or by written consent without a meeting as provided in Section 9 hereof. Each General Partner, by becoming a General Partner, consents to the admission as an added or substituted General Partner of any person elected by the Partners in accordance with this Partnership Agreement. Any person who is elected to be admitted as a General Partner at a meeting of the Partners or by written consent in accordance with Section 9 hereof and who shall not be serving as a General Partner at the time of such election, shall be admitted to the Partnership as a General Partner effective as of the date of such election. Any General Partner who is not re-elected at any such meeting in the manner specified in Section 9 shall be deemed to have withdrawn as of the date of such meeting. 4.10 Liability to Limited Partners. The General Partners shall not be personally liable for the repayment of any amounts standing in the account of a Limited Partner or holder of Shares including, but not limited to, contributions with respect to such Shares, except by reason of their wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office. Any payment, other than in the event of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by a General Partner, which results in a personal liability to Limited Partners or holders of Shares, shall be solely from the Partnership's assets. So long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners, the General Partners shall not have any personal liability to any holder of Shares or to any Limited Partner by reason of (1) any failure to withhold income tax under Federal or state tax laws with respect to income allocated to Limited Partners or (2) any change in the Federal or state tax laws or in interpretation thereof as they apply to the Partnership, the holders of the Shares or the Limited Partners, whether such change occurs through legislative, judicial or administrative action. 4.11 Assignment and Substitution. Each Share held by a General Partner in his capacity as a General Partner shall be designated as such, and each such Share shall be nonassignable, except to another person who already is a General Partner, and then only with the consent of the Managing General Partners, and shall be redeemable by the Partnership only in the event that (i) the holder thereof has ceased to be a General Partner of the Partnership or (ii) in the opinion of counsel for the Partnership redemption of Shares held by a General Partner would not jeopardize the status of the Partnership as a partnership for Federal income tax purposes. 4.12 No Agency. Except as provided in Section 15.9 below, nothing in this Partnership Agreement shall be construed as establishing any General Partner as an agent of any Limited Partner. 4.13 Reimbursement and Compensation. Managing General Partners may receive reasonable compensation for their services as Managing General Partners and will be reimbursed for all reasonable out-of-pocket expenses incurred in performing their duties hereunder. 4.14 Indemnification. (a) Subject to the exceptions and limitations contained in Subsection (b) below: (i) Every person who is, or has been, a General Partner, an officer and/or Director of a corporate General Partner or Officer of the Partnership (hereinafter referred to as "Covered Person") shall be indemnified by the Partnership to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a General Partner, an officer and/or Director of a Corporate General Partner or officer of the Partnership and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim", "action", "suit", or "proceeding" shall include, without limitation, any administrative inquiry, audit, investigation or other form of regulatory actions and shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person who shall have been finally adjudicated by a court or other body before which the proceeding was brought (i) to be liable to the Partnership or its Partners by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (ii) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Partnership. (c) In the event of a settlement, or other disposition not involving a final adjudication as provided insubsection (b), indemnification shall be provided unless there has been a determination that such Covered Person did engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, (i) by the court or other body approving the settlement or other disposition; (ii) by vote of at least a majority of those Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (iii) by written opinion of independent legal counsel, based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Partner may, by appropriate legal proceedings, challenge any such determination by the Managing General Partners, or by independent counsel. (d) The rights of indemnification herein provided may be insured against by policies maintained by the Partnership, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such General Partner, officer and/or Director of a Corporate General Partner or officer of the Partnership and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Partnership personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law. (e) Expenses incurred in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section 4.14 shall be paid by the Partnership from time to time in advance prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Partnership if it is ultimately determined that he is not entitled to indemnification under this Section 4.14; provided, however, that either (i) such Covered Persons shall have provided appropriate security for such undertaking, (ii) the Partnership is insured against losses arising out of any such advance payments, or (iii) either a majority of the Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a full trial- type inquiry), that there is reason to believe that such Covered Person will be found entitled to indemnification under this Section 4.14. 5. LIMITED PARTNERS 5.1 Identity of Limited Partners. The names of the Limited Partners and their last known business or residence addresses, together with the amounts of their contributions and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. 5.2 Admission of Limited Partners. The Managing General Partners may admit a purchaser of Shares as a Limited Partner, upon (i) the execution by such purchaser of such subscription documents and other instruments as the Managing General Partners may deem necessary or desirable to effectuate such admission, which documents, if any shall be required, shall be described in the Partnership's Registration Statement, (ii) the purchaser's acceptance of all the terms and provisions of this Partnership Agreement, including the power of attorney set forth in Section 15.9 hereof, as the same may have been amended in such manner as shall be specified by the Managing General Partners, and (iii) the addition of such purchaser to the Partnership List. The admission of a purchaser as a Limited Partner shall be effective upon his addition to the Partnership List provided good payment has been received by the Partnership for the purchased Shares. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the admission of new Limited Partners. In no event shall the consent or approval of any of the Limited Partners be required to effectuate such admission. Each purchaser of a Share of the Partnership who becomes a Limited Partner shall be bound by all the terms and conditions of this Partnership Agreement including, without limitation, the allocation of income, gains, losses, deductions and credits as provided in Section 10.3. Notwithstanding anything in this Partnership Agreement to the contrary, the Managing General Partners reserve the right to refuse to admit any Person as a Limited Partner who has not completed, signed and furnished to the Partnership or its designated agent an account application, a Certificate of Foreign Status on Form W-8 or such other required documents as may be described in the Registration Statement, and any other Person if, in their judgment, it would not be in the Partnership's best interests to admit such Person. 5.3 Contributions of the Limited Partners. The amount contributed by each Limited Partner to the Partnership shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges and which amount may be less than the offering price paid by such Limited Partner for his Shares to the extent the offering price includes any sales charges. All contributions shall be made in U.S. dollars, which shall be invested in Shares of the Partnership at Net Asset Value. The amount of such contributions and the number of Shares owned by each Partner shall be set forth in the Partnership List. 5.4 Additional Contributions of Limited Partners. No Limited Partner shall be required to make any additional contributions to (or investments in) or lend additional funds to the Partnership, and no Limited Partner shall be liable for any additional assessment therefor. A Limited Partner may make an additional contribution (or investment), however, at his option through the purchase of additional Shares subject to the same terms and conditions as his initial contribution. 5.5 Use of Contributions. The aggregate of all capital contributions shall be, and hereby are agreed to be, available to the Partnership to carry out the objects and purposes of the Partnership. 5.6 Redemption by Limited Partners. A Limited Partner may redeem his Shares at any time in accordance with Section 8. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the redemption of Shares by any Limited Partner and the withdrawal or return through such redemption, in whole or in part, of the contribution of any Limited Partner. Except as provided in Sections 8.1, 10.04 and 12.2 hereof, a Limited Partner shall have no right to the return or withdrawal of his contribution. 5.7 Minimum Contribution and Mandatory Redemption. The Managing General Partners shall determine the minimum amounts required for the initial or additional contributions of a Limited Partner, which amounts may, from time to time, be changed by the Managing General Partners. Additionally, the Managing General Partners may, from time to time, establish a minimum total investment for Limited Partners, and there is reserved to the Partnership the right to redeem automatically the interest of any Limited Partner the value of whose investment, due to redemptions, is less than such minimum upon the giving of at least 30 days' notice to such Limited Partner, provided that such minimum total investment is not greater than the investment of any Limited Partner at the time the new minimum total investment becomes effective. The amounts which the Managing General Partners shall fix from time to time for initial or additional contributions and the amount of the minimum total investment shall be stated in the Partnership's current Registration Statement. 5.8 Limited Liability. (a) No Limited Partner shall be liable for any debts or obligations of the Partnership and each Limited Partner shall be indemnified by the Partnership against any such liability; provided, however, that contributions of a Limited Partner and his share of any undistributed assets of the Partnership shall be subject to the risks of the operations of the Partnership and subject to the claims of the Partnership's creditors, and provided further, that after any Limited Partner has redeemed his Shares or otherwise received the return of any part of his contribution or any distribution of assets of the Partnership, he will be liable to the Partnership for: (i) any money or other property wrongfully distributed to him; and (ii) any sum, not in excess of the amount of such distribution, necessary to discharge any liabilities of the Partnership to creditors who extended credit or whose claims arose before such returns or distributions were made, but only to the extent that the assets of the Partnership are not sufficient to discharge such liabilities. The obligation of a Limited Partner to return all or any part of a distribution made to him shall be the sole obligation of such Limited Partner and not of the General Partners. (b) If an action is brought against a Limited Partner to satisfy an obligation of the Partnership, the Partnership, upon notice from the Limited Partner about the action, will either pay the claim itself or, if the Partnership believes the claim to be without merit, will undertake the defense of the claim itself. (c) The General Partners shall not have any personal liability to any Holder of Shares or to any Limited Partner for the repayment of any amounts standing in the account of a Limited Partner including, but not limited to, contributions with respect to such Shares. Any such payment shall be solely from the assets of the Partnership. The General Partners shall not be liable to any Holder of Shares or to any Limited Partner by reason of any change in the Federal income tax laws or any State or local income or franchise tax laws as they apply to the Partnership or the Limited Partners, whether such change occurs through legislative, judicial or administrative action, so long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners. 5.9 No Power to Control Operations. A Limited Partner shall have no right to and shall take no part in control of the Partnership's operations or activities but may exercise the rights and powers of a Limited Partner under this Partnership Agreement, including without limitation, the voting rights and the giving of consents and approvals provided for in Section 9 hereof. The exercise of such rights and powers are deemed to be matters affecting the basic structure of the Partnership and not the control of its operations or activities. 5.10 Tax Responsibility. Each Limited Partner shall (a) provide the Managing General Partners with any tax information which may be required under applicable law, (b) pay any penalties imposed on such Limited Partner for any non- compliance with applicable tax laws, and (c) be subject to withholding of income tax by the Partnership to the extent required by law. 6. SHARES OF PARTNERSHIP INTEREST All interests in the Partnership, including contributions by the General Partners, pursuant to Section 4.3 and by the Limited Partners, pursuant to Section 5.3, shall be expressed in units of participation herein referred to as "Shares" (which term includes fractional Shares). Each Share shall represent an equal proportionate interest in the income and assets of the Partnership with each other Share outstanding. 7. PURCHASE AND EXCHANGE OF SHARES 7.1 Purchase of Shares. The Partnership may offer Shares on a continuing basis to investors. Except for the initial purchase of Shares by the initial Limited Partner and the General Partners, all Shares issued shall be issued and sold at the Net Asset Value (plus such sales charge or other charge as may be applicable to the purchase of the Shares) next computed after receipt of a purchase order in accordance with the Partnership's Registration Statement in effect at the time the order is received. Only investors who agree to be admitted, and who are eligible for admission, as Limited Partners pursuant to Section 5.2 shall be eligible to purchase Shares (unless such investor has already been admitted as a Partner). Orders for the purchase of Shares shall be accepted on any day that the Partnership's Transfer Agent is open for business (which shall normally be limited to those days when the New York Stock Exchange is open for business). The form in which purchase orders may be presented shall be as set forth in the Partnership's Registration Statement in effect at the time the order is received. The Managing General Partners on behalf of the Partnership reserve the right to reject any specific order and to suspend the Partnership's offering of new Shares at any time. Payment for all Shares must be made in U.S. dollars. 7.2 Net Asset Value. The Net Asset Value per Share of the Partnership shall be determined as of the close of the New York Stock Exchange on each day the Exchange is open for trading or as of such other time or times as the Managing General Partners may determine in accordance with the provisions of the 1940 Act. The Net Asset Value per Share shall be expressed in U.S. dollars and shall be computed by dividing the value of all the assets of the Partnership, less its liabilities, by the number of Shares outstanding (including Shares held by General Partners). Portfolio securities will be valued at their fair value using methods determined in good faith by the Managing General Partners in accordance with the 1940 Act. The Partnership may suspend the determination of the Net Asset Value during any period when the New York Stock Exchange is closed, other than customary weekend and holiday closings, during periods when trading on the Exchange is restricted as determined by the Securities and Exchange Commission (the "Commission") or during any emergency as determined by the Commission which makes it impracticable for the Partnership to dispose of its securities or value its assets, or during any other period permitted by order of the Commission for the protection of investors. 7.3 Exchange of Shares. Shares of the Partnership may be exchanged for (i.e., redeemed and reinvested in) shares of other investment companies as provided in the Partnership's Registration Statement in effect at the time of the exchange. 8. REDEMPTION OR REPURCHASE OF SHARES 8.1 Redemption of Shares. (a) The Partnership will redeem from any Partner all or any portion of the Shares owned by him provided that the Partner delivers to the Partnership or its designated agent notice of such redemption, stating the number of Shares to be redeemed, together with a properly endorsed Share certificate(s) where certificate(s) have been issued, in good order for transfer and in proper form as determined by the Managing General Partners and the Partnership's Transfer Agent. The Partner shall be entitled to payment in U.S. Dollars of the Net Asset Value of his Shares (as set forth in Section 7.2 hereof). Any such redemption shall be in accordance with Section 4 with respect to General Partners or Section 5 with respect to Limited Partners. Any distribution upon redemption pursuant to this Section 8.1 shall, in accordance with Section 10.4 below, constitute a return in full of the redeeming Partner's contribution attributable to the Shares which are redeemed regardless of the amount distributed with respect to such Shares. No consent of any of the Partners shall be required for the withdrawal or return of a Limited Partner's contribution. The Managing General Partners shall have sole discretion to determine the amount of cash to be distributed to a withdrawing Partner. All redemptions shall be recorded on the Partnership List, which shall be amended daily on each day that the Partnership's Transfer Agent is open for business. (b) The Managing General Partners may suspend redemptions and defer payment of the redemption price at any time, subject to the Rules and Regulations of the Securities and Exchange Commission. The Partnership may suspend or withhold redemptions or repurchases of shares (including exchanges pursuant to Section 7.3) or redeem shares for the purpose of satisfying any tax withholding obligations under Federal or state tax laws. 8.2 Payment for Redeemed Shares. Payments for Shares redeemed or repurchased by the Partnership will be made in U.S. Dollars within seven days after receipt by the Partnership's Transfer Agent of a written redemption request in proper form as specified in Section 8.1 above. If a redemption request is received with respect to Shares for which the Partnership has not yet received good payment, the Partnership may delay the mailing of a redemption check until such time as it has assured itself that good payment has been collected for the purchase of such Shares. 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE 9.1 Rights of Limited Partners. (a) As provided in the Partnership Act, the Limited Partners shall have the right to vote together with the General Partners in accordance with the provisions of this Section 9 only upon the following matters affecting the basic structure of the Partnership, which include the voting, approval, consent or similar rights required under the 1940 Act for voting security holders: (i) the right to remove General Partner(s); (ii) the right to elect new General Partner(s), except in the circumstance where the last remaining or surviving General Partner has been removed; (iii) the right to approve or terminate investment advisory, underwriting and distribution contracts and plans; (iv) the right to ratify or reject the appointment and to terminate the employment of the independent public accountants of the Partnership; (v) the right to approve or disapprove the sale of all or substantially all of the assets of the Partnership; (vi) the right to approve the incurrence of indebtedness by the Partnership other than in the ordinary course of its operations; (vii) the right to approve transactions in which the General Partners have an actual or potential conflict of interest with the Limited Partners or the Partnership; (viii) the right to terminate the Partnership, as provided in Section 12 hereof; (ix) the right to elect to continue the operations of the Partnership, except in circumstances where the last remaining or surviving General Partner has been removed; and (x) the right to amend this Partnership Agreement, including, without limitation, the right to approve or disapprove proposed changes in the investment and operating limitations set forth in Section 3.3 and the right to approve or disapprove proposed changes in the nature of the Partnership's activities as such activities are described herein; provided, however, that no such amendment shall conflict with the 1940 Act so long as the Partnership intends to remain registered thereunder, nor affect the liability of the General Partners without their consent nor the limited liability of the Limited Partners as provided under Section 5.8 above. Notwithstanding the foregoing, the right of Limited Partners to vote on matters affecting the basic structure of the Partnership as designated herein shall not be construed as a requirement that all such matters be submitted to the Limited Partners for their approval or be so approved to the extent such approval is not required by the Partnership Act, the 1940 Act or this Partnership Agreement. (b) Notwithstanding the foregoing, no vote, approval or other consent shall be required of the Limited Partners with respect to any matter not affecting the basic structure of the Partnership, including, without limitation, the following:(i) any change in the amount or character of the contribution of any Limited Partner; (ii) any change in the procedures for the purchase or redemption of Shares, (iii) the substitution or deletion of a Limited Partner; (iv) the admission of any additional Limited Partner; (v) the retirement, resignation, death or incompetency of a Managing General Partner; (vi) any addition to the duties or obligations of the General Partners, or any reduction in the rights or powers granted to the General Partners herein, for the benefit of the Limited Partners; (vii) the correction of any false or erroneous statement, or change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners, in this Partnership Agreement; (viii) the addition of any omitted provision or amendment of any provision to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof; or (ix) such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership. (c) The Limited Partners shall have no right or power to cause the termination and dissolution of the Partnership except as set forth in this Partnership Agreement. No Limited Partner shall have the right to bring an action for partition against the Partnership. 9.2 Action of the Partners. Actions which require the vote of the Limited Partners under Section 9.1 of this Partnership Agreement shall be taken at a meeting of both the General and Limited Partners, or by consent without a meeting as provided in Section 9.10. All Partners' meetings shall be held at such place as the Managing General Partners shall designate. The Partners may vote at any such meeting in person or by proxy. 9.3 Meetings. Meetings of the Partnership for the purpose of taking any action which the Limited Partners are permitted to take under this Partnership Agreement may be called by a majority vote of the Managing General Partners or by Limited Partners representing 10% or more of the outstanding Shares. Written notice of such meeting shall be given in accordance with Section 9.4. 9.4 Notices. (a) Whenever Partners are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each Partner entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted, and no other business may be transacted. (b) Notice of a Partners' meeting or any report shall be given either personally or by mail or other means of written communication, addressed to the Partner at the address of the Partner appearing on the books of the Partnership or given by the Partner to the Partnership for the purpose of notice, or, if no address appears or is given, at the place where the principal executive office of the Partnership is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this subsection, executed by a General Partner, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the Partner at the address of the Partner appearing on the books of the Partnership is returned to the Partnership marked to indicate that the notice or report to the Partner could not be delivered at such address, all future notices or reports shall be deemed to have been duly given without further mailing if they are available for the Partner at the principal executive office of the Partnership for a period of one year from the date of the giving of the notice or report to all other Partners. (c) Upon written request to the General Partners by any person entitled to call a meeting of Partners, the General Partners immediately shall cause notice to be given to the Partners entitled to vote that a meeting will be held at a time requested by the person calling the meeting, not less than ten (10), nor more than sixty (60), days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person entitled to call the meeting may give the notice. 9.5 Validity of Vote for Certain Matters. Any Partner approval at a meeting, other than unanimous approval by those entitled to vote, with respect to the matters set forth in Section 9.1(a) shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice. 9.6 Adjournment. When a Partners' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Partner of record entitled to vote at the meeting in accordance with Section 9.4. 9.7 Waiver of Notice and Consent to Meeting. The transactions of any meeting of Partners, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All waivers, consents, and approvals shall be filed with the Partnership records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of the meeting, except when the person objects, at the beginning because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice of the meeting but not so included, if the objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any meeting of Partners need be specified in any written waiver of notice, except as provided in Section 9.6. 9.8 Quorum. The presence in person or by proxy of more than forty percent (40%) of the outstanding Shares on the record date for any meeting constitutes a quorum at such meeting. The Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by Partners holding a majority of the Shares then represented at such meeting (except as otherwise may be required by the 1940 Act or the Partnership Act). In the absence of a quorum, any meeting of Partners may be adjourned from time to time by the vote of a majority in interest of the Limited Partners represented either in person or by proxy, but no other business may be transacted except as provided in this Section 9.8. The Managing General Partners may adjourn such meeting to such time or times as determined by the Managing General Partners. 9.9 Required Vote. Any action which requires the vote of the Limited Partners may be taken by the General Partners with (i) the Majority Vote of the then outstanding Shares or (ii) if at a meeting, with a majority vote of those Shares present if the quorum requirements of Section 9.8 hereof have been satisfied (except as otherwise may be required by the 1940 Act or the Partnership Act); provided, however, that the admission of a General Partner shall require the affirmative vote of at least a majority of the then outstanding Shares, and provided further, that the admission of a General Partner or an election to continue the operations of the Partnership after a General Partner ceases to be a General Partner (other than by removal) when there is no remaining or surviving General Partner shall require the affirmative vote of all the Limited Partners. 9.10 Action by Consent Without a Meeting. Any action which may be taken at any meeting of the Partners may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by Partners having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting. In the event the Limited Partners are requested to consent on a matter without a meeting, each Partner shall be given notice of the matter to be approved in the same manner as described in Section 9.4. In the event any General Partner, or Limited Partners representing 10% or more of the outstanding Shares request a meeting for the purpose of discussing or voting on the matter, notice of such meeting shall be given in accordance with Section 9.4 and no action shall be taken until such meeting is held. Unless delayed in accordance with the provisions of the preceding sentence, any action taken without a meeting will be effective ten (10) days after the required minimum number of voters have signed the consent; however, the action will be effective immediately if the General Partners and Limited Partners representing at least 90% of the Shares of the Partners have signed the consent. 9.11 Record Date. (a) In order that the Partnership may determine the Partners of record entitled to notices of any meeting or to vote, or entitled to receive any distribution or to exercise any rights in respect of any other lawful action, the Managing General Partners, or Limited Partners representing more than 10% of the Shares then outstanding, may fix, in advance, a record date which is not more than sixty (60) or less than ten (10) days prior to the date of the meeting and not more than sixty (60) days prior to any other action. If no record date is fixed, the record date shall be determined as provided in the Partnership Act. (b) The determination of Partners of record entitled to notice of or to vote at a meeting of Partners shall apply to any adjournment of the meeting unless the Managing General Partners, or the Limited Partners who called the meeting, fix a new record date for the adjourned meeting, but the Managing General Partners, or the Limited Partners who called the meeting, shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. (c) Any Holder of a Share prior to the record date for a meeting shall be entitled to vote at such meeting, provided such person becomes a Partner prior to the date of the meeting. 9.12 Proxies. A Partner may vote at any meeting of the Partnership by a proxy executed in writing by the Partner. All such proxies shall be filed with the Partnership before or at the time of the meeting. The law of California pertaining to corporate proxies will be deemed to govern all Partnership proxies as if they were proxies with respect to shares of a California corporation. A proxy may be revoked by the person executing the proxy in a writing delivered to the Managing General Partners at any time prior to its exercise. Notwithstanding that a valid proxy is outstanding, powers of the proxy holder will be suspended if the person executing the proxy is present at the meeting and elects to vote in person. 9.13 Number of Votes. All Shares have equal voting rights. Each Partner shall have the right to vote the number of Shares standing of record in such Partner's name as of the record date set forth in the notice of meeting. 10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES 10.1 Fees of General Partners. As compensation for services rendered to the Partnership, each Managing General Partner may be paid a fee during each year, which fee shall be fixed by the Managing General Partners. All the General Partners shall be entitled to reimbursement of reasonable expenses incurred by them in connection with their performance of their duties as General Partners. Neither payment of compensation or reimbursement of expenses to a General Partner hereunder nor payment of fees to any Affiliate of a General Partner for the performance of services to the Partnership shall be deemed a distribution for purposes of Section 10.2, nor shall any such payment affect such person's right to receive any distribution to which he would otherwise be entitled as a Holder of Shares. 10.2 Distributions of Income and Gains. Subject to the provisions of the Partnership Act and the terms of Section 10.4 hereof, the Managing General Partners in their sole discretion shall determine the amounts, if any, to be distributed to Holders of Shares, the record date for purposes of such distributions and the time or times when such distributions shall be made. Distributions of income may be in cash (U.S. Dollars) or in additional full and fractional Shares of the Partnership, at the option of the Holder of Shares, valued at the Net Asset Value on the record date, which amount may be less than the offering price to the extent it includes any sales charges. With respect to capital gains, the Managing General Partners may determine at least annually what portion, if any, of the Partnership's capital gains will be distributed and any such distribution may be in cash or in additional full and fractional Shares of the Partnership at the Net Asset Value on the record date. Notwithstanding the foregoing, the Managing General Partners shall not be required to make any distribution of income or capital gains for any taxable year. The Managing General Partners may require that such distributions be reinvested in additional shares of the Partnership, determine that no withdrawal should be made from an account, or institute withholding of taxes pursuant to Federal or state tax laws on distributions to the extent required by law. 10.3 Allocation of Income, Gains, Losses, Deductions and Credits. The net income, gains, losses, deductions and credits of the Partnership shall be allocated equally among the outstanding Shares of the Partnership on a regular basis to be determined by the Managing General Partners. The net income earned by the Partnership shall consist of the interest accrued on portfolio securities, less expenses, since the most recent determination of income. Original issue discount will be amortized as an income item. Market discount and premiums will be treated as capital items except as otherwise required for Federal income tax purposes. Expenses of the Partnership will be accrued on a regular basis to be determined by the Managing General Partners. A Holder of a Share shall be allocated the proportionate part of such items actually realized by the Partnership for each such full accrual period during which such Share was owned by such Holder. A person shall be deemed to be a Holder of a Share on a specific day if he is the record holder of such Share on such day (regardless of whether or not such record holder has yet been admitted as a Partner). 10.4 Returns of Contributions. Except upon dissolution of the Partnership by expiration of its terms or otherwise pursuant to Section 12 hereof (which shall be the time for return to each Partner of the value of the Shares acquired by his contributions, subject to the priorities therein), and except upon redemption of Shares of the Partnership as provided in Section 8, no Partner has the right to demand return of any part of his contribution. The Managing General Partners may, however, from time to time, elect to permit partial returns of the value of the Shares acquired by his contributions to Holders of Shares, provided that: (a) all liabilities of the Partnership to persons other than General and Limited Partners have been paid or, in the good faith determination of the Managing General Partners, there remains property of the Partnership sufficient to pay them; and (b) the Managing General Partners cause the Partnership List to be amended to reflect a reduction in contributions. In the event that the Managing General Partners elect to make a partial return of the value of Shares acquired by contributions to Holders of Shares, such distribution shall be made pro rata to all of the Holders of Shares in accordance with the number of Shares held by each. Each General and Limited Partner, by becoming such, consents to any such pro rata distribution therefore or thereafter duly authorized and made in accordance with such provisions and to any distribution through redemption of Shares pursuant to Section 8 above. 10.5 Capital Accounts. In addition to any capital accounts required to be maintained for accounting purposes in accordance with generally accepted accounting principles, the Partnership shall maintain two Capital Accounts for each Partner, one for book purposes and the other for tax purposes. Each such Capital Account shall be maintained in accordance with the requirements of Treasury Regulations Section 1.704-1(b). Each such Capital Account shall be credited with the Partner's capital contributions and share of profits, shall be charged with such Partner's share of losses, distributions and withholding taxes (if any) and shall otherwise appropriately reflect transactions of the Partnership and the Partners. At the end of each day, the book Capital Accounts of all Partners shall be adjusted to reflect unrealized appreciation or depreciation in the value of the Partnership's assets which accrued on that day. Further adjustments shall then be made to reflect any purchases and redemptions of Shares by the Partners. The intent of these adjustments is to achieve consistency and equivalence between book Capital Accounts and the Net Asset Value per Share used to determine the value of the Shares purchased, redeemed or liquidated in accordance with industry practice for investment partnerships such as the Partnership. Adjustments to tax Capital Accounts to take into account allocations of gains and losses realized by the Partnership for tax purposes shall be made in the manner described in Section 10.6. A Substituted Limited Partner shall be deemed to succeed to the book and tax Capital Accounts of the Partner whom such Substituted Limited Partner replaced. 10.6 Allocations for Tax Purposes. (a) General. For each fiscal year, items of income, deduction, loss or credit from normal operations (other than from the disposition or deemed disposition of assets of the Partnership) shall be allocated for income tax purposes among the Partners in proportion to the amounts distributed to them during such year pursuant to Sections 10.3 and 10.4 hereof. The Partners' tax Capital Accounts shall be adjusted to reflect allocations of such items of income, deduction, loss or credit. (b) Special Allocations. Allocations of gains and losses from the disposition or deemed disposition of assets of the Partnership to Partners for tax purposes shall be made in accordance with the following method which is intended to ensure that allocations for tax purposes reflect the economic experience of the Partners with respect to their interests in the Partnership: (i) With respect to each Partner, a daily account of unrealized appreciation/depreciation and realized gain/loss shall be maintained. Each day's net unrealized appreciation/depreciation in the assets of the Partnership and each day's net realized gains/losses of the Partnership shall be allocated to the Partners in proportion to their book Capital Account balances at the beginning of such day. Any entry of realized gain or loss into any Partner's account for net realized gains/losses shall result in an equal and offsetting adjustment to the Partner's account for net unrealized appreciation/ depreciation for that day. Purchases of Shares and partial or complete redemptions of Shares shall be regarded as occurring at the end of each day, after entries and adjustments in the Partners' accounts for net unrealized appreciation/depreciation and net realized gains/losses have been made. The amounts for each Partner's share of net unrealized appreciation/depreciation and net realized gains/losses, together with adjustments made to reflect purchases or redemptions of Shares, shall be combined to arrive at each Partner's ending book Capital Account balance for the day. (ii) At the end of each year, the daily amounts of net unrealized appreciation/depreciation and net realized gains/losses shall be aggregated to arrive at a total amount for net unrealized appreciation/depreciation and a total amount for net realized gains/losses for each Partner for the year. These two amounts shall be combined to arrive at each Partner's "Investment Experience." Net gains realized by the Partnership shall be allocated among the Partners whose Investment Experience is positive, and each such Partner's allocable share of such gains for tax purposes shall be equal to a fraction the numerator of which is the Partner's Investment Experience and the denominator of which is the total Investment Experience of the Partners whose Investment Experience is positive. Net losses realized by the Partnership shall be allocated among the Partners whose Investment Experience is negative, and each such Partner's allocable share of such losses shall be computed in the manner described in the previous sentence, except that the word "negative" shall be substituted for the word "positive." Each Partner's tax Capital Account shall then be adjusted to reflect such Partner's allocable share of Partnership realized gains or losses for such year. The Partners' accounts for unrealized appreciation/depreciation and net realized gains/losses, adjusted appropriately to reflect the allocation of the net gain realized or the net loss realized, shall be carried over to the next year. (iii) In the event of a partial or complete redemption of Shares which results in a distribution in excess of a Partner's tax Capital Account, the Partnership may make an election to adjust the basis of Partnership assets under Section 754 of the Code, and the Partnership may increase the tax basis of its Partnership assets in accordance with Section 743(b) and 755 of the Code by the difference between the amount of the distribution made to the redeeming Partner in redemption of his Shares and his tax Capital Account. (c) Minimum Gain Chargeback. A Partner's share of Minimum Gain shall be computed in accordance with Treasury Department Regulations Section 1.704-1(b)(4)(iv)(f). In the event that there is a net decrease in the Partnership's Minimum Gain during any taxable year and any Partner has a negative book Capital Account (after taking into account reductions for items described in paragraphs (4), (5) and (6) of book Treasury Department Regulations Section 1.704-1(b)(2)(ii)(d)) and such negative balance exceeds the sum of (i) the amount that such Partner is obligated to restore upon liquidation of the Partnership and (ii) such Partner's share of the Minimum Gain at the end of such taxable year, such Partner shall be allocated Partnership profits for such year (and, if necessary, subsequent years) in an amount necessary to eliminate such excess negative balance as quickly as possible. Allocations of profits to such Partners having such excess negative book Capital Accounts shall be made in proportion to the amounts of such excess negative book Capital Account balances. The term "Minimum Gain" means the excess of the outstanding balances of all nonrecourse indebtedness which is secured by property of the Partnership over the adjusted basis of such property for federal income tax purposes, as computed in accordance with the provisions of Treasury Department Regulations Section 1.704-1(b)(4)(iv)(c). (d) Qualified Income Offset. Notwithstanding anything in Sections 10.3 and 10.6 to the contrary, in the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Department Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(d)(5) or 1.704- 1(b)(2)(ii)(d)(6), items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the deficit balance in his book Capital Account (in excess of (i) the amount he is obligated to restore upon liquidation of the Partnership or upon liquidation of his interest in the Partnership and (ii) his share of the Minimum Gain) created by such adjustments, allocations or distributions as quickly as possible. 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment. Except for redemptions as provided in Section 8, a Partner shall not have the right to sell, transfer or assign his Shares to any other person, but may pledge them as collateral. 11.2 Rights of the Holders of Shares as Collateral or Judgment Creditor. In the event that any person who is holding Shares as collateral or any judgment creditor becomes the owner of such Shares due to foreclosure or otherwise, such person shall not have the right to be substituted as a Limited Partner, but shall only have the rights, upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Limited Partner, set forth immediately below: (a) To redeem the Shares in accordance with the provisions of Section 8 hereof; and (b) To receive any subsequent distributions made with respect to such Shares. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his ownership of Shares, the owner shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. Such owner shall be liable to return any excess distributions pursuant to Section 5.8(a). However, although such owner shall own an equity interest in the Partnership in the form of Shares, such owner shall have none of the rights or obligations of a Substituted Limited Partner unless and until he is admitted as such. 11.3 Death, Incompetency, Bankruptcy or Termination of the Existence of a Partner. In the event of the death or an adjudication of incompetency or bankruptcy of an individual Partner (or, in the case of a Partner that is a corporation, association, partnership, joint venture or trust, an adjudication of bankruptcy, dissolution or other termination of the existence of such Partner), the successor in interest of such Partner (including without limitation the Partner's executor, administrator, guardian, conservator, receiver or other legal representative), upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, shall have the rights set forth below: (a) to redeem the Shares of the Partner in accordance with the provisions of Section 8 hereof; (b) to receive any subsequent distributions made with respect to such Shares; and (c) to be substituted as a Limited Partner upon compliance with the conditions of the admission of a Limited Partner as provided in Sections 5 and 11 hereof. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, the successor in interest shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. 11.4 Substituted Limited Partners. (a) A person shall not become a Substituted Limited Partner unless the Managing General Partners consent to such substitution (which consent may be withheld in their absolute discretion) and receive such instruments and documents (including those specified in Section 5.2), and a reasonable transfer fee as the Managing General Partners shall require. (b) The original Limited Partner shall cease to be a Limited Partner, and the person to be substituted shall become a Substituted Limited Partner, as of the date on which the person to be substituted has satisfied the requirements set forth above and as of the date the Partnership List is amended to reflect his admission as a Substituted Limited Partner. The Managing General Partners agree to cause such amendments to the Partnership List to be processed daily on each day that its Transfer Agent shall be open for business. Thereafter the original Limited Partner shall have no rights or obligations with respect to the Partnership insofar as the Shares transferred to the Substituted Limited Partner are concerned other than liabilities which the original Limited Partner may have had to the Partnership on the date of transfer, and the Substituted Limited Partners shall be liable to return any excess distributions pursuant to Section 5.8(a) hereof. (c) Unless and until a person becomes a Substituted Limited Partner, his status and rights shall be limited to the rights of a Holder of Shares pursuant to Sections 11.3(a) and 11.3(b). A Holder of Shares who does not become a Substituted Limited Partner shall have no right to inspect the Partnership's books or to vote on any of the matters on which a Limited Partner would be entitled to vote. A Holder of Shares who has become a Substituted Limited Partner has all the rights and powers, and is subject to the restrictions and liabilities of a Limited Partner under this Agreement. (d) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to and bound by the provisions of this Partnership Agreement as if originally a party to this Partnership Agreement. 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP 12.1 Dissolution. The Partnership shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (a) the stated term of the Partnership has expired unless the Partners by a Majority Vote have previously amended the Partnership Agreement to state a different term; (b) the Partnership has disposed of all of its assets; (c) A General Partner has ceased to be a General Partner and the remaining General Partners do not elect to continue the operations of the Partnership; (d) There is only one General Partner remaining and such General Partner has ceased to be a General Partner as set forth in Section 4.8; provided, however, that if the last remaining or surviving General Partner ceases to be a General Partner other than by removal, the Limited Partners may agree by unanimous vote to continue the operations of the Partnership and to admit one or more General Partners in accordance with the Partnership Agreement; (e) a decree of judicial dissolution has been entered by a court of competent jurisdiction; or (f) the Partners by a Majority Vote have voted to dissolve the Partnership. 12.2 Liquidation. (a) In the event of dissolution as provided in Section 12.1, the assets of the Partnership shall be distributed as follows: (i) all of the Partnership's debts and liabilities to persons (including Partners to the extent permitted by law) shall be paid and discharged, and any reserve deemed necessary by the Managing General Partners for the payment of such debts shall be set aside; and (ii) the balance of the assets of the Partnership (and any reserves not eventually used to satisfy debts of the Partnership) shall be liquidated and distributed pro rata to the Partners in accordance with the number of Shares held by each. (b) Upon dissolution, each Partner shall look solely to the assets of the Partnership for the return of his capital contribution and shall be entitled to receive only a distribution of a pro rata share of Partnership property and assets, as provided in Section 12.2 (a). If the Partnership property remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the capital contribution of each Limited Partner, such Limited Partner shall have no recourse against any General Partner, the assets of any other partnership of which any General Partner is a partner, or any other Limited Partner. The winding up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the Managing General Partners, who are authorized to do any and all acts and things authorized by law for these purposes. In the event of dissolution where there is no remaining General Partner, and there is a failure to appoint a new General Partner, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person as may be selected by Majority Vote, which person is hereby authorized to do any and all acts and things authorized by law for these purposes. 12.3 Termination. Upon the completion of the distribution of Partnership assets as provided in this Section and the termination of the Partnership, the General Partner(s) or other person acting as liquidator (or the Limited Partners, if necessary) shall cause the Certificate of Limited Partnership of the Partnership to be cancelled and shall take such other actions as may be necessary to legally terminate the Partnership. 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS 13.1 Books and Records. (a) The Partnership shall continuously maintain an office in the State of California, at which the following books and records shall be kept: (i) A Partnership List (or copy thereof) which shall be a current list of the full name and last known business or residence address of each Partner, set forth in alphabetical order together with the contribution and the share in profits and losses of each Partner, which list shall separately identify the interests of General and Limited Partners. (ii) A copy of the Certificate of Limited Partnership and all certificates of amendments thereto, together with executed copies of any powers of attorney pursuant to which any such certificate has been executed. (iii) Copies of the Partnership's Federal, state and local income tax or information returns and reports, if any, for the six most recent taxable years. (iv) Copies of this Partnership Agreement and all amendments thereto. (v) Financial statements of the Partnership for the six most recent fiscal years. (vi) The Partnership's books and records for at least the current and past three fiscal years. (b) The Partnership shall also maintain at its principal office such additional books and records as are necessary for the operation of the Partnership. 13.2 Limited Partners' Rights to Records. (a) Upon the request of a Limited Partner, the Managing General Partners shall promptly deliver to the Limited Partner, at the Partnership's expense, a copy of the items set forth in Section 13.1(a)(i), (ii) and (iv), provided, however, that such books and records and the information contained therein shall be treated as confidential and that such access shall be for proper Partnership purposes only and not for the private or commercial use of any Partner and further provided that the Partnership may require a Partner to enter into an undertaking to that effect. (b) Each Limited Partner shall have the right upon reasonable request to each of the following: (i) To inspect and copy during normal business hours, at the Limited Partner's expense, any of the Partnership's records required to be kept pursuant to the Partnership Act. (ii) To obtain from the Managing General Partners promptly after becoming available, at the Limited Partner's expense, a copy of any Federal, state and local income tax or information returns required to be filed by the Partnership for each year. (c) The Managing General Partners shall promptly furnish to a Limited Partner a copy of any amendment to this Partnership Agreement executed by the Managing General Partners pursuant to a power of attorney from the Limited Partner. (d) The Managing General Partners shall send to each Partner within ninety (90) days after the end of each taxable year such information as is necessary to complete Federal and state income tax or information returns or such information as is required by the Tax Code. (e) At any time that the Partnership shall have more than 35 Limited Partners: (i) The Managing General Partners shall cause an annual report to be sent to each of the Partners not later than 120 days after the close of the Partnership's fiscal year. That report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year. (ii) Limited Partners representing at least 5% of the outstanding Shares of the Partnership may make a written request to the Managing General Partners for an income statement of the Partnership for the initial three-month, six- month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the Partnership as of the end of that period. The statement shall be delivered or mailed to the Limited Partners within thirty (30) days thereafter. (iii) The financial statements referred to in this subsection shall be accompanied by the report thereon, if any, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the Managing General Partners that such financial statements were prepared without audit from the books and records of the Partnership. (f) The Managing General Partners shall cause to be transmitted to each Partner such other reports and information as shall be required by the 1940 Act, the Partnership Act or the Tax Code. 13.3 Accounting Basis and Fiscal Year. The Partnership's books and records (i) shall be kept on a basis chosen by the Managing General Partners in accordance with the accounting methods followed by the Partnership for Federal income tax purposes and otherwise in accordance with generally accepted accounting principles applied in a consistent manner, (ii) shall reflect all Partnership transactions, (iii) shall be appropriate and adequate for the Partnership's business and for the carrying out of all provisions of this Partnership Agreement, and (iv) shall be closed and balanced at the end of each Partnership fiscal year. The fiscal year of the Partnership shall be the calendar year. 13.4 Tax Returns. The Managing General Partners, at the Partnership's expense, shall cause to be prepared any income tax or information returns required to be made by the Partnership and shall further cause such returns to be timely filed with the appropriate authorities. 13.5 Filings with Regulatory Agencies. The Managing General Partners, at the Partnership's expense, shall cause to be prepared and timely filed with appropriate Federal and state regulatory and administrative bodies, all reports required to be filed with such entities under then current applicable laws, rules and regulations. 13.6 Tax Matters and Notice Partner. The Managing General Partners shall designate one or more General Partners as the "Tax Matters Partner" and the "Notice Partner" of the Partnership in accordance with Sections 6231(a)(7) and (8) of the Tax Code, and each such Partner shall have no personal liability arising out of his good faith performance of his duties in such capacity. The "Tax Matters Partner" is authorized, at the Partnership's sole cost and expense, to represent and to retain legal counsel and accounting assistance to represent the Partnership and each Limited Partner in connection with all examinations of the Partnership affairs by tax authorities, including any resulting administrative and judicial proceedings. Each Limited Partner agrees to cooperate with the Managing General Partners and to do or refrain from doing any and all things reasonably required by the Managing General Partners to conduct such proceeding. The Managing General Partners shall have the right to settle any audits without the consent of the Limited Partners. 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS 14.1 Amendments in General. Except as otherwise provided in this Partnership Agreement, the Partnership Agreement may be amended only by the General Partners. 14.2 Amendments Without Consent of Limited Partners. In addition to any amendments otherwise authorized herein and except as otherwise provided, amendments may be made to this Partnership Agreement from time to time by the General Partners without the consent of any of the Limited Partners, including, without limitation, amendments: (i) to reflect the retirement, resignation, death or incompetency of a Managing General Partner; (ii) to add to the duties or obligations of the General Partners, or to surrender any right or power granted to the General Partners herein, for the benefit of the Limited Partners; (iii) to correct any false or erroneous statement, or to make a change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners; (iv) to supply any omission or to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or (v) to make such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership, as now or hereafter in effect. 14.3 Amendments Needing Consent of Affected Partners. Notwithstanding any other provision of this Partnership Agreement, without the consent of the Partner or Partners to be affected by any amendment to this Agreement, this Agreement may not be amended to (i) convert a Limited Partner's interest into a General Partner's interest, (ii) modify the limited liability of a Limited Partner, (iii) alter the interest of a Partner in income, gain, loss, deductions, credits, and distributions other than by purchase or redemption of Shares, or (iv) increase, add or alter any obligation of any Limited Partner. 14.4 Amendments to Certificate of Limited Partnership. (a) The Managing General Partners shall cause to be filed with the Secretary of State, within thirty (30) days after the happening of any of the following events, an amendment to the Certificate of Limited Partnership reflecting the occurrence of any of the following events: (i) A change in the name of the Partnership. (ii) A change in either of the following: (A)The street address of the Partnership's principal executive office. (B)If the principal executive office is not in California, the street address of an office in California. (iii) A change in the address of or the withdrawal of any of the General Partners, or a change in the address of the agent for service of process, unless a corporate agent is designated, or appointment of a new agent for service of process. (iv) The admission of a new General Partner and that Partner's address. (v) The discovery by the General Partner of any false or erroneous material statement contained in the Certificate of Limited Partnership. (b) Any Certificate of Limited Partnership filed or recorded in jurisdictions other than California shall be amended as required by applicable law. (c) The Certificate of Limited Partnership may also be amended at any time in any other manner deemed appropriate by the General Partner. 14.5 Amendments After Change of Law. This Agreement and any other Partnership documents may be amended and refiled, if necessary, by the Managing General Partners without the consent of the Limited Partners if there occurs any change that permits or requires an amendment of this Agreement under the Act or of any other Partnership document under applicable law, so long as no Partner is adversely affected (or consent is given by such Partner). 15. MISCELLANEOUS PROVISIONS 15.1 Notices. (a) Any written notice, offer, demand or communication required or permitted to be given by any provision of this Partnership Agreement, unless otherwise specified herein, shall be deemed to have been sufficiently given for all purposes if delivered personally to the party to whom the same is directed or if sent by first class mail addressed (i) if to a General Partner, to the principal place of business and office of the Partnership specified in this Agreement and (ii) if to a Limited Partner, to such Limited Partner's address as set forth in the Partnership List; provided, however, that notice given by any other means shall be deemed sufficient if actually received by the party to whom it is directed. (b) Any such notice that is sent by first class mail shall be deemed to be given two (2) days after the date on which the same is mailed. (c) The Managing General Partners may change the Partnership's address for purposes of this Partnership Agreement by giving written notice of such change to the Limited Partners, and any Limited Partner may change his address for purposes of this Partnership Agreement by giving written notice of such change to the Managing General Partners, in the manner herein provided for the giving of notices. 15.2 Section Headings. The Section headings in this Partnership Agreement are inserted for convenience and identification only and are in no way intended to define or limit the scope, extent or intent of this Partnership Agreement or any of the provisions hereof. 15.3 Construction. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. If any language is stricken or deleted from this Partnership Agreement, such language shall be deemed never to have appeared herein and no other implication shall be drawn therefrom. The language in all parts of this Partnership Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the General Partners or the Limited Partners. 15.4 Severability. If any covenant, condition, term or provision of this Partnership Agreement is illegal, or if the application thereof to any person or in any circumstance shall to any extent be judicially determined to be invalid or unenforceable, the remainder of this Partnership Agreement, or the application of such covenant, condition, term or provision to persons or in circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each remaining covenant, condition, term and provision of this Partnership Agreement shall be valid and enforceable to the fullest extent permitted by law. 15.5 Governing Law. This Partnership Agreement shall be construed and enforced in accordance with, and governed by, California law. 15.6 Counterparts. This Partnership Agreement may be executed in one or more counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same Partnership Agreement. 15.7 Entire Agreement. This Partnership Agreement and the separate subscription agreements of each Limited Partner and General Partner constitute the entire agreement of the parties as to the subject matter hereof. All prior agreements among the parties as to the subject matter hereof, whether written or oral, are merged herein and shall be of no force or effect. This Partnership Agreement cannot be changed, modified or discharged orally but only by an agreement in writing. There are no representations, warranties, or agreements other than those set forth in this Partnership Agreement and such separate subscription agreements, if any. 15.8 Cross-References. All cross-references in this Partnership Agreement, unless specifically directed to another agreement or document, refer to provisions in this Partnership Agreement. 15.9 Power of Attorney to the General Partners. (a) Each Partner hereby makes, constitutes and appoints each Managing General Partner and any person designated by the Managing General Partners, with full substitution, his agent and attorney-in-fact in his name, place and stead, to take any and all actions and to make, execute, swear to and acknowledge, amend, file, record and deliver the following documents and any other documents deemed by the Managing General Partners necessary for the operations of the Partnership: (i) any Certificate of Limited Partnership or Certificate of Amendment thereto, required or permitted to be filed on behalf of the Partnership, and any and all certificates as necessary to qualify or continue the Partnership as a limited partnership or partnership wherein the Limited Partners thereof have limited liability in the states where the Partnership may be conducting activities, and all instruments which effect a change or modification of the Partnership in accordance with this Partnership Agreement; (ii) this Partnership Agreement and any amendments thereto in accordance with this Partnership Agreement; (iii) any other instrument which is now or which may hereafter be required or advisable to be filed for or on behalf of the Partnership; (iv) any document which may be required to effect the continuation of the Partnership, the admission of an additional Limited Partner or Substituted Limited Partner, or the dissolution and termination of the Partnership (provided such continuation, admission or dissolution and termination is in accordance with the terms of this Partnership Agreement), or to reflect any reductions or additions in the amount of the contributions of Partners, in each case having the power to execute such instruments on his behalf, whether the undersigned approved of such action or not; (v) any document containing any investment representations and/or representations relating to citizenship, residence and tax status required by any state or Federal law or regulation in connection with an investment by the Partnership; and (iv) any tax elections. (b) This Power of Attorney is a special Power of Attorney coupled with an interest, and shall not be revoked and shall survive the transfer by any Limited Partner of all or part of his interest in the Partnership and, being coupled with an interest, shall survive the death or disability or cessation of the existence as a legal entity of any Limited Partner; except that where the successor in interest has been approved by said attorney for admission to the Partnership as a Substituted Limited Partner, this Power of Attorney shall survive the transfer for the sole purpose of enabling said attorney to execute, acknowledge and file any instrument necessary to effectuate such substitution. (c) Each Limited Partner hereby gives and grants to his said attorney under this Power of Attorney full power and authority to do and perform each and every act and thing whatsoever requisite, necessary or appropriate to be done in or in connection with this Power of Attorney as fully to all intents and purposes as he might or could do if personally present, hereby ratifying all that his said attorney shall lawfully do or cause to be done by virtue of this Power of Attorney. (d) The existence of this Power of Attorney shall not preclude execution of any such instrument by the undersigned individually on any such matter. A person dealing with the Partnership may conclusively presume and rely on the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. (e) The appointment of each Managing General Partner and each designee of that General Partner as attorney-in- fact pursuant to this power of attorney automatically shall terminate as to such person at such time as he ceases to be a General Partner and from such time shall be effective only as to the substitute General Partner admitted in accordance with this Partnership Agreement and his designees. 15.10 Further Assurances. The Limited Partners will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purposes of this Partnership Agreement. 15.11 Successors and Assigns. Subject in all respects to the limitations on transferability contained herein, this Partnership Agreement shall be binding upon, and shall inure to the benefit of, the heirs, administrators, personal representatives, successors and assigns of the respective parties hereto. 15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Partnership and during the period of its liquidation following any dissolution, any right that he may have to maintain any action for partition with respect to any of the assets of the Partnership. 15.13 Creditors. None of the provisions of this Partnership Agreement shall be for the benefit of or enforceable by any of the creditors of the Partnership or the Partners. 15.14 Remedies. The rights and remedies of the Partners hereunder shall not be mutually exclusive, and the exercise by any Partner of any right to which he is entitled shall not preclude the exercise of any other right he may have. 15.15 Custodian. All assets of the Partnership shall be held by a custodian meeting the requirements of the 1940 Act, and may be registered in the name of the Partnership or such custodian or nominee. The terms of the custodian agreement shall be determined by the Managing General Partners. 15.16 Use of Name "Franklin. "Franklin Partners, Inc., as the initial Non-Managing General Partner, on behalf of its parent, Franklin Resources, Inc., hereby consents to the use by the Partnership of the name "Franklin" as part of the Partnership's name; provided, however, that such consent shall be conditioned upon the employment of Franklin Resources, Inc. or one of its affiliates as an investment adviser of the Partnership. The name "Franklin" or any variation thereof may be used from time to time in other connections and for other purposes by Franklin Resources, Inc. and its affiliates and other investment companies that have obtained consent to use the name "Franklin." Franklin Resources, Inc. and its affiliates shall have the right to require the Partnership to cease using the name "Franklin" as part of the Partnership's name if the Partnership ceases, for any reason, to employ Franklin Resources, Inc. or one of its affiliates as its investment adviser. Future names adopted by the Partnership for itself, insofar as such names include identifying words requiring the consent of Franklin Resources, Inc. or one of its affiliates, shall be the property of Franklin Resources, Inc. and its affiliates and shall be subject to the same terms and conditions. 15.17 Authority. Each individual executing this Agreement on behalf of a partnership, corporation, or other entity warrants that he is authorized to do so and that this agreement will constitute the legal binding obligation of the entity which he represents. 15.18 Signatures. The signature of a Managing General Partners or an Officer or agent of the Partnership duly appointed by the Managing General Partners shall be sufficient to bind the Partnership to any agreement or on any document, including, but not limited to, documents drawn or agreements made in connection with the acquisition or disposition of any assets. 15.19 Arbitration. The parties hereby submit all controversies, claims and matters of difference to arbitration before a single arbitrator in San Francisco, California, according to the rules and practices of the American Arbitration Association from time to time in force. This submission and agreement to arbitrate shall be specifically enforceable. Without limiting the generality of the foregoing, the following shall be considered controversies for this purpose: (a) all questions relating to the breach of any obligation, warranty, agreement or condition hereunder; (b) failure of any party to deny or reject a claim or demand of any other party; and (c) all questions as to whether the right to arbitrate any question exists. Arbitration may proceed in the absence of any party if written notice (pursuant to the American Arbitration Association's rules and regulations) of the proceedings has been given to such party. The parties agree to abide by all awards rendered in such proceedings. Such awards shall be final and binding on all parties to the extent and in the manner provided by California statute. All awards may be filed with the Clerk of the Superior Court in San Francisco, California, as a basis of judgment and of the issuance of execution for its collection and, at the election of the party making such filing, with the clerk of one or more other courts, state or Federal, having jurisdiction over the party against whom such an award is rendered or his property. FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP Dated May 1, 1987 as amended April 28, 1988 and May 1, 1991 APPENDIX "B" TABLE OF CONTENTS Page 1. GENERAL PROVISIONS 1.1 Formation B-2 1.2 Name and Place of Business B-2 1.3 Term B-2 1.4 Agent for Service of Process B-2 1.5 Certificate of Limited Partnership B-2 1.6 Other Acts/Filings B-2 2. DEFINITIONS B-2 2.1 Affiliate B-2 2.2 Capital Account B-2 2.3 General Partner B-2 2.4 Holder of Record or Holder of a Share B-3 2.5 Limited Partner B-3 2.6 Majority Vote B-3 2.7 Managing General Partner B-3 2.8 Net Asset Value (per Share) B-3 2.9 Non-Managing General Partner B-3 2.10 Officers B-3 2.11 Persons B-3 2.12 Partners B-3 2.13 Partnership B-3 2.14 Partnership Act B-3 2.15 Partnership Group B-3 2.16 Partnership List B-3 2.17 Registration Statement B-3 2.18 Secretary of State B-3 2.19 Share (including fractional Shares) B-3 2.20 Substituted Limited Partner B-3 2.21 Tax Code B-3 2.22 Transfer Agent B-3 2.23 1940 Act B-4 3. ACTIVITIES AND PURPOSE B-4 3.1 Operating Policy B-4 3.2 Investment Objectives B-4 3.3 Investment and Operating Limitations B-4 3.4 Other Authorized Activities B-4 4. GENERAL PARTNERS B-5 4.1 Identity and Number B-5 4.2 Managing and Non-Managing General Partners B-5 4.3 General Partners' Contributions B-5 4.4 Management and Control B-6 4.5 Action by the Managing General Partners B-6 4.6 Limitations of the Authority of the Managing B-6 General Partners 4.7 Right of General Partners to Become Limited B-7 Partners 4.8 Termination of a General Partner B-7 4.9 Additional or Successor General Partners B-7 4.10 Liability to Limited Partners B-8 4.11 Assignment and Substitution B-8 4.12 No Agency B-8 4.13 Reimbursement and Compensation B-8 4.14 Indemnification B-8 5. LIMITED PARTNERS B-9 5.1 Identity of Limited Partners B-9 5.2 Admission of Limited Partners B-9 5.3 Contributions of the Limited Partners B-10 5.4 Additional Contributions of Limited Partners B-10 5.5 Use of Contributions B-10 5.6 Redemption by Limited Partners B-10 5.7 Minimum Contribution and Mandatory Redemption B-10 5.8 Limited Liability B-10 5.9 No Power to Control Operations B-11 5.10 Tax Responsibility B-11 6. SHARES OF PARTNERSHIP INTEREST B-11 7. PURCHASE AND EXCHANGE OF SHARES B-11 7.1 Purchase of Shares B-11 7.2 Net Asset Value B-11 7.3 Exchange of Shares B-12 8. REDEMPTION OR REPURCHASE OF SHARES B-12 8.1 Redemption of Shares B-12 8.2 Payment for Redeemed Shares B-12 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE B-12 9.1 Rights of Limited Partners B-12 9.2 Action of the Partners B-13 9.3 Meeting B-13 9.4 Notices B-13 9.5 Validity of Vote for Certain Matters B-14 9.6 Adjournment B-14 9.7 Waiver of Notice and Consent to Meeting B-14 9.8 Quorum B-14 9.9 Required Vote B-14 9.10 Action by Consent Without a Meeting B-15 9.11 Record Date B-15 9.12 Proxies B-15 9.13 Number of Votes B-15 10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES B-15 10.1 Fees of General Partners B-15 10.2 Distributions of Income and Gains B-16 10.3 Allocation of Income, Gains, Losses, Deductions and B-16 Credits 10.4 Returns of Contributions B-16 10.5 Capital Accounts B-16 10.6 Allocations for Tax Purposes B-17 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; B-18 SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment B-18 11.2 Rights of the Holders of Shares as Collateral or B-18 Judgment Creditor 11.3 Death, Incompetency, Bankruptcy or Termination of B-18 the Existence of a Partner 11.4 Substituted Limited Partners B-19 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP B-19 12.1 Dissolution B-19 12.2 Liquidation B-20 12.3 Termination B-20 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS B-20 13.1 Books and Records B-20 13.2 Limited Partners' Rights to Records B-21 13.3 Accounting Basis and Fiscal Year B-21 13.4 Tax Returns B-21 13.5 Filings with Regulatory Agencies B-21 13.6 Tax Matters and Notice Partner B-22 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS B-22 14.1 Amendments in General B-22 14.2 Amendments Without Consent of Limited Partners B-22 14.3 Amendments Needing Consent of Affected Partners B-22 14.4 Amendments to Certificate of Limited Partnership B-22 14.5 Amendments After Change of Law B-23 15. MISCELLANEOUS PROVISIONS B-23 15.1 Notices B-23 15.2 Section Headings B-23 15.3 Construction B-23 15.4 Severability B-23 15.5 Governing Law B-23 15.6 Counterparts B-23 15.7 Entire Agreement B-23 15.8 Cross-References B-24 15.9 Power of Attorney to the General Partners B-24 15.10 Further Assurances B-24 15.11 Successors and Assigns B-24 15.12 Waiver of Action for Partition B-25 15.13 Creditors B-25 15.14 Remedies B-25 15.15 Custodian B-25 15.16 Use of Name "Franklin" B-25 15.17 Authority B-25 15.18 Signatures B-25 15.19 Arbitration B-25 FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND (a California limited partnership) This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ("Partnership Agreement") is entered into as of this 1st day of May, 1987 by and among the undersigned individuals, as Managing General Partners; FRANKLIN PARTNERS, INC., a California corporation, as Non-Managing General Partner (collectively, the "General Partners"); and each of the persons identified on the Partnership List of the Partnership as limited partners (the "Limited Partners"). This Partnership Agreement amends and restates in its entirety the Agreement of Limited Partnership dated as of January 20, 1987. 1. GENERAL PROVISIONS 1.1 Formation. The parties hereby agree to continue the limited partnership (the "Partnership") under the terms and conditions set forth below pursuant to the California Revised Limited Partnership Act (the "Partnership Act"). 1.2 Name and Place of Business. The name of the Partnership is Franklin Tax-Advantaged High Yield Securities Fund (a California limited partnership), or such other name as shall be selected from time to time by the Managing General Partners upon notice to the Limited Partners. The principal place of business of the Partnership shall be 777 Mariners Island Boulevard, San Mateo, California 94404, or such other place or places as the Managing General Partners may deem necessary or desirable to the conduct of the Partnership's activities, including places or the conduct of activities relating to its investments, the location and holding of its assets, the execution of its portfolio transactions and other operations. 1.3 Term. The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership with the Secretary of State on January 27, 1987 and shall continue until the 31st day of December, 2050, unless terminated earlier in accordance with the provisions of this Partnership Agreement. 1.4 Agent for Service of Process. The agent for service of process on the Partnership in California is Murray L. Simpson, Esq. or such other eligible California resident individual or corporation qualified to act as an agent for service of process as the Managing General Partners shall designate. 1.5 Certificate of Limited Partnership. The Managing General Partners have caused a Certificate of Limited Partnership to be filed with the Secretary of State in accordance with the terms of the Partnership Act. 1.6 Other Acts/Filings. The Partners shall from time to time execute or cause to be executed all such certificates, fictitious business name statements, and other documents, and do or cause to be done all such filings, recordings, publishings, and other acts as the Managing General Partners may deem necessary or appropriate to comply with the requirements of law for the formation and operation of the Partnership in all jurisdictions in which the Partnership shall desire to conduct its activities. 2. DEFINITIONS When used in this Partnership Agreement the following terms shall have the meanings set forth below: 2.1 Affiliate. "Affiliate" shall mean: (i) any person directly or indirectly controlling, controlled by or under common control with another person; (ii) a person owning or controlling 10% or more of the outstanding securities of that other person; (iii) any officer, director or partner of that other person; and (iv) if that other person is an officer, director or partner, any company for which that person acts in any such capacity (person shall include any natural person, partnership, corporation, association or other legal entity). 2.2 Capital Accounts. The accounts maintained for each Partner in accordance with Section 10.5 hereof. 2.3 General Partner. Each of the initial General Partners designated in the Preamble and any other person or entity who shall hereafter become a General Partner. 2.4 Holder of Record or Holder of a Share. (a) a General Partner; (b) a Limited Partner if he or it has not redeemed or transferred all of his (its) Shares of the Partnership pursuant to Sections 8 or 11; (c) a purchaser of a Share or Shares of the Partnership who has made good payment to the Partnership and who has not redeemed all his Shares; or (d) the successor in interest of a Partner under Section 11. 2.5 Limited Partner. The original Limited Partner and all other persons who shall hereafter be admitted to the Partnership as additional Limited Partners or Substituted Limited Partners, except those persons who: (a) have redeemed all Shares of the Partnership owned by them and such redemption has been reflected in the Partnership List; or (b) have been replaced by a Substituted Limited Partner to the extent of their entire Limited Partnership Interest. Reference to a "Limited Partner" shall mean any one of the Limited Partners. 2.6 Majority Vote. The affirmative vote of the lesser of (i) 67% or more of the Shares represented at a meeting and entitled to vote if more than 50% of the then outstanding shares are present or represented by proxy, or (ii) more than 50% of the then outstanding Shares entitled to vote. 2.7 Managing General Partner. Each General Partner who is an individual. 2.8 Net Asset Value (per Share). The value (in U.S. Dollars) of a Share as determined in accordance with Section 7.2 hereof. 2.9 Non-Managing General Partner. Each General Partner that is not an individual (i.e., any General Partner that is a corporation, association, partnership, joint venture or trust). 2.10 Officers. Those persons designated by the Managing General Partners to perform administrative and operational functions on behalf of the Managing General Partners. 2.11 Person. An individual, partnership, joint venture, association, corporation or trust. 2.12 Partners. Collectively, the General Partners and the Limited Partners. "Partner" means any one of the Partners. 2.13 Partnership. The limited partnership created and continued by this Partnership Agreement. 2.14 Partnership Act. The California Revised Limited Partnership Act (Chapter 3 of Title 2 of the Corporations Code of California) as such Act may be amended from time to time. 2.15 Partnership Group. All other limited partnerships organized under the Partnership Act of which Franklin Resources, Inc. or any parent, subsidiary or affiliate of Franklin Resources, Inc. is a General Partner and which are registered under the 1940 Act as open-end management investment companies. 2.16 Partnership List. A current list of all the Partners containing the information specified in Section 13.1(a)(i) hereof. 2.17 Registration Statement. The Registration Statement on Form N-1A, registering the Shares of the Partnership under the Securities Act of 1933 and the 1940 Act, as such Registration Statement may be amended from time to time. 2.18 Secretary of State. The Secretary of State of the State of California. 2.19 Share (including fractional Shares). A partnership interest in the Partnership. Reference to "Shares" shall be to more than one Share. 2.20 Substituted Limited Partner. A successor in interest of a Limited Partner who has complied with the conditions set forth in Section 11. 2.21 Tax Code. The Internal Revenue Code of 1986 or corresponding provisions of subsequent revenue laws, and all regulations, rulings and other promulgations or judicial decisions thereunder. 2.22 Transfer Agent. The person appointed by the Managing General Partners to be primarily responsible for maintaining the Partnership List and certain other records of the Partnership. 2.23 1940 Act. The Investment Company Act of 1940, as amended, or as it may hereafter be amended, and the Rules and Regulations thereunder. 3. ACTIVITIES AND PURPOSE 3.1 Operating Policy. The Partnership will be authorized and empowered to operate and will operate as an open- end, diversified management investment company registered pursuant to the 1940 Act. 3.2 Investment Objectives. Subject to the limitations set forth in this Partnership Agreement, the investment objective of the Partnership shall be to invest and reinvest its assets in investment securities which shall consist primarily, but not necessarily exclusively, of debt securities. 3.3 Investment and Operating Limitations. The following additional fundamental policies and investment restrictions have been adopted by the Partnership and cannot be changed except by Majority Vote. These investment restrictions provide that the Partnership may not: (a) With respect to at least 75% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment (i) more than 5% of the total assets of the Partnership would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of such issuer would be owned by the Partnership. (b) Make loans to others, except through the purchase of debt securities in accordance with its investment objectives and policies or to the extent the entry into a repurchase agreement is deemed to be a loan. (c) (i) Borrow money, except temporarily from a bank for extraordinary or emergency purposes and then not in excess of 5% of its total assets (at the lower of cost or fair market value). Any such borrowing will be made only if immediately thereafter there is an asset coverage of at least 300% of all borrowings. (ii) Mortgage, pledge or hypothecate any of its assets except in connection with any such borrowings. (d) Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite securities.(Does not preclude the Partnership from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.) (e) Buy or sell interests in oil, gas or mineral exploration or development programs, or real estate. (Does not preclude investments in marketable securities of companies engaged in such activities.) (f) Purchase or hold securities of any issuer, if, at the time of purchase or thereafter, any of the General Partners or Officers of the Partnership or its investment adviser(s) own beneficially more than of 1%, and such General Partners or Officers holding more than of 1% together own beneficially more than 5% of the issuer's securities. (g) Invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with predecessors, of at least three years of continuous operation. (h) Purchase or sell commodities or commodity contracts or invest in puts, calls, straddles or spread options. (Does not preclude authorized transactions in foreign currencies.) (i) Invest in securities of other investment companies, except as they may be acquired as part of a merger, consolidation or acquisition of assets. (j) Invest more than 10% of its assets in securities with legal or contractual restrictions or which are not readily marketable (except for permissible transactions in repurchase agreements). (k) Invest in any issuer for purposes of exercising control or management. 3.4 Other Authorized Activities. Subject to the limitations set forth in this Partnership Agreement, the Partnership shall have the power to purchase and sell securities, issue evidences of indebtedness in connection with Partnership business, to join or become a partner in limited or general partnerships and to do any and all other things and acts, and to exercise any and all of the powers that a natural person could do or exercise and which now or hereafter may be lawfully done or exercised by a limited partnership. 4. GENERAL PARTNERS 4.1 Identity and Number. The names of the General Partners and their last known business or residence address shall be set forth in the Certificate of Limited Partnership, as it may be amended from time to time; this same information, together with the amounts of the contributions of each General Partner and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. The General Partners shall be identified as such on the Partnership List and also shall be identified separately as Managing General Partners or Non- Managing General Partners. The Managing General Partners may from time to time recommend to the Partners that additional persons be admitted as General Partners; provided, however, that if at any time following the effective date of the Partnership's Registration Statement the number of Managing General Partners is reduced to less than three, the remaining Managing General Partners shall, within 120 days, call a meeting of Partners for the purpose of electing an additional Managing General Partner or Managing General Partners so as to restore the number of Managing General Partners to at least three. 4.2 Managing and Non-Managing General Partners. Only individuals may act as Managing General Partners, and all General Partners who are individuals shall act as Managing General Partners. Any General Partner that is a corporation, association, partnership, joint venture or trust shall act as a Non-Managing General Partner. Except as provided in Section 4.4 hereof, a Non- Managing General Partner as such shall take no part in the management, conduct or operation of the Partnership's activities and shall have no authority to act on behalf of the Partnership or to bind the Partnership. All General Partners, including Managing and Non-Managing General Partners, shall be subject to election and removal by the Partners as hereinafter provided. 4.3 General Partners' Contributions. (a) Each General Partner, as such, shall make a contribution of cash to the Partnership sufficient to purchase at least one Share and shall continue to own unencumbered at least one such Share at all times while serving as a General Partner. The amount contributed by each General Partner shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges. The amount of such contributions and the number of Shares owned by each General Partner shall be set forth in the Partnership List. (b) The Non-Managing General Partner shall, in its capacity as such Non-Managing General Partner, be obligated to contribute to the Partnership through the purchase of Shares from time to time amounts sufficient to enable the General Partners in the aggregate, to maintain in their capacities as General Partners an interest in each material item of Partnership income, gain, loss, deduction or credit equal to at least 1% of each such item at all times during the existence of the Partnership. If upon termination of the Partnership, the General Partners have a negative balance in their Capital Accounts, they shall in their capacity as General Partners be obligated to make additional capital contributions in cash equal to the lesser of (i) the negative balance in their Capital Accounts or (ii) the amount, if any, by which 1.01% of the total capital contributions of the Limited Partners exceeds the total capital contributions of the General Partners prior to such termination. For as long as the Non-Managing General Partner retains its status as such, it shall not redeem or assign Shares held by it in its capacity as the Non-Managing General Partner or otherwise accept distributions in cash or property if such action would result in the failure of the General Partners to maintain such an interest. In the event that the Non-Managing General Partner is removed or stands for re-election and is not re-elected by the Partners pursuant to Section 9 hereof, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice, redeem its Shares in the same manner as is provided in Section 8 hereof. In the event that the Non-Managing General Partner voluntarily withdraws or declines to stand for re-election, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice following the occurrence of an event described in (i), (ii) or (v) in Section 4.8(a), redeem its Shares in the same manner as provided in Section 8. In the event that the Non- Managing General Partner is removed, stands for re-election and is not re-elected, voluntarily withdraws or declines to stand for re-election, the Managing General Partners shall cause the Certificate of Limited Partnership to be amended as provided in Section 14.4 hereof to reflect such withdrawal. 4.4 Management and Control. Subject to the terms of the Partnership Agreement and the 1940 Act, the Partnership will be managed by the Managing General Partners, who will have complete and exclusive control over the management, conduct and operation of the Partnership's activities, and, except as otherwise specifically provided in this Partnership Agreement, the Managing General Partners shall have the rights, powers and authority, on behalf of the Partnership and in its name, to exercise all of the rights, powers and authority of partners of a partnership without limited partners. The Managing General Partners may contract on behalf of the Partnership in conformity with the 1940 Act with one or more banks, trust companies or investment advisers for the performance of such functions as the Managing General Partners may determine, but subject always to their continuing supervision, including, without limitation, the investment and reinvestment of all or part of the Partnership's assets and execution of portfolio transactions, the distribution of Shares, and any or all administrative functions. The Managing General Partners may appoint officers or agents to perform such duties on behalf of the Partnership and the Managing General Partners as the Managing General Partners deem desirable. Such officers or agents need not be General or Limited Partners. The Managing General Partners may also employ persons to perform various duties on behalf of the Partnership as employees of the Partnership. The Managing General Partners shall devote themselves to the affairs of the Partnership to the extent they may determine necessary for the efficient conduct thereof, which need not, however, occupy their full time. The General Partners may also engage in other activities or businesses, whether or not similar in nature to the activities of the Partnership, subject to the limitations of the 1940 Act. In the event that no Managing General Partner shall remain for the purpose of managing and conducting the operations of the Partnership, the Non-Managing General Partner shall promptly call a meeting of the Limited Partners to be held within sixty (60) days of the date the last Managing General Partner ceases to act in such capacity to elect new Managing General Partners up to a maximum number of Managing General Partners theretofore admitted to the Partnership (but no fewer than three). For the period of time during which no Managing General Partner shall remain, the Non-Managing General Partner, subject to the terms and provisions of this Partnership Agreement, shall be permitted to engage in the management, conduct and operation of the activities of the Partnership. 4.5 Action by the Managing General Partners. Unless otherwise required by the 1940 Act with respect to any particular action, the Managing General Partners shall act only by the vote of a majority of the Managing General Partners at a meeting duly called at which a quorum of the Managing General Partners is present or by unanimous written or telephonic consent of the Managing General Partners without a meeting. At any meeting of the General Partners, a majority of the Managing General Partners shall constitute a quorum. If there shall be more than one Managing General Partner, no single Managing General Partner shall have authority to act on behalf of the Partnership or to bind the Partnership. The Managing General Partners shall appoint one of their number to be Chairman. Meetings of the Managing General Partners may be called orally or in writing by the Chairman or by any two Managing General Partners. Notice of the time, date and place of all meetings of the Managing General Partners shall be given by an Officer or by the party calling the meeting to each Managing General Partner by telephone or telegram sent to his home or business address at least twenty-four hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two hours in advance of the meeting. Notice need not be given to any Managing General Partner who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting. The Chairman, if present, shall preside at all meeting of Partners. 4.6 Limitations of the Authority of the Managing General Partners. The Managing General Partners shall have no authority without the vote or written consent or ratification of the Limited Partners to: (a) do any act in contravention of this Partnership Agreement, as it may be amended from time to time; (b) do any act which would make it impossible to carry on the ordinary operations of the Partnership; (c) confess a judgment against the Partnership; (d) possess Partnership property, or assign their rights in specific property, for other than a partnership purpose; (e) admit a person as a General Partner except in accordance with Section 9 hereof; or (f) admit a person as a Limited Partner, except in accordance with Section 5 hereof. 4.7 Right of General Partners to Become Limited Partners. A General Partner may also own Shares as a Limited Partner without obtaining the consent of the Limited Partners and thereby become entitled to all the rights of a Limited Partner to the extent of the Limited Partnership interest so acquired. Such event shall not, however, be deemed to reduce or otherwise affect any of the General Partners' liability hereunder as a General Partner. If a General Partner shall also become a Limited Partner, the contributions and Share ownership of such General Partner shall be separately designated in the Partnership List to reflect his interest in each capacity. 4.8 Termination of a General Partner. (a) The interest of a General Partner shall terminate and such party shall have no further right or power to act as a General Partner (except to execute any amendment to this Partnership Agreement to evidence his termination): (i) upon death of the General Partner; (ii) upon an adjudication of incompetency of the General Partner; (iii) if such Partner is removed or stands for re-election and is not re-elected by the Partners, as provided in Section 9 below; (iv) in the case of the Non-Managing General Partner, upon the filing of a certificate of dissolution, or its equivalent, or voluntary or involuntary petition in bankruptcy for such Non-Managing General Partner; or (v) if such Partner voluntarily retires upon not less than ninety (90) days' written notice to the other General Partners. (b) Notwithstanding the foregoing, the Non- Managing General Partner shall not voluntarily withdraw or otherwise voluntarily terminate its status as the Non-Managing General Partner until the earliest of (i) 180 days from the date that the Non-Managing General Partner gives the other General Partners its written notice of its intention to withdraw as a Non- Managing General Partner, (ii) the date that a successor Non- Managing General Partner, who has agreed to assume the obligations of Section 4.3(b) hereof, is elected by the Partners pursuant to Section 9 hereof, or (iii) the date that another General Partner assumes the obligations imposed upon the Non- Managing General Partner pursuant to Section 4.3(b) hereof. The failure of the Non-Managing General Partner to seek re-election at any meeting of the Partners called for such purpose shall be deemed to constitute a voluntary withdrawal as of the date of notice of such meeting and shall constitute written notice as at the date of such meeting of its intention to withdraw as a Non- Managing General Partner, unless it has delivered written notice at an earlier date. (c) In the event a General Partner ceases to be a General Partner, the remaining General Partners shall have the right to continue the operations of the Partnership. (d) Termination of a person's status as a General Partner shall not affect his status, if any, as a Limited Partner. A General Partner may retain Shares owned in his capacity as a Limited Partner provided such General Partner has been or is admitted to Partnership as a Limited Partner in accordance with Section 5.2. (e) A person who ceases to be a General Partner shall nevertheless be deemed to be acting as a General Partner with respect to a third party doing business with the Partnership until an amended Certificate of Limited Partnership is filed with the Secretary of State. 4.9 Additional or Successor General Partners. A person may be added or substituted as a General Partner only upon his admission by the Partners at a meeting of Partners or by written consent without a meeting as provided in Section 9 hereof. Each General Partner, by becoming a General Partner, consents to the admission as an added or substituted General Partner of any person elected by the Partners in accordance with this Partnership Agreement. Any person who is elected to be admitted as a General Partner at a meeting of the Partners or by written consent in accordance with Section 9 hereof and who shall not be serving as a General Partner at the time of such election, shall be admitted to the Partnership as a General Partner effective as of the date of such election. Any General Partner who is not re-elected at any such meeting in the manner specified in Section 9 shall be deemed to have withdrawn as of the date of such meeting. 4.10 Liability to Limited Partners. The General Partners shall not be personally liable for the repayment of any amounts standing in the account of a Limited Partner or holder of Shares including, but not limited to, contributions with respect to such Shares, except by reason of their wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office. Any payment, other than in the event of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by a General Partner, which results in a personal liability to Limited Partners or holders of Shares, shall be solely from the Partnership's assets. So long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners, the General Partners shall not have any personal liability to any holder of Shares or to any Limited Partner by reason of (1) any failure to withhold income tax under Federal or state tax laws with respect to income allocated to Limited Partners or (2) any change in the Federal or state tax laws or in interpretation thereof as they apply to the Partnership, the holders of the Shares or the Limited Partners, whether such change occurs through legislative, judicial or administrative action. 4.11 Assignment and Substitution. Each Share held by a General Partner in his capacity as a General Partner shall be designated as such, and each such Share shall be nonassignable, except to another person who already is a General Partner, and then only with the consent of the Managing General Partners, and shall be redeemable by the Partnership only in the event that (i) the holder thereof has ceased to be a General Partner of the Partnership or (ii) in the opinion of counsel for the Partnership redemption of Shares held by a General Partner would not jeopardize the status of the Partnership as a partnership for Federal income tax purposes. 4.12 No Agency. Except as provided in Section 15.9 below, nothing in this Partnership Agreement shall be construed as establishing any General Partner as an agent of any Limited Partner. 4.13 Reimbursement and Compensation. Managing General Partners may receive reasonable compensation for their services as Managing General Partners and will be reimbursed for all reasonable out-of-pocket expenses incurred in performing their duties hereunder. 4.14 Indemnification. (a) Subject to the exceptions and limitations contained in Subsection (b) below: (i) Every person who is, or has been, a General Partner, an officer and/or Director of a corporate General Partner or Officer of the Partnership (hereinafter referred to as "Covered Person") shall be indemnified by the Partnership to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a General Partner, an officer and/or Director of a Corporate General Partner or officer of the Partnership and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim", "action", "suit", or "proceeding" shall include, without limitation, any administrative inquiry, audit, investigation or other form of regulatory actions and shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person who shall have been finally adjudicated by a court or other body before which the proceeding was brought (i) to be liable to the Partnership or its Partners by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (ii) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Partnership. (c) In the event of a settlement, or other disposition not involving a final adjudication as provided in subsection (b), indemnification shall be provided unless there has been a determination that such Covered Person did engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, (i) by the court or other body approving the settlement or other disposition; (ii) by vote of at least a majority of those Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (iii) by written opinion of independent legal counsel, based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Partner may, by appropriate legal proceedings, challenge any such determination by the Managing General Partners, or by independent counsel. (d) The rights of indemnification herein provided may be insured against by policies maintained by the Partnership, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such General Partner, officer and/or Director of a Corporate General Partner or officer of the Partnership and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Partnership personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law. (e) Expenses incurred in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section 4.14 shall be paid by the Partnership from time to time in advance prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Partnership if it is ultimately determined that he is not entitled to indemnification under this Section 4.14; provided, however, that either (i) such Covered Persons shall have provided appropriate security for such undertaking, (ii) the Partnership is insured against losses arising out of any such advance payments, or (iii) either a majority of the Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a full trial- type inquiry), that there is reason to believe that such Covered Person will be found entitled to indemnification under this Section 4.14. 5. LIMITED PARTNERS 5.1 Identity of Limited Partners. The names of the Limited Partners and their last known business or residence addresses, together with the amounts of their contributions and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. 5.2 Admission of Limited Partners. The Managing General Partners may admit a purchaser of Shares as a Limited Partner, upon (i) the execution by such purchaser of such subscription documents and other instruments as the Managing General Partners may deem necessary or desirable to effectuate such admission, which documents, if any shall be required, shall be described in the Partnership's Registration Statement, (ii) the purchaser's acceptance of all the terms and provisions of this Partnership Agreement, including the power of attorney set forth in Section 15.9 hereof, as the same may have been amended in such manner as shall be specified by the Managing General Partners, and (iii) the addition of such purchaser to the Partnership List. The admission of a purchaser as a Limited Partner shall be effective upon his addition to the Partnership List provided good payment has been received by the Partnership for the purchased Shares. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the admission of new Limited Partners. In no event shall the consent or approval of any of the Limited Partners be required to effectuate such admission. Each purchaser of a Share of the Partnership who becomes a Limited Partner shall be bound by all the terms and conditions of this Partnership Agreement including, without limitation, the allocation of income, gains, losses, deductions and credits as provided in Section 10.3. Notwithstanding anything in this Partnership Agreement to the contrary, the Managing General Partners reserve the right to refuse to admit any Person as a Limited Partner who has not completed, signed and furnished to the Partnership or its designated agent an account application, a Certificate of Foreign Status on Form W-8 or such other required documents as may be described in the Registration Statement, and any other Person if, in their judgment, it would not be in the Partnership's best interests to admit such Person. 5.3 Contributions of the Limited Partners. The amount contributed by each Limited Partner to the Partnership shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges and which amount may be less than the offering price paid by such Limited Partner for his Shares to the extent the offering price includes any sales charges. All contributions shall be made in U.S. dollars, which shall be invested in Shares of the Partnership at Net Asset Value. The amount of such contributions and the number of Shares owned by each Partner shall be set forth in the Partnership List. 5.4 Additional Contributions of Limited Partners. No Limited Partner shall be required to make any additional contributions to (or investments in) or lend additional funds to the Partnership, and no Limited Partner shall be liable for any additional assessment therefor. A Limited Partner may make an additional contribution (or investment), however, at his option through the purchase of additional Shares subject to the same terms and conditions as his initial contribution. 5.5 Use of Contributions. The aggregate of all capital contributions shall be, and hereby are agreed to be, available to the Partnership to carry out the objects and purposes of the Partnership. 5.6 Redemption by Limited Partners. A Limited Partner may redeem his Shares at any time in accordance with Section 8. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the redemption of Shares by any Limited Partner and the withdrawal or return through such redemption, in whole or in part, of the contribution of any Limited Partner. Except as provided in Sections 8.1, 10.4 and 12.2 hereof, a Limited Partner shall have no right to the return or withdrawal of his contribution. 5.7 Minimum Contribution and Mandatory Redemption. The Managing General Partners shall determine the minimum amounts required for the initial or additional contributions of a Limited Partner, which amounts may, from time to time, be changed by the Managing General Partners. Additionally, the Managing General Partners may, from time to time, establish a minimum total investment for Limited Partners, and there is reserved to the Partnership the right to redeem automatically the interest of any Limited Partner the value of whose investment, due to redemptions, is less than such minimum upon the giving of at least 30 days' notice to such Limited Partner, provided that such minimum total investment is not greater than the investment of any Limited Partner at the time the new minimum total investment becomes effective. The amounts which the Managing General Partners shall fix from time to time for initial or additional contributions and the amount of the minimum total investment shall be stated in the Partnership's current Registration Statement. 5.8 Limited Liability. (a) No Limited Partner shall be liable for any debts or obligations of the Partnership and each Limited Partner shall be indemnified by the Partnership against any such liability; provided, however, that contributions of a Limited Partner and his share of any undistributed assets of the Partnership shall be subject to the risks of the operations of the Partnership and subject to the claims of the Partnership's creditors, and provided further, that after any Limited Partner has redeemed his Shares or otherwise received the return of any part of his contribution or any distribution of assets of the Partnership, he will be liable to the Partnership for: (i) any money or other property wrongfully distributed to him; and (ii) any sum, not in excess of the amount of such distribution, necessary to discharge any liabilities of the Partnership to creditors who extended credit or whose claims arose before such returns or distributions were made, but only to the extent that the assets of the Partnership are not sufficient to discharge such liabilities. The obligation of a Limited Partner to return all or any part of a distribution made to him shall be the sole obligation of such Limited Partner and not of the General Partners. (b) If an action is brought against a Limited Partner to satisfy an obligation of the Partnership, the Partnership, upon notice from the Limited Partner about the action, will either pay the claim itself or, if the Partnership believes the claim to be without merit, will undertake the defense of the claim itself. (c) The General Partners shall not have any personal liability to any Holder of Shares or to any Limited Partner for the repayment of any amounts standing in the account of a Limited Partner including, but not limited to, contributions with respect to such Shares. Any such payment shall be solely from the assets of the Partnership. The General Partners shall not be liable to any Holder of Shares or to any Limited Partner by reason of any change in the Federal income tax laws or any State or local income or franchise tax laws as they apply to the Partnership or the Limited Partners, whether such change occurs through legislative, judicial or administrative action, so long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners. 5.9 No Power to Control Operations. A Limited Partner shall have no right to and shall take no part in control of the Partnership's operations or activities but may exercise the rights and powers of a Limited Partner under this Partnership Agreement, including without limitation, the voting rights and the giving of consents and approvals provided for in Section 9 hereof. The exercise of such rights and powers are deemed to be matters affecting the basic structure of the Partnership and not the control of its operations or activities. 5.10 Tax Responsibility. Each Limited Partner shall (a) provide the Managing General Partners with any tax information which may be required under applicable law, (b) pay any penalties imposed on such Limited Partner for any non- compliance with applicable tax laws, and (c) be subject to withholding of income tax by the Partnership to the extent required by law. 6. SHARES OF PARTNERSHIP INTEREST All interests in the Partnership, including contributions by the General Partners, pursuant to Section 4.3 and by the Limited Partners, pursuant to Section 5.3, shall be expressed in units of participation herein referred to as "Shares" (which term includes fractional Shares). Each Share shall represent an equal proportionate interest in the income and assets of the Partnership with each other Share outstanding. 7. PURCHASE AND EXCHANGE OF SHARES 7.1 Purchase of Shares. The Partnership may offer Shares on a continuing basis to investors. Except for the initial purchase of Shares by the initial Limited Partner and the General Partners, all Shares issued shall be issued and sold at the Net Asset Value (plus such sales charge or other charge as may be applicable to the purchase of the Shares) next computed after receipt of a purchase order in accordance with the Partnership's Registration Statement in effect at the time the order is received. Only investors who agree to be admitted, and who are eligible for admission, as Limited Partners pursuant to Section 5.2 shall be eligible to purchase Shares (unless such investor has already been admitted as a Partner). Orders for the purchase of Shares shall be accepted on any day that the Partnership's Transfer Agent is open for business (which shall normally be limited to those days when the New York Stock Exchange is open for business). The form in which purchase orders may be presented shall be as set forth in the Partnership's Registration Statement in effect at the time the order is received. The Managing General Partners on behalf of the Partnership reserve the right to reject any specific order and to suspend the Partnership's offering of new Shares at any time. Payment for all Shares must be made in U.S. dollars. 7.2 Net Asset Value. The Net Asset Value per Share of the Partnership shall be determined as of the close of the New York Stock Exchange on each day the Exchange is open for trading or as of such other time or times as the Managing General Partners may determine in accordance with the provisions of the 1940 Act. The Net Asset Value per Share shall be expressed in U.S. dollars and shall be computed by dividing the value of all the assets of the Partnership, less its liabilities, by the number of Shares outstanding (including Shares held by General Partners). Portfolio securities will be valued at their fair value using methods determined in good faith by the Managing General Partners in accordance with the 1940 Act. The Partnership may suspend the determination of the Net Asset Value during any period when the New York Stock Exchange is closed, other than customary weekend and holiday closings, during periods when trading on the Exchange is restricted as determined by the Securities and Exchange Commission (the "Commission") or during any emergency as determined by the Commission which makes it impracticable for the Partnership to dispose of its securities or value its assets, or during any other period permitted by order of the Commission for the protection of investors. 7.3 Exchange of Shares. Shares of the Partnership may be exchanged for (i.e., redeemed and reinvested in) shares of other investment companies as provided in the Partnership's Registration Statement in effect at the time of the exchange. 8. REDEMPTION OR REPURCHASE OF SHARES 8.1 Redemption of Shares. (a) The Partnership will redeem from any Partner all or any portion of the Shares owned by him provided that the Partner delivers to the Partnership or its designated agent notice of such redemption, stating the number of Shares to be redeemed, together with a properly endorsed Share certificate(s) where certificate(s) have been issued, in good order for transfer and in proper form as determined by the Managing General Partners and the Partnership's Transfer Agent. The Partner shall be entitled to payment in U.S. Dollars of the Net Asset Value of his Shares (as set forth in Section 7.2 hereof). Any such redemption shall be in accordance with Section 4 with respect to General Partners or Section 5 with respect to Limited Partners. Any distribution upon redemption pursuant to this Section 8.1 shall, in accordance with Section 10.4 below, constitute a return in full of the redeeming Partner's contribution attributable to the Shares which are redeemed regardless of the amount distributed with respect to such Shares. No consent of any of the Partners shall be required for the withdrawal or return of a Limited Partner's contribution. The Managing General Partners shall have sole discretion to determine the amount of cash to be distributed to a withdrawing Partner. All redemptions shall be recorded on the Partnership List, which shall be amended daily on each day that the Partnership's Transfer Agent is open for business. (b) The Managing General Partners may suspend redemptions and defer payment of the redemption price at any time, subject to the Rules and Regulations of the Securities and Exchange Commission. The Partnership may suspend or withhold redemptions or repurchases of shares (including exchanges pursuant to Section 7.3) or redeem shares for the purpose of satisfying any tax withholding obligations under Federal or state tax laws. 8.2 Payment for Redeemed Shares. Payments for Shares redeemed or repurchased by the Partnership will be made in U.S. Dollars within seven days after receipt by the Partnership's Transfer Agent of a written redemption request in proper form as specified in Section 8.1 above. If a redemption request is received with respect to Shares for which the Partnership has not yet received good payment, the Partnership may delay the mailing of a redemption check until such time as it has assured itself that good payment has been collected for the purchase of such Shares. 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE 9.1 Rights of Limited Partners. (a) As provided in the Partnership Act, the Limited Partners shall have the right to vote together with the General Partners in accordance with the provisions of this Section 9 only upon the following matters affecting the basic structure of the Partnership, which include the voting, approval, consent or similar rights required under the 1940 Act for voting security holders: (i) the right to remove General Partner(s); (ii) the right to elect new General Partner(s), except in the circumstance where the last remaining or surviving General Partner has been removed; (iii) the right to approve or terminate investment advisory, underwriting and distribution contracts and plans; (iv) the right to ratify or reject the appointment and to terminate the employment of the independent public accountants of the Partnership; (v) the right to approve or disapprove the sale of all or substantially all of the assets of the Partnership; (vi) the right to approve the incurrence of indebtedness by the Partnership other than in the ordinary course of its operations; (vii) the right to approve transactions in which the General Partners have an actual or potential conflict of interest with the Limited Partners or the Partnership; (viii)the right to terminate the Partnership, as provided in Section 12 hereof; (ix) the right to elect to continue the operations of the Partnership, except in circumstances where the last remaining or surviving General Partner has been removed; and (x) the right to amend this Partnership Agreement, including, without limitation, the right to approve or disapprove proposed changes in the investment and operating limitations set forth in Section 3.3 and the right to approve or disapprove proposed changes in the nature of the Partnership's activities as such activities are described herein; provided, however, that no such amendment shall conflict with the 1940 Act so long as the Partnership intends to remain registered thereunder, nor affect the liability of the General Partners without their consent nor the limited liability of the Limited Partners as provided under Section 5.8 above. Notwithstanding the foregoing, the right of Limited Partners to vote on matters affecting the basic structure of the Partnership as designated herein shall not be construed as a requirement that all such matters be submitted to the Limited Partners for their approval or be so approved to the extent such approval is not required by the Partnership Act, the 1940 Act or this Partnership Agreement. (b) Notwithstanding the foregoing, no vote, approval or other consent shall be required of the Limited Partners with respect to any matter not affecting the basic structure of the Partnership, including, without limitation, the following: (i) any change in the amount or character of the contribution of any Limited Partner; (ii) any change in the procedures for the purchase or redemption of Shares, (iii) the substitution or deletion of a Limited Partner; (iv) the admission of any additional Limited Partner; (v) the retirement, resignation, death or incompetency of a Managing General Partner; (vi) any addition to the duties or obligations of the General Partners, or any reduction in the rights or powers granted to the General Partners herein, for the benefit of the Limited Partners; (vii) the correction of any false or erroneous statement, or change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners, in this Partnership Agreement; (viii) the addition of any omitted provision or amendment of any provision to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof; or (ix) such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership. (c) The Limited Partners shall have no right or power to cause the termination and dissolution of the Partnership except as set forth in this Partnership Agreement. No Limited Partner shall have the right to bring an action for partition against the Partnership. 9.2 Action of the Partners. Actions which require the vote of the Limited Partners under Section 9.1 of this Partnership Agreement shall be taken at a meeting of both the General and Limited Partners, or by consent without a meeting as provided in Section 9.10. All Partners' meetings shall be held at such place as the Managing General Partners shall designate. The Partners may vote at any such meeting in person or by proxy. 9.3 Meetings. Meetings of the Partnership for the purpose of taking any action which the Limited Partners are permitted to take under this Partnership Agreement may be called by a majority vote of the Managing General Partners or by Limited Partners representing 10% or more of the outstanding Shares. Written notice of such meeting shall be given in accordance with Section 9.4. 9.4 Notices. (a) Whenever Partners are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each Partner entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted, and no other business may be transacted. (b) Notice of a Partners' meeting or any report shall be given either personally or by mail or other means of written communication, addressed to the Partner at the address of the Partner appearing on the books of the Partnership or given by the Partner to the Partnership for the purpose of notice, or, if no address appears or is given, at the place where the principal executive office of the Partnership is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this subsection, executed by a General Partner, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the Partner at the address of the Partner appearing on the books of the Partnership is returned to the Partnership marked to indicate that the notice or report to the Partner could not be delivered at such address, all future notices or reports shall be deemed to have been duly given without further mailing if they are available for the Partner at the principal executive office of the Partnership for a period of one year from the date of the giving of the notice or report to all other Partners. (c) Upon written request to the General Partners by any person entitled to call a meeting of Partners, the General Partners immediately shall cause notice to be given to the Partners entitled to vote that a meeting will be held at a time requested by the person calling the meeting, not less than ten (10), nor more than sixty (60), days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person entitled to call the meeting may give the notice. 9.5 Validity of Vote for Certain Matters. Any Partner approval at a meeting, other than unanimous approval by those entitled to vote, with respect to the matters set forth in Section 9.1(a) shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice. 9.6 Adjournment. When a Partners' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Partner of record entitled to vote at the meeting in accordance with Section 9.4. 9.7 Waiver of Notice and Consent to Meeting. The transactions of any meeting of Partners, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All waivers, consents, and approvals shall be filed with the Partnership records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of the meeting, except when the person objects, at the beginning because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice of the meeting but not so included, if the objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any meeting of Partners need be specified in any written waiver of notice, except as provided in Section 9.6. 9.8 Quorum. The presence in person or by proxy of more than forty percent (40%) of the outstanding Shares on the record date for any meeting constitutes a quorum at such meeting. The Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by Partners holding a majority of the Shares then represented at such meeting (except as otherwise may be required by the 1940 Act or the Partnership Act). In the absence of a quorum, any meeting of Partners may be adjourned from time to time by the vote of a majority in interest of the Limited Partners represented either in person or by proxy, but no other business may be transacted except as provided in this Section 9.8. The Managing General Partners may adjourn such meeting to such time or times as determined by the Managing General Partners. 9.9 Required Vote. Any action which requires the vote of the Limited Partners may be taken by the General Partners with (i) the Majority Vote of the then outstanding Shares or (ii) if at a meeting, with a majority vote of those Shares present if the quorum requirements of Section 9.8 hereof have been satisfied (except as otherwise may be required by the 1940 Act or the Partnership Act); provided, however, that the admission of a General Partner shall require the affirmative vote of at least a majority of the then outstanding Shares, and provided further, that the admission of a General Partner or an election to continue the operations of the Partnership after a General Partner ceases to be a General Partner (other than by removal) when there is no remaining or surviving General Partner shall require the affirmative vote of all the Limited Partners. 9.10 Action by Consent Without a Meeting. Any action which may be taken at any meeting of the Partners may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by Partners having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting. In the event the Limited Partners are requested to consent on a matter without a meeting, each Partner shall be given notice of the matter to be approved in the same manner as described in Section 9.4. In the event any General Partner, or Limited Partners representing 10% or more of the outstanding Shares request a meeting for the purpose of discussing or voting on the matter, notice of such meeting shall be given in accordance with Section 9.4 and no action shall be taken until such meeting is held. Unless delayed in accordance with the provisions of the preceding sentence, any action taken without a meeting will be effective ten (10) days after the required minimum number of voters have signed the consent; however, the action will be effective immediately if the General Partners and Limited Partners representing at least 90% of the Shares of the Partners have signed the consent. 9.11 Record Date. (a) In order that the Partnership may determine the Partners of record entitled to notices of any meeting or to vote, or entitled to receive any distribution or to exercise any rights in respect of any other lawful action, the Managing General Partners, or Limited Partners representing more than 10% of the Shares then outstanding, may fix, in advance, a record date which is not more than sixty (60) or less than ten (10) days prior to the date of the meeting and not more than sixty (60) days prior to any other action. If no record date is fixed, the record date shall be determined as provided in the Partnership Act. (b) The determination of Partners of record entitled to notice of or to vote at a meeting of Partners shall apply to any adjournment of the meeting unless the Managing General Partners, or the Limited Partners who called the meeting, fix a new record date for the adjourned meeting, but the Managing General Partners, or the Limited Partners who called the meeting, shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. (c) Any Holder of a Share prior to the record date for a meeting shall be entitled to vote at such meeting, provided such person becomes a Partner prior to the date of the meeting. 9.12 Proxies. A Partner may vote at any meeting of the Partnership by a proxy executed in writing by the Partner. All such proxies shall be filed with the Partnership before or at the time of the meeting. The law of California pertaining to corporate proxies will be deemed to govern all Partnership proxies as if they were proxies with respect to shares of a California corporation. A proxy may be revoked by the person executing the proxy in a writing delivered to the Managing General Partners at any time prior to its exercise. Notwithstanding that a valid proxy is outstanding, powers of the proxy holder will be suspended if the person executing the proxy is present at the meeting and elects to vote in person. 9.13 Number of Votes. All Shares have equal voting rights. Each Partner shall have the right to vote the number of Shares standing of record in such Partner's name as of the record date set forth in the notice of meeting. 10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES 10.1 Fees of General Partners. As compensation for services rendered to the Partnership, each Managing General Partner may be paid a fee during each year, which fee shall be fixed by the Managing General Partners. All the General Partners shall be entitled to reimbursement of reasonable expenses incurred by them in connection with their performance of their duties as General Partners. Neither payment of compensation or reimbursement of expenses to a General Partner hereunder nor payment of fees to any Affiliate of a General Partner for the performance of services to the Partnership shall be deemed a distribution for purposes of Section 10.2, nor shall any such payment affect such person's right to receive any distribution to which he would otherwise be entitled as a Holder of Shares. 10.2 Distributions of Income and Gains. Subject to the provisions of the Partnership Act and the terms of Section 10.4 hereof, the Managing General Partners in their sole discretion shall determine the amounts, if any, to be distributed to Holders of Shares, the record date for purposes of such distributions and the time or times when such distributions shall be made. Distributions of income may be in cash (U.S. Dollars) or in additional full and fractional Shares of the Partnership, at the option of the Holder of Shares, valued at the Net Asset Value on the record date, which amount may be less than the offering price to the extent it includes any sales charges. With respect to capital gains, the Managing General Partners may determine at least annually what portion, if any, of the Partnership's capital gains will be distributed and any such distribution may be in cash or in additional full and fractional Shares of the Partnership at the Net Asset Value on the record date. Notwithstanding the foregoing, the Managing General Partners shall not be required to make any distribution of income or capital gains for any taxable year. The Managing General Partners may require that such distributions be reinvested in additional shares of the Partnership, determine that no withdrawal should be made from an account, or institute withholding of taxes pursuant to Federal or state tax laws on distributions with respect to shares held by any Person who has failed to complete, sign and furnish to the Partnership or its designated agent an account application, a Certificate of Foreign Status on Form W-8 or such other required documents as may be described in the Registration Statement. 10.3 Allocation of Income, Gains, Losses, Deductions and Credits. The net income, gains, losses, deductions and credits of the Partnership shall be allocated equally among the outstanding Shares of the Partnership on a regular basis to be determined by the Managing General Partners. The net income earned by the Partnership shall consist of the interest accrued on portfolio securities, less expenses, since the most recent determination of income. Original issue discount will be amortized as an income item. Market discount and premiums will be treated as capital items except as otherwise required for Federal income tax purposes. Expenses of the Partnership will be accrued on a regular basis to be determined by the Managing General Partners. A Holder of a Share shall be allocated the proportionate part of such items actually realized by the Partnership for each such full accrual period during which such Share was owned by such Holder. A person shall be deemed to be a Holder of a Share on a specific day if he is the record holder of such Share on such day (regardless of whether or not such record holder has yet been admitted as a Partner). 10.4 Returns of Contributions. Except upon dissolution of the Partnership by expiration of its terms or otherwise pursuant to Section 12 hereof (which shall be the time for return to each Partner of the value of the Shares acquired by his contributions, subject to the priorities therein), and except upon redemption of Shares of the Partnership as provided in Section 8, no Partner has the right to demand return of any part of his contribution. The Managing General Partners may, however, from time to time, elect to permit partial returns of the value of the Shares acquired by his contributions to Holders of Shares, provided that: (a) all liabilities of the Partnership to persons other than General and Limited Partners have been paid or, in the good faith determination of the Managing General Partners, there remains property of the Partnership sufficient to pay them; and (b) the Managing General Partners cause the Partnership List to be amended to reflect a reduction in contributions. In the event that the Managing General Partners elect to make a partial return of the value of Shares acquired by contributions to Holders of Shares, such distribution shall be made pro rata to all of the Holders of Shares in accordance with the number of Shares held by each. Each General and Limited Partner, by becoming such, consents to any such pro rata distribution therefore or thereafter duly authorized and made in accordance with such provisions and to any distribution through redemption of Shares pursuant to Section 8 above. 10.5 Capital Accounts. In addition to any capital accounts required to be maintained for accounting purposes in accordance with generally accepted accounting principles, the Partnership shall maintain two Capital Accounts for each Partner, one for book purposes and the other for tax purposes. Each such Capital Account shall be maintained in accordance with the requirements of Treasury Regulations Section 1.704-1(b). Each such Capital Account shall be credited with the Partner's capital contributions and share of profits, shall be charged with such Partner's share of losses, distributions and withholding taxes (if any) and shall otherwise appropriately reflect transactions of the Partnership and the Partners. At the end of each day, the book Capital Accounts of all Partners shall be adjusted to reflect unrealized appreciation or depreciation in the value of the Partnership's assets which accrued on that day. Further adjustments shall then be made to reflect any purchases and redemptions of Shares by the Partners. The intent of these adjustments is to achieve consistency and equivalence between book Capital Accounts and the Net Asset Value per Share used to determine the value of the Shares purchased, redeemed or liquidated in accordance with industry practice for investment partnerships such as the Partnership. Adjustments to tax Capital Accounts to take into account allocations of gains and losses realized by the Partnership for tax purposes shall be made in the manner described in Section 10.6. A Substituted Limited Partner shall be deemed to succeed to the book and tax Capital Accounts of the Partner whom such Substituted Limited Partner replaced. 10.6 Allocations for Tax Purposes. (a) General. For each fiscal year, items of income, deduction, loss or credit from normal operations (other than from the disposition or deemed disposition of assets of the Partnership) shall be allocated for income tax purposes among the Partners in proportion to the amounts distributed to them during such year pursuant to Sections 10.3 and 10.4 hereof. The Partners' tax Capital Accounts shall be adjusted to reflect allocations of such items of income, deduction, loss or credit. (b) Special Allocations. Allocations of gains and losses from the disposition or deemed disposition of assets of the Partnership to Partners for tax purposes shall be made in accordance with the following method which is intended to ensure that allocations for tax purposes reflect the economic experience of the Partners with respect to their interests in the Partnership: (i) With respect to each Partner, a daily account of unrealized appreciation/depreciation and realized gain/loss shall be maintained. Each day's net unrealized appreciation/depreciation in the assets of the Partnership and each day's net realized gains/losses of the Partnership shall be allocated to the Partners in proportion to their book Capital Account balances at the beginning of such day. Any entry of realized gain or loss into any Partner's account for net realized gains/losses shall result in an equal and offsetting adjustment to the Partner's account for net unrealized appreciation/ depreciation for that day. Purchases of Shares and partial or complete redemptions of Shares shall be regarded as occurring at the end of each day, after entries and adjustments in the Partners' accounts for net unrealized appreciation/depreciation and net realized gains/losses have been made. The amounts for each Partner's share of net unrealized appreciation/depreciation and net realized gains/losses, together with adjustments made to reflect purchases or redemptions of Shares, shall be combined to arrive at each Partner's ending book Capital Account balance for the day. (ii) At the end of each year, the daily amounts of net unrealized appreciation/depreciation and net realized gains/losses shall be aggregated to arrive at a total amount for net unrealized appreciation/depreciation and a total amount for net realized gains/losses for each Partner for the year. These two amounts shall be combined to arrive at each Partner's "Investment Experience." Net gains realized by the Partnership shall be allocated among the Partners whose Investment Experience is positive, and each such Partner's allocable share of such gains for tax purposes shall be equal to a fraction the numerator of which is the Partner's Investment Experience and the denominator of which is the total Investment Experience of the Partners whose Investment Experience is positive. Net losses realized by the Partnership shall be allocated among the Partners whose Investment Experience is negative, and each such Partner's allocable share of such losses shall be computed in the manner described in the previous sentence, except that the word "negative" shall be substituted for the word "positive." Each Partner's tax Capital Account shall then be adjusted to reflect such Partner's allocable share of Partnership realized gains or losses for such year. The Partners' accounts for unrealized appreciation/depreciation and net realized gains/losses, adjusted appropriately to reflect the allocation of the net gain realized or the net loss realized, shall be carried over to the next year. (iii) In the event of a partial or complete redemption of Shares which results in a distribution in excess of a Partner's tax Capital Account, the Partnership may make an election to adjust the basis of Partnership assets under Section 754 of the Code, and the Partnership may increase the tax basis of its Partnership assets in accordance with Section 743(b) and 755 of the Code by the difference between the amount of the distribution made to the redeeming Partner in redemption of his Shares and his tax Capital Account. (c) Minimum Gain Chargeback. A Partner's share of Minimum Gain shall be computed in accordance with Treasury Department Regulations Section 1.704-1(b)(4)(iv)(f). In the event that there is a net decrease in the Partnership's Minimum Gain during any taxable year and any Partner has a negative book Capital Account (after taking into account reductions for items described in paragraphs (4), (5) and (6) of Treasury Department Regulations Section 1.704-1(b)(2)(ii)(d)) and such negative balance exceeds the sum of (i) the amount that such Partner is obligated to restore upon liquidation of the Partnership and (ii) such Partner's share of the Minimum Gain at the end of such taxable year, such Partner shall be allocated Partnership profits for such year (and, if necessary, subsequent years) in an amount necessary to eliminate such excess negative balance as quickly as possible. Allocations of profits to such Partners having such excess negative book Capital Accounts shall be made in proportion to the amounts of such excess negative book Capital Account balances. The term "Minimum Gain" means the excess of the outstanding balances of all nonrecourse indebtedness which is secured by property of the Partnership over the adjusted basis of such property for federal income tax purposes, as computed in accordance with the provisions of Treasury Department Regulations Section 1.704-1(b)(4)(iv)(c). (d) Qualified Income Offset. Notwithstanding anything in Sections 10.3 and 10.6 to the contrary, in the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Department Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(d)(5) or 1.704- 1(b)(2)(ii)(d)(6), items of Partnership income (including gross income) and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the deficit balance in his book Capital Account (in excess of (i) the amount he is obligated to restore upon liquidation of the Partnership or upon liquidation of his interest in the Partnership and (ii) his share of the Minimum Gain) created by such adjustments, allocations or distributions as quickly as possible. 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment. Except for redemptions as provided in Section 8, a Partner shall not have the right to sell, transfer or assign his Shares to any other person, but may pledge them as collateral. 11.2 Rights of the Holders of Shares as Collateral or Judgment Creditor. In the event that any person who is holding Shares as collateral or any judgment creditor becomes the owner of such Shares due to foreclosure or otherwise, such person shall not have the right to be substituted as a Limited Partner, but shall only have the rights, upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Limited Partner, set forth immediately below: (a) To redeem the Shares in accordance with the provisions of Section 8 hereof; and (b) To receive any subsequent distributions made with respect to such Shares. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his ownership of Shares, the owner shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. Such owner shall be liable to return any excess distributions pursuant to Section 5.8(a). However, although such owner shall own an equity interest in the Partnership in the form of Shares, such owner shall have none of the rights or obligations of a Substituted Limited Partner unless and until he is admitted as such. 11.3 Death, Incompetency, Bankruptcy or Termination of the Existence of a Partner. In the event of the death or an adjudication of incompetency or bankruptcy of an individual Partner (or, in the case of a Partner that is a corporation, association, partnership, joint venture or trust, an adjudication of bankruptcy, dissolution or other termination of the existence of such Partner), the successor in interest of such Partner (including without limitation the Partner's executor, administrator, guardian, conservator, receiver or other legal representative), upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, shall have the rights set forth below: (a) to redeem the Shares of the Partner in accordance with the provisions of Section 8 hereof; (b) to receive any subsequent distributions made with respect to such Shares; and (c) to be substituted as a Limited Partner upon compliance with the conditions of the admission of a Limited Partner as provided in Sections 5 and 11 hereof. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, the successor in interest shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. 11.4 Substituted Limited Partners. (a) A person shall not become a Substituted Limited Partner unless the Managing General Partners consent to such substitution (which consent may be withheld in their absolute discretion) and receive such instruments and documents (including those specified in Section 5.2), and a reasonable transfer fee as the Managing General Partners shall require. (b) The original Limited Partner shall cease to be a Limited Partner, and the person to be substituted shall become a Substituted Limited Partner, as of the date on which the person to be substituted has satisfied the requirements set forth above and as of the date the Partnership List is amended to reflect his admission as a Substituted Limited Partner. The Managing General Partners agree to cause such amendments to the Partnership List to be processed daily on each day that its Transfer Agent shall be open for business. Thereafter the original Limited Partner shall have no rights or obligations with respect to the Partnership insofar as the Shares transferred to the Substituted Limited Partner are concerned other than liabilities which the original Limited Partner may have had to the Partnership on the date of transfer, and the Substituted Limited Partners shall be liable to return any excess distributions pursuant to Section 5.8(a) hereof. (c) Unless and until a person becomes a Substituted Limited Partner, his status and rights shall be limited to the rights of a Holder of Shares pursuant to Sections 11.3(a) and 11.3(b). A Holder of Shares who does not become a Substituted Limited Partner shall have no right to inspect the Partnership's books or to vote on any of the matters on which a Limited Partner would be entitled to vote. A Holder of Shares who has become a Substituted Limited Partner has all the rights and powers, and is subject to the restrictions and liabilities of a Limited Partner under this Agreement. (d) Any person admitted to the Partnership as Substituted Limited Partner shall be subject to and bound by the provisions of this Partnership Agreement as if originally a party to this Partnership Agreement. 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP 12.1 Dissolution. The Partnership shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (a) the stated term of the Partnership has expired unless the Partners by a Majority Vote have previously amended the Partnership Agreement to state a different term; (b) the Partnership has disposed of all of its assets; (c) A General Partner has ceased to be a General Partner and the remaining General Partners do not elect to continue the operations of the Partnership; (d) There is only one General Partner remaining and such General Partner has ceased to be a General Partner as set forth in Section 4.8; provided, however, that if the last remaining or surviving General Partner ceases to be a General Partner other than by removal, the Limited Partners may agree by unanimous vote to continue the operations of the Partnership and to admit one or more General Partners in accordance with the Partnership Agreement; (e) a decree of judicial dissolution has been entered by a court of competent jurisdiction; or (f) the Partners by a Majority Vote have voted to dissolve the Partnership. 12.2 Liquidation. (a) In the event of dissolution as provided in Section 12.1, the assets of the Partnership shall be distributed as follows: (i) all of the Partnership's debts and liabilities to persons (including Partners to the extent permitted by law) shall be paid and discharged, and any reserve deemed necessary by the Managing General Partners for the payment of such debts shall be set aside; and (ii) the balance of the assets of the Partnership (and any reserves not eventually used to satisfy debts of the Partnership) shall be liquidated and distributed pro rata to the Partners in accordance with the number of Shares held by each. (b) Upon dissolution, each Partner shall look solely to the assets of the Partnership for the return of his capital contribution and shall be entitled to receive only a distribution of a pro-rata share of Partnership property and assets, as provided in Section 12.2(a). If the Partnership property remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the capital contribution of each Limited Partner, such Limited Partner shall have no recourse against any General Partner, the assets of any other partnership of which any General Partner is a partner, or any other Limited Partner. The winding up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the Managing General Partners, who are authorized to do any and all acts and things authorized by law for these purposes. In the event of dissolution where there is no remaining General Partner, and there is a failure to appoint a new General Partner, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person as may be selected by Majority Vote, which person is hereby authorized to do any and all acts and things authorized by law for these purposes. 12.3 Termination. Upon the completion of the distribution of Partnership assets as provided in this Section and the termination of the Partnership, the General Partner(s) or other person acting as liquidator (or the Limited Partners, if necessary) shall cause the Certificate of Limited Partnership of the Partnership to be cancelled and shall take such other actions as may be necessary to legally terminate the Partnership. 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS 13.1 Books and Records. (a) The Partnership shall continuously maintain an office in the State of California, at which the following books and records shall be kept: (i) A Partnership List (or copy thereof) which shall be a current list of the full name and last known business or residence address of each Partner, set forth in alphabetical order together with the contribution and the share in profits and losses of each Partner, which list shall separately identify the interests of General and Limited Partners. (ii) A copy of the Certificate of Limited Partnership and all certificates of amendments thereto, together with executed copies of any powers of attorney pursuant to which any such certificate has been executed. (iii) Copies of the Partnership's Federal, state and local income tax or information returns and reports, if any, for the six most recent taxable years. (iv) Copies of this Partnership Agreement and all amendments thereto. (v) Financial statements of the Partnership for the six most recent fiscal years. (vi) The Partnership's books and records for at least the current and past three fiscal years. (b) The Partnership shall also maintain at its principal office such additional books and records as are necessary for the operation of the Partnership. 13.2 Limited Partners' Rights to Records. (a) Upon the request of a Limited Partner, the Managing General Partners shall promptly deliver to the Limited Partner, at the Partnership's expense, a copy of the items set forth in Section 13.1(a)(i), (ii) and (iv), provided, however, that such books and records and the information contained therein shall be treated as confidential and that such access shall be for proper Partnership purposes only and not for the private or commercial use of any Partner and further provided that the Partnership may require a Partner to enter into an undertaking to that effect. (b) Each Limited Partner shall have the right upon reasonable request to each of the following: (i) To inspect and copy during normal business hours, at the Limited Partner's expense (which shall include, without limitation, all Partnership costs to comply with such request, including any processing costs), any of the Partnership's records required to be kept pursuant to the Partnership Act. (ii) To obtain from the Managing General Partners promptly after becoming available, at the Limited Partner's expense, a copy of any Federal, state and local income tax or information returns required to be filed by the Partnership for each year. (c) The Managing General Partners shall promptly furnish to a Limited Partner a copy of any amendment to this Partnership Agreement executed by the Managing General Partners pursuant to a power of attorney from the Limited Partner. (d) The Managing General Partners shall send to each Partner within ninety (90) days after the end of each taxable year such information as is necessary to complete Federal and state income tax or information returns or such information as is required by the Tax Code. (e) At any time that the Partnership shall have more than 35 Limited Partners: (i) The Managing General Partners shall cause an annual report to be sent to each of the Partners not later than 120 days after the close of the Partnership's fiscal year. That report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year. (ii) Limited Partners representing at least 5% of the outstanding Shares of the Partnership may make a written request to the Managing General Partners for an income statement of the Partnership for the initial three-month, six- month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the Partnership as of the end of that period. The statement shall be delivered or mailed to the Limited Partners within thirty (30) days thereafter. (iii) The financial statements referred to in this subsection shall be accompanied by the report thereon, if any, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the Managing General Partners that such financial statements were prepared without audit from the books and records of the Partnership. (f) The Managing General Partners shall cause to be transmitted to each Partner such other reports and information as shall be required by the 1940 Act, the Partnership Act or the Tax Code. 13.3 Accounting Basis and Fiscal Year. The Partnership's books and records (i) shall be kept on a basis chosen by the Managing General Partners in accordance with the accounting methods followed by the Partnership for Federal income tax purposes and otherwise in accordance with generally accepted accounting principles applied on a consistent basis, (ii) shall reflect all Partnership transactions, (iii) shall be appropriate and adequate for the Partnership's business and for the carrying out of all provisions of this Partnership Agreement, and (iv) shall be closed and balanced at the end of each Partnership fiscal year. The fiscal year of the Partnership shall be the calendar year. 13.4 Tax Returns. The Managing General Partners, at the Partnership's expense, shall cause to be prepared any income tax or information returns required to be made by the Partnership and shall further cause such returns to be timely filed, including extensions, with the appropriate authorities. 13.5 Filings with Regulatory Agencies. The Managing General Partners, at the Partnership's expense, shall cause to be prepared and timely filed, including extensions, with appropriate Federal and state regulatory and administrative bodies, all reports required to be filed with such entities under then current applicable laws, rules and regulations. 13.6 Tax Matters and Notice Partner. The Managing General Partners shall designate one or more General Partners as the "Tax Matters Partner" and the "Notice Partner" of the Partnership in accordance with Sections 6231(a)(7) and (8) of the Tax Code, and each such Partner shall have no personal liability arising out of his good faith performance of his duties in such capacity. The "Tax Matters Partner" is authorized, at the Partnership's sole cost and expense, to represent and to retain legal counsel and accounting assistance to represent the Partnership and each Limited Partner in connection with all examinations of the Partnership affairs by tax authorities, including any resulting administrative and judicial proceedings. Each Limited Partner agrees to cooperate with the Managing General Partners and to do or refrain from doing any and all things reasonably required by the Managing General Partners to conduct such proceeding. The Managing General Partners shall have the right to settle any audits without the consent of the Limited Partners. 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS 14.1 Amendments in General. Except as otherwise provided in this Partnership Agreement, the Partnership Agreement may be amended only by the General Partners. 14.2 Amendments Without Consent of Limited Partners. In addition to any amendments otherwise authorized herein and except as otherwise provided, amendments may be made to this Partnership Agreement from time to time by the General Partners without the consent of any of the Limited Partners, including, without limitation, amendments: (i) to reflect the retirement, resignation, death or incompetency of a Managing General Partner; (ii) to add to the duties or obligations of the General Partners, or to surrender any right or power granted to the General Partners herein, for the benefit of the Limited Partners; (iii) to correct any false or erroneous statement, or to make a change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners; (iv) to supply any omission or to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or (v) to make such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership, as now or hereafter in effect. 14.3 Amendments Needing Consent of Affected Partners. Notwithstanding any other provision of this Partnership Agreement, without the consent of the Partner or Partners to be affected by any amendment to this Agreement, this Agreement may not be amended to (i) convert a Limited Partner's interest into a General Partner's interest, (ii) modify the limited liability of a Limited Partner, (iii) alter the interest of a Partner in income, gain, loss, deductions, credits, and distributions other than by purchase or redemption of Shares, or (iv) increase, add or alter any obligation of any Limited Partner. 14.4 Amendments to Certificate of Limited Partnership. (a) The Managing General Partners shall cause to be filed with the Secretary of State, within thirty (30) days after the happening of any of the following events, an amendment to the Certificate of Limited Partnership reflecting the occurrence of any of the following events: (i) A change in the name of the Partnership. (ii) A change in either of the following: (A) The street address of the Partnership's principal executive office. (B) If the principal executive office is not in California, the street address of an office in California. (iii) A change in the address of or the withdrawal of any of the General Partners, or a change in the address of the agent for service of process, unless a corporate agent is designated, or appointment of a new agent for service of process. (iv) The admission of a new General Partner and that Partner's address. (v) The discovery by the General Partner of any false or erroneous material statement contained in the Certificate of Limited Partnership. (b) Any Certificate of Limited Partnership filed or recorded in jurisdictions other than California shall be amended as required by applicable law. (c) The Certificate of Limited Partnership may also be amended at any time in any other manner deemed appropriate by the General Partner. 14.5 Amendments After Change of Law. This Agreement and any other Partnership documents may be amended and refiled, if necessary, by the Managing General Partners without the consent of the Limited Partners if there occurs any change that permits or requires an amendment of this Agreement under the Act or of any other Partnership document under applicable law, so long as no Partner is adversely affected (or consent is given by such Partner). 15. MISCELLANEOUS PROVISIONS 15.1 Notices. (a) Any written notice, offer, demand or communication required or permitted to be given by any provision of this Partnership Agreement, unless otherwise specified herein, shall be deemed to have been sufficiently given for all purposes if delivered personally to the party to whom the same is directed or if sent by first class mail addressed (i) if to a General Partner, to the principal place of business and office of the Partnership specified in this Agreement and (ii) if to a Limited Partner, to such Limited Partner's address as set forth in the Partnership List; provided, however, that notice given by any other means shall be deemed sufficient if actually received by the party to whom it is directed. (b) Any such notice that is sent by first class mail shall be deemed to be given two (2) days after the date on which the same is mailed. (c) The Managing General Partners may change the Partnership's address for purposes of this Partnership Agreement by giving written notice of such change to the Limited Partners, and any Limited Partner may change his address for purposes of this Partnership Agreement by giving written notice of such change to the Managing General Partners, in the manner herein provided for the giving of notices. 15.2 Section Headings. The Section headings in this Partnership Agreement are inserted for convenience and identification only and are in no way intended to define or limit the scope, extent or intent of this Partnership Agreement or any of the provisions hereof. 15.3 Construction. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. If any language is stricken or deleted from this Partnership Agreement, such language shall be deemed never to have appeared herein and no other implication shall be drawn therefrom. The language in all parts of this Partnership Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the General Partners or the Limited Partners. 15.4 Severability. If any covenant, condition, term or provision of this Partnership Agreement is illegal, or if the application thereof to any person or in any circumstance shall to any extent be judicially determined to be invalid or unenforceable, the remainder of this Partnership Agreement, or the application of such covenant, condition, term or provision to persons or in circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each remaining covenant, condition, term and provision of this Partnership Agreement shall be valid and enforceable to the fullest extent permitted by law. 15.5 Governing Law. This Partnership Agreement shall be construed and enforced in accordance with, and governed by, California law. 15.6 Counterparts. This Partnership Agreement may be executed in one or more counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same Partnership Agreement. 15.7 Entire Agreement. This Partnership Agreement and the separate subscription agreements of each Limited Partner and General Partner constitute the entire agreement of the parties as to the subject matter hereof. All prior agreements among the parties as to the subject matter hereof, whether written or oral, are merged herein and shall be of no force or effect. This Partnership Agreement cannot be changed, modified or discharged orally but only by an agreement in writing. There are no representations, warranties, or agreements other than those set forth in this Partnership Agreement and such separate subscription agreements, if any. 15.8 Cross-References. All cross-references in this Partnership Agreement, unless specifically directed to another agreement or document, refer to provisions in this Partnership Agreement. 15.9 Power of Attorney to the General Partners. (a) Each Partner hereby makes, constitutes and appoints each Managing General Partner and any person designated by the Managing General Partners, with full substitution, his agent and attorney-in-fact in his name, place and stead, to take any and all actions and to make, execute, swear to and acknowledge, amend, file, record and deliver the following documents and any other documents deemed by the Managing General Partners necessary for the operations of the Partnership: (i) any Certificate of Limited Partnership or Certificate of Amendment thereto, required or permitted to be filed on behalf of the Partnership, and any and all certificates as necessary to qualify or continue the Partnership as a limited partnership or partnership wherein the Limited Partners thereof have limited liability in the states where the Partnership may be conducting activities, and all instruments which effect a change or modification of the Partnership in accordance with this Partnership Agreement; (ii) this Partnership Agreement and any amendments thereto in accordance with this Partnership Agreement; (iii) any other instrument which is now or which may hereafter be required or advisable to be filed for or on behalf of the Partnership; (iv) any document which may be required to effect the continuation of the Partnership, the admission of an additional Limited Partner or Substituted Limited Partner, or the dissolution and termination of the Partnership (provided such continuation, admission or dissolution and termination is in accordance with the terms of this Partnership Agreement), or to reflect any reductions or additions in the amount of the contributions of Partners, in each case having the power to execute such instruments on his behalf, whether the undersigned approved of such action or not; (v) any document containing any investment representations and/or representations relating to citizenship, residence and tax status required by any state or Federal law or regulation in connection with an investment by the Partnership; and (iv) any tax elections. (b) This Power of Attorney is a special Power of Attorney coupled with an interest, and shall not be revoked and shall survive the transfer by any Limited Partner of all or part of his interest in the Partnership and, being coupled with an interest, shall survive the death or disability or cessation of the existence as a legal entity of any Limited Partner; except that where the successor in interest has been approved by said attorney for admission to the Partnership as a Substituted Limited Partner, this Power of Attorney shall survive the transfer for the sole purpose of enabling said attorney to execute, acknowledge and file any instrument necessary to effectuate such substitution. (c) Each Limited Partner hereby gives and grants to his said attorney under this Power of Attorney full power and authority to do and perform each and every act and thing whatsoever requisite, necessary or appropriate to be done in or in connection with this Power of Attorney as fully to all intents and purposes as he might or could do if personally present, hereby ratifying all that his said attorney shall lawfully do or cause to be done by virtue of this Power of Attorney. (d) The existence of this Power of Attorney shall not preclude execution of any such instrument by the undersigned individually on any such matter. A person dealing with the Partnership may conclusively presume and rely on the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. (e) The appointment of each Managing General Partner and each designee of that General Partner as attorney-in- fact pursuant to this power of attorney automatically shall terminate as to such person at such time as he ceases to be a General Partner and from such time shall be effective only as to the substitute General Partner admitted in accordance with this Partnership Agreement and his designees. 15.10 Further Assurances. The Limited Partners will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purposes of this Partnership Agreement. 15.11 Successors and Assigns. Subject in all respects to the limitations on transferability contained herein, this Partnership Agreement shall be binding upon, and shall inure to the benefit of, the heirs, administrators, personal representatives, successors and assigns of the respective parties hereto. 15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Partnership and during the period of its liquidation following any dissolution, any right that he may have to maintain any action for partition with respect to any of the assets of the Partnership. 15.13 Creditors. None of the provisions of this Partnership Agreement shall be for the benefit of or enforceable by any of the creditors of the Partnership or the Partners. 15.14 Remedies. The rights and remedies of the Partners hereunder shall not be mutually exclusive, and the exercise by any Partner of any right to which he is entitled shall not preclude the exercise of any other right he may have. 15.15 Custodian. All assets of the Partnership shall be held by a custodian meeting the requirements of the 1940 Act, and may be registered in the name of the Partnership or such custodian or nominee. The terms of the custodian agreement shall be determined by the Managing General Partners. 15.16 Use of Name "Franklin. "Franklin Partners, Inc., as the initial Non-Managing General Partner, on behalf of its parent, Franklin Resources, Inc., hereby consents to the use by the Partnership of the name "Franklin" as part of the Partnership's name; provided, however, that such consent shall be conditioned upon the employment of Franklin Resources, Inc. or one of its affiliates as an investment adviser of the Partnership. The name "Franklin" or any variation thereof may be used from time to time in other connections and for other purposes by Franklin Resources, Inc. and its affiliates and other investment companies that have obtained consent to use the name "Franklin." Franklin Resources, Inc. and its affiliates shall have the right to require the Partnership to cease using the name "Franklin" as part of the Partnership's name if the Partnership ceases, for any reason, to employ Franklin Resources, Inc. or one of its affiliates as its investment adviser. Future names adopted by the Partnership for itself, insofar as such names include identifying words requiring the consent of Franklin Resources, Inc. or one of its affiliates, shall be the property of Franklin Resources, Inc. and its affiliates and shall be subject to the same terms and conditions. 15.17 Authority. Each individual executing this Agreement on behalf of a partnership, corporation, or other entity warrants that he is authorized to do so and that this agreement will constitute the legal binding obligation of the entity which he represents. 15.18 Signatures. The signature of a Managing General Partners or an Officer or agent of the Partnership duly appointed by the Managing General Partners shall be sufficient to bind the Partnership to any agreement or on any document, including, but not limited to, documents drawn or agreements made in connection with the acquisition or disposition of any assets. 15.19 Arbitration. The parties hereby submit all controversies, claims and matters of difference to arbitration before a single arbitrator in San Francisco, California, according to the rules and practices of the American Arbitration Association from time to time in force. This submission and agreement to arbitrate shall be specifically enforceable. Without limiting the generality of the foregoing, the following shall be considered controversies for this purpose: (a) all questions relating to the breach of any obligation, warranty, agreement or condition hereunder; (b) failure of any party to deny or reject a claim or demand of any other party; and (c) all questions as to whether the right to arbitrate any question exists. Arbitration may proceed in the absence of any party if written notice (pursuant to the American Arbitration Association's rules and regulations) of the proceedings has been given to such party. The parties agree to abide by all awards rendered in such proceedings. Such awards shall be final and binding on all parties to the extent and in the manner provided by California All awards may be filed with the Clerk of the Superior Court in San Francisco, California, as a basis of judgment and of the issuance of execution for its collection and, at the election of the party making such filing, with the clerk of one or more other courts, state or Federal, having jurisdiction over the party against whom such an award is rendered or his property. FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (A CALIFORNIA LIMITED PARTNERSHIP) AGREEMENT OF LIMITED PARTNERSHIP as amended December 19, 1986, July 13, 1987, June 19, 1990, May 1, 1991 and January 18, 1994 APPENDIX C TABLE OF CONTENTS 1. GENERAL PROVISIONS 1.1 Formation 1.2 Name and Place of Business 1.3 Term 1.4 Agent for Service of Process 1.5 Certificate of Limited Partnership 1.6 Other Acts/Filings 2. DEFINITIONS 2.1 Affiliate 2.2 Capital Accounts 2.3 General Partner 2.4 Holder of Record or Holder of a Share 2.5 Limited Partner 2.6 Majority Vote 2.7 Managing General Partner 2.8 Net Asset Value (per Share) 2.9 Non-Managing General Partner 2.10 Officers 2.11 Person 2.12 Partners 2.13 Partnership 2.14 Partnership Act 2.15 Partnership Group 2.16 Partnership List 2.17 Registration Statement 2.18 Secretary of State 2.19 Share (including fractional Shares) 2.20 Substituted Limited Partner 2.21 Tax Code 2.22 Transfer Agent 2.23 1940 Act 3. ACTIVITIES AND PURPOSE 3.1 Operating Policy 3.2 Investment Objectives 3.3 Investment and Operating Limitations 3.4 Other Authorized Activities 4. GENERAL PARTNERS 4.1 Identity and Number 4.2 Managing and Non-Managing General Partners 4.3 General Partners' Contributions 4.4 Management and Control 4.5 Action by the Managing General Partners 4.6 Limitations of the Authority of the Managing General Partners 4.7 Right of General Partners to Become Limited Partners 4.8 Termination of a General Partner 4.9 Additional or Successor General Partners 4.10 Liability to Limited Partners 4.11 Assignment and Substitution 4.12 No Agency 4.13 Reimbursement and Compensation 4.14 Indemnification 5. LIMITED PARTNERS 5.1 Identity of Limited Partners 5.2 Admission of Limited Partners 5.3 Contributions of the Limited Partners 5.4 Additional Contributions of Limited Partners 5.5 Use of Contributions 5.6 Redemption by Limited Partners 5.7 Minimum Contribution and Mandatory Redemption 5.8 Limited Liability 5.9 No Power to Control Operations 6. SHARES OF PARTNERSHIP INTEREST 7. PURCHASE AND EXCHANGE OF SHARES 7.1 Purchase of Shares 7.2 Net Asset Value 7.3 Exchange of Shares 8. REDEMPTION OR REPURCHASE OF SHARES 8.1 Redemption of Shares 8.2 Payment for Redeemed Shares 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE 9.1 Rights of Limited Partners 9.2 Action of the Partners 9.3 Meeting 9.4 Notices 9.5 Validity of Vote for Certain Matters 9.6 Adjournment 9.7 Waiver of Notice and Consent to Meeting 9.8 Quorum 9.9 Required Vote 9.10 Action by Consent Without a Meeting 9.11 Record Date 9.12 Proxies 9.13 Number of Votes 10 DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES 10.1 Fees of General Partners 10.2 Distributions of Income and Gains 10.3 Allocation of Income, Gains, Losses, Deductions and Credits 10.4 Returns of Contributions 10.5 Capital Accounts 10.6 Allocations for Tax Purposes 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment 11.2 Rights of the Holders of Shares as Collateral or Judgment Creditor 11.3 Death, Incompetency, Bankruptcy or Termination of the Existence of a Partner 11.4 Substituted Limited Partners 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP 12.1 Dissolution 12.2 Liquidation 12.3 Termination 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS 13.1 Books and Records 13.2 Limited Partners' Rights to Records 13.3 Accounting Basis and Fiscal Year 13.4 Tax Returns 13.5 Filings with Regulatory Agencies 13.6 Tax Matters and Notice Partner 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS 14.1 Amendments in General 14.2 Amendments Without Consent of Limited Partners 14.3 Amendments Needing Consent of Affected Partners 14.4 Amendments to Certificate of Limited Partnership 14.5 Amendments After Change of Law 15. MISCELLANEOUS PROVISIONS 15.1 Notices 15.2 Section Headings 15.3 Construction 15.4 Severability 15.5 Governing Law 15.6 Counterparts 15.7 Entire Agreement 15.8 Cross-References 15.9 Power of Attorney to the General Partners 15.10 Further Assurances 15.11 Successors and Assigns 15.12 Waiver of Action for Partition 15.13 Creditors 15.14 Remedies 15.15 Custodian 15.16 Use of Name "Franklin" 15.17 Authority 15.18 Signatures 15.19 Arbitration FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND (a California limited partnership) This AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ("Partnership Agreement") is entered into as of the 19th day of June, 1990 by and among the undersigned individuals, as Managing General Partners; FRANKLIN PARTNERS, INC., a California corporation, as Non-Managing General Partner (collectively, the "General Partners"); and each of the persons identified on the Partnership List of the Partnership as limited partners (the "Limited Partners"). 1. GENERAL PROVISIONS 1.1 Formation. The parties hereby agree to form a limited partnership (the "Partnership") under the terms and conditions set forth below pursuant to the California Revised Limited Partnership Act (the "Partnership Act"). 1.2 Name and Place of Business. The name of the Partnership shall be Franklin Tax-Advantaged International Bond Fund (a California limited partnership), or such other name as shall be selected from time to time by the Managing General Partners upon notice to the Limited Partners. The principal place of business of the Partnership shall be 777 Mariners Island Boulevard, San Mateo, California 94404, or such other place or places as the Managing General Partners may deem necessary or desirable to the conduct of the Partnership's activities, including places or the conduct of activities relating to its investments, the location and holding of its assets, the execution of its portfolio transactions and other operations. 1.3 Term. The term of the Partnership shall commence upon the filing of the Certificate of Limited Partnership with the Secretary of State and shall continue until the 31st day of December, 2036, unless terminated earlier in accordance with the provisions of this Partnership Agreement. 1.4 Agent for Service of Process. The agent for service of process on the Partnership in California shall be Harmon E. Burns, Esq. or such other eligible California resident individual or corporation qualified to act as an agent for service of process as the Managing General Partners shall designate. 1.5 Certificate of Limited Partnership. The Managing General Partners shall cause a Certificate of Limited Partnership to be filed with the Secretary of State in accordance with the terms of the Partnership Act. 1.6 Other Acts/Filings. The Partners shall from time to time execute or cause to be executed all such certificates, fictitious business name statements, and other documents, and do or cause to be done all such filings, recordings, publishings, and other acts as the Managing General Partners may deem necessary or appropriate to comply with the requirements of law for the formation and operation of the Partnership in all jurisdictions in which the Partnership shall desire to conduct its activities. 2. DEFINITIONS When used in this Partnership Agreement the following terms shall have the meanings set forth below: 2.1 Affiliate. "Affiliate" shall mean: (i) any person directly or indirectly controlling, controlled by or under common control with another person; (ii) a person owning or controlling 10% or more of the outstanding securities of that other person; (iii) any officer, director or partner of that other person; and (iv) if that other person is an officer, director or partner, any company for which that person acts in any such capacity (person shall include any natural person, partnership, corporation, association or other legal entity). 2.2 Capital Accounts. The accounts maintained for each Partner in accordance with Section 10.5 hereof. 2.3 General Partner. Each of the initial General Partners designated in the Preamble and any other person or entity who shall hereafter become a General Partner. 2.4 Holder of Record or Holder of a Share. (a) a General Partner; (b) a Limited Partner if he or it has not redeemed or transferred all of his (its) Shares of the Partnership pursuant to Sections 8 or 11; (c) a purchaser of a Share or Shares of the Partnership; or (d) the successor in interest of a Partner under Section 11. 2.5 Limited Partner. The original Limited Partner and all other persons who shall hereafter be admitted to the Partnership as additional Limited Partners or Substituted Limited Partners, except those persons who: (a) have redeemed all Shares of the Partnership owned by them and such redemption has been reflected in the Partnership List; or (b) have been replaced by a Substituted Limited Partner to the extent of their entire Limited Partnership Interest. Reference to a "Limited Partner" shall mean any one of the Limited Partners. 2.6 Majority Vote. The affirmative vote of the lesser of (i) 67% or more of the Shares represented at a meeting and entitled to vote if more than 50% of the then outstanding shares are present or represented by proxy, or (ii) more than 50% of the then outstanding Shares entitled to vote. 2.7 Managing General Partner. Each General Partner who is an individual. 2.8 Net Asset Value (per Share).The value (in U.S. Dollars) of a Share as determined in accordance with Section 7.2 hereof. 2.9 Non-Managing General Partner. Each General Partner that is not an individual (i.e., any General Partner that is a corporation, association, partnership, joint venture or trust). 2.10 Officers. Those persons designated by the Managing General Partners to perform administrative and operational functions on behalf of the Managing General Partners. 2.11 Person. An individual, partnership, joint venture, association, corporation or trust. 2.12 Partners. Collectively, the General Partners and the Limited Partners. "Partner" means any one of the Partners. 2.13 Partnership. The limited partnership created and continued by this Partnership Agreement. 2.14 Partnership Act. The California Revised Limited Partnership Act (Chapter 3 of Title 2 of the Corporations Code of California). 2.15 Partnership Group. All other limited partnerships organized under the Partnership Act of which Franklin Partners, Inc. or any parent, subsidiary or affiliate of Franklin Partners, Inc. is a General Partner and which are registered under the 1940 Act as open-end management investment companies. 2.16 Partnership List. A current list of all the Partners containing the information specified in Section 13.1(a)(i) hereof. 2.17 Registration Statement. The Registration Statement on Form N-1A, registering the Shares of the Partnership under the Securities Act of 1933 and the 1940 Act, as such Registration Statement may be amended from time to time. 2.18 Secretary of State. The Secretary of State of the State of California. 2.19 Share (including fractional Shares).A partnership interest in the Partnership. Reference to "Shares" shall be to more than one Share. 2.20 Substituted Limited Partner. A successor in interest of a Limited Partner who has complied with the conditions set forth in Section 11. 2.21 Tax Code. The Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent revenue laws, and all regulations, rulings and other promulgations or judicial decisions thereunder. 2.22 Transfer Agent. The person appointed by the Managing General Partners to be primarily responsible for maintaining the Partnership List and certain other records of the Partnership. 2.23 1940 Act. The Investment Company Act of 1940, as amended, or as it may hereafter be amended, and the Rules and Regulations thereunder. 3. ACTIVITIES AND PURPOSE 3.1 Operating Policy. The Partnership will be authorized and empowered to operate and will operate as an open-end, diversified management investment company under the 1940 Act. 3.2 Investment Objectives. Subject to the limitations set forth in this Partnership Agreement, the investment objectives of the Partnership shall be to invest and reinvest its assets to seek income, consistent with preservation of principal, by investing principally in U.S. dollar denominated debt securities of non-U.S. issuers and foreign currency denominated debt securities of both U.S. and foreign issuers which are readily marketable. 3.3 Investment and Operating Limitations. The following additional fundamental policies and investment restrictions have been adopted by the Partnership and (unless otherwise noted) cannot be changed except by Majority Vote. These investment restrictions provide that the Partnership may not: (a) With respect to at least 75% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment (i) more than 5% of the total assets of the Partnership would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of such issuer would be owned by the Partnership. (b) Make loans to others, except through the purchase of debt securities in accordance with its investment objectives and policies or to the extent the entry into a repurchase agreement is deemed to be a loan. (c) (i) Borrow money, except temporarily for extraordinary or emergency purposes from a bank and then not in excess of 25% of its total assets (at the lower of cost or fair market value). Any such borrowing will be made only if immediately thereafter there is an asset coverage of at least 300% of all borrowings, and no additional investments may be made while any such borrowings are in excess of 5% of total assets. (ii) Mortgage, pledge or hypothecate any of its assets except in connection with any such borrowings. (d) Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite securities. (Does not preclude the Partnership from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, or from engaging in permissible foreign currency hedging transactions.) (e) Buy or sell interests in oil, gas or mineral exploration or development programs, or real estate. (Does not preclude investments in marketable securities of companies engaged in such activities.) (f) Purchase or hold securities of any issuer, if, at the time of purchase or thereafter, any of the General Partners or Officers of the Partnership or its investment adviser(s) own beneficially more than 1/2 of 1%, and such General Partners or Officers holding more than 1/2 of 1% together own beneficially more than 5% of the issuer's securities. (g) Invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with predecessors, of at least three years of continuous operation. This is not a fundamental policy and may be changed by the Managing General Partners without prior approval by Majority Vote. (h) Purchase or sell commodities or commodity contracts or invest in puts, calls, straddles or spread options. (Does not preclude the purchase of or transactions in foreign exchange for hedging purposes, including forward foreign exchange transactions, the purchase or sale of foreign currency options, foreign currency futures transactions and the purchase or sale of options on foreign currency futures, or transactions in foreign exchange in connection with the investment of cash balances held outside of the United States.) (i) Invest in securities of other investment companies, except as they may be acquired as part of a merger, consolidation or acquisition of assets. This is not a fundamental policy and may be changed by the Managing General Partners without prior approval by Majority Vote. (j) Invest more than 10% of its assets in securities with legal or contractual restrictions on resale, securities which are not readily marketable, and repurchase agreements with more than 7 days to maturity. (k) Invest in any issuer for purposes of exercising control or management. (l) Concentrate more than 25% of the market value of its assets in the securities of companies engaged in any one industry. (Does not apply to investment in the securities of the U.S. Government, its agencies or instrumentalities.) (m) Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Partnership from (a) making any permitted borrowings, mortgages or pledges, or (b) entering into repurchase transactions. This is not a fundamental policy and may be changed by the Managing General Partners without prior approval by Majority Vote. 3.4 Other Authorized Activities. Subject to the limitations set forth in this Partnership Agreement, the Partnership shall have the power to purchase and sell securities, issue evidences of indebtedness in connection with Partnership business, to join or become a partner in limited or general partnerships and to do any and all other things and acts, and to exercise any and all of the powers that a natural person could do or exercise and which now or hereafter may be lawfully done or exercised by a limited partnership. 4. GENERAL PARTNERS 4.1 Identity and Number. The names of the General Partners and their last known business or residence address shall be set forth in the Certificate of Limited Partnership, as it may be amended from time to time; this same information, together with the amounts of the contributions of each General Partner and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. The General Partners shall be identified as such on the Partnership List and also shall be identified separately as Managing General Partners or Non- Managing General Partners. The Managing General Partners may from time to time recommend to the Partners that additional persons be admitted as General Partners; provided, however, that if at any time following the effective date of the Partnership's Registration Statement the number of Managing General Partners is reduced to less than three, the remaining Managing General Partners shall, within 120 days, call a meeting of Partners for the purpose of electing an additional Managing General Partner or Managing General Partners so as to restore the number of Managing General Partners to at least three. 4.2 Managing and Non-Managing General Partners. Only individuals may act as Managing General Partners, and all General Partners who are individuals shall act as Managing General Partners. Any General Partner that is a corporation, association, partnership, joint venture or trust shall act as a Non-Managing General Partner. Except as provided in Section 4.4 hereof, a Non- Managing General Partner as such shall take no part in the management, conduct or operation of the Partnership's business and shall have no authority to act on behalf of the Partnership or to bind the Partnership. All General Partners, including Managing and Non-Managing General Partners, shall be subject to election and removal by the Partners as hereinafter provided. 4.3 General Partners' Contributions. (a) Each General Partner, as such, shall make a contribution of cash to the Partnership sufficient to purchase at least one Share (plus any applicable sales charge) and shall continue to own unencumbered at least one such Share at all times while serving as a General Partner. The amount contributed by each General Partner shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges and which amount may be less than the offering price paid by such General Partner for his shares to the extent the offering price includes any sales charges. The amount of such contributions and the number of Shares owned by each General Partner shall be set forth in the Partnership List. (b) The Non-Managing General Partner shall, in its capacity as such Non-Managing General Partner, be obligated to contribute to the Partnership through the purchase of Shares from time to time amounts sufficient to enable the General Partners in the aggregate, to maintain in their capacities as General Partners an interest in each material item of Partnership income, gain, loss, deduction or credit equal to at least 1% of each such item at all times during the existence of the Partnership. If upon termination of the Partnership, the General Partners have a negative balance in their Capital Accounts, they shall in their capacity as General Partners be obligated to make additional capital contributions in cash equal to the lesser of (i) the negative balance in their Capital Accounts or (ii) the amount, if any, by which 1.01% of the total capital contributions of the Limited Partners exceeds the total capital contributions of the General Partners prior to such termination. For as long as the Non-Managing General Partner retains its status as such, it shall not redeem or assign Shares held by it in its capacity as the Non- Managing General Partner or otherwise accept distributions in cash or property if such action would result in the failure of the General Partners to maintain such an interest. In the event that the Non-Managing General Partner is removed or stands for re- election and is not re-elected by the Partners pursuant to Section 9 hereof, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice, redeem its Shares in the same manner as is provided in Section 8 hereof. In the event that the Non-Managing General Partner voluntarily withdraws or declines to stand for re-election, the Non-Managing General Partner may, upon not less than thirty (30) days' written notice following the occurrence of an event described in (i), (ii) or (v) in Section 4.8(a), redeem its Shares in the same manner as provided in Section 8. In the event that the Non-Managing General Partner is removed, stands for re-election and is not re-elected, voluntarily withdraws or declines to stand for re-election, the Managing General Partners shall cause the Certificate of Limited Partnership to be amended as provided in Section 14.4 hereof to reflect such withdrawal. 4.4 Management and Control. Subject to the terms of the Partnership Agreement and the 1940 Act, the Partnership will be managed by the Managing General Partners, who will have complete and exclusive control over the management, conduct and operation of the Partnership's business, and, except as otherwise specifically provided in this Partnership Agreement, the Managing General Partners shall have the rights, powers and authority, on behalf of the Partnership and in its name, to exercise all of the rights, powers and authority of partners of a partnership without limited partners. The Managing General Partners may contract on behalf of the Partnership with one or more banks, trust companies or investment advisers for the performance of such functions as the Managing General Partners may determine, but subject always to their continuing supervision, including, without limitation, the investment and reinvestment of all or part of the Partnership's assets and execution of portfolio transactions, the distribution of Shares, and any or all administrative functions. The Managing General Partners may appoint officers or agents to perform such duties on behalf of the Partnership and the Managing General Partners as the Managing General Partners deem desirable. Such officers or agents need not be General or Limited Partners. The Managing General Partners may also employ persons to perform various duties on behalf of the Partnership as employees of the Partnership. The Managing General Partners shall devote themselves to the Partnership's business to the extent they may determine necessary for the efficient conduct thereof, which need not, however, occupy their full time. The General Partners may also engage in other businesses, whether or not similar in nature to the business of the Partnership, subject to the limitations of the 1940 Act. In the event that no Managing General Partner shall remain for the purpose of managing and conducting the business of the Fund, the Non-Managing General Partner shall promptly call a meeting of the Limited Partners to be held within sixty (60) days of the date the last Managing General Partner ceases to act in such capacity to elect new Managing General Partners up to a maximum number of Managing General Partners theretofore admitted to the Partnership (but no fewer than three). For the period of time during which no Managing General Partner shall remain, the Non-Managing General Partner, subject to the terms and provisions of this Partnership Agreement, shall be permitted to engage in the management, conduct and operation of the business of the Partnership. 4.5 Action by the Managing General Partners. Unless otherwise required by the 1940 Act with respect to any particular action, the Managing General Partners shall act only by the vote of a majority of the Managing General Partners at a meeting duly called at which a quorum of the Managing General Partners is present or by unanimous written or telephonic consent of the Managing General Partners without a meeting. At any meeting of the General Partners, a majority of the Managing General Partners shall constitute a quorum. If there shall be more than one Managing General Partner, no single Managing General Partner shall have authority to act on behalf of the Partnership or to bind the Partnership. The Managing General Partners shall appoint one of their number to be Chairman. Meetings of the Managing General Partners may be called orally or in writing by the Chairman or by any two Managing General Partners. Notice of the time, date and place of all meetings of the Managing General Partners shall be given by the party calling the meeting to each Managing General Partner by telephone or telegram sent to his home or business address at least twenty-four hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two hours in advance of the meeting. Notice need not be given to any Managing General Partner who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting. The Chairman, if present, shall preside at all meeting of Partners. 4.6 Limitations of the Authority of the Managing General Partners. The Managing General Partners shall have no authority without the vote or written consent or ratification of the Limited Partners to: (a) do any act in contravention of this Partnership Agreement, as it may be amended from time to time; (b) do any act which would make it impossible to carry on the ordinary business of the Partnership; (c) confess a judgment against the Partnership; (d) possess Partnership property, or assign their rights in specific property, for other than a partnership purpose; (e) admit a person as a General Partner except in accordance with Section 9 hereof; or (f) admit a person as a Limited Partner, except in accordance with Section 5 hereof. 4.7 Right of General Partners to Become Limited Partners. A General Partner may also own Shares as a Limited Partner without obtaining the consent of the Limited Partners and thereby become entitled to all the rights of a Limited Partner to the extent of the Limited Partnership interest so acquired. Such event shall not, however, be deemed to reduce or otherwise affect any of the General Partners' liability hereunder as a General Partner. If a General Partner shall also become a Limited Partner, the contributions and Share ownership of such General Partner shall be separately designated in the Partnership List to reflect his interest in each capacity. 4.8 Termination of a General Partner. (a) The interest of a General Partner shall terminate and such party shall have no further right or power to act as a General Partner (except to execute any amendment to this Partnership Agreement to evidence his termination): (i) upon death of the General Partner; (ii) upon an adjudication of incompetency of the General Partner; (iii) if such Partner is removed or stands for re- election and is not re-elected by the Partners, as provided in Section 9 below; (iv) in the case of the Non-Managing General Partner, upon the filing of a certificate of dissolution, or its equivalent, or voluntary or involuntary petition in bankruptcy for such Non-Managing General Partner; or (v) if such Partner voluntarily retires upon not less than ninety (90) days' written notice to the other General Partners. (b) Notwithstanding the foregoing, the Non-Managing General Partner shall not voluntarily withdraw or otherwise voluntarily terminate its status as the Non-Managing General Partner until the earliest of (i) 180 days from the date that the Non-Managing General Partner gives the other General Partners its written notice of its intention to withdraw as a Non-Managing General Partner, (ii) the date that a successor Non-Managing General Partner, who has agreed to assume the obligations of Section 4.3(b) hereof, is elected by the Partners pursuant to Section 9 hereof, or (iii) the date that another General Partner assumes the obligations imposed upon the Non-Managing General Partner pursuant to Section 4.3(b) hereof. The failure of the Non- Managing General Partner to seek re-election at any meeting of the Partners called for such purpose shall be deemed to constitute a voluntary withdrawal as of the date of such meeting and shall constitute written notice as at the date of notice of such meeting of its intention to withdraw as a Non-Managing General Partner, unless it has delivered written notice at an earlier date. (c) In the event a General Partner ceases to be a General Partner, the remaining General Partners shall have the right to continue the operations of the Partnership. (d) Termination of a person's status as a General Partner shall not affect his status, if any, as a Limited Partner. A General Partner may retain Shares owned in his capacity as a Limited Partner provided such General Partner has been or is admitted to Partnership as a Limited Partner in accordance with Section 5.2. (e) A person who ceases to be a General Partner shall nevertheless be deemed to be acting as a General Partner with respect to a third party doing business with the Partnership until an amended Certificate of Limited Partnership is filed with the Secretary of State. 4.9 Additional or Successor General Partners. A person may be added or substituted as a General Partner only upon his admission by the Partners at a meeting of Partners or by written consent without a meeting as provided in Section 9 hereof. Each General Partner, by becoming a General Partner, consents to the admission as an added or substituted General Partner of any person elected by the Partners in accordance with this Partnership Agreement. Any person who is elected to be admitted as a General Partner at a meeting of the Partners or by written consent in accordance with Section 9 hereof and who shall not be serving as a General Partner at the time of such election, shall be admitted to the Partnership as a General Partner effective as of the date of such election. Any General Partner who is not re- elected at any such meeting in the manner specified in Section 9 shall be deemed to have withdrawn as of the date of such meeting. 4.10 Liability to Limited Partners. The General Partners shall not be personally liable for the repayment of any amounts standing in the account of a Limited Partner or holder of Shares including, but not limited to, contributions with respect to such Shares, except by reason of their wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office. Any payment, other than in the event of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by a General Partner, which results in a personal liability to Limited Partners or holders of Shares, shall be solely from the Partnership's assets. So long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners, the General Partners shall not have any personal liability to any holder of Shares or to any Limited Partner by reason of (1) any failure to withhold income tax under Federal or state tax laws with respect to income allocated to Limited Partners or (2) any change in the Federal or state tax laws or in interpretation thereof as they apply to the Partnership, the holders of the Shares or the Limited Partners, whether such change occurs through legislative, judicial or administrative action. 4.11 Assignment and Substitution. Each Share held by a General Partner in his capacity as a General Partner shall be designated as such, and each such Share shall be non-assignable, except to another person who already is a General Partner, and then only with the consent of the Managing General Partners, and shall be redeemable by the Partnership only in the event that (i) the holder thereof has ceased to be a General Partner of the Partnership or (ii) in the opinion of counsel for the Partnership redemption of Shares held by a General Partner would not jeopardize the status of the Partnership as a partnership for Federal income tax purposes. 4.12 No Agency. Except as provided in Section 15.9 below, nothing in this Partnership Agreement shall be construed as establishing any General Partner as an agent of any Limited Partner. 4.13 Reimbursement and Compensation. Managing General Partners may receive reasonable compensation for their services as Managing General Partners and will be reimbursed for all reasonable out-of-pocket expenses incurred in performing their duties hereunder. 4.14 Indemnification. (a) Subject to the exceptions and limitations contained in Subsection (b) below: (i) Every person who is, or has been, a General Partner, an officer and/or Director of a corporate General Partner or Officer of the Partnership (hereinafter referred to as "Covered Person") shall be indemnified by the Partnership to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a General Partner, an officer and/or Director of a Corporate General Partner or officer of the Partnership and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim", "action", "suit", or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person: (i) who shall have been finally adjudicated by a court or other body before which the proceeding was brought (A) to be liable to the Partnership or its Partners by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Partnership; or (ii) in the event of a settlement, or other disposition not involving a final adjudication as provided in subsection (b)(i) unless there has been a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, (A) by the court or other body approving the settlement or other disposition; (B) by vote of at least a majority of those Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel, based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Partner may, by appropriate legal proceedings, challenge any such determination by the Managing General Partners, or by independent counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Partnership, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such General Partner, officer and/or Director of a Corporate General Partner or officer of the Partnership and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Partnership personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law. (d) Expenses incurred in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section 4.14 shall be paid by the Partnership from time to time in advance prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Partnership if it is ultimately determined that he is not entitled to indemnification under this Section 4.14; provided, however, that either (i) such Covered Persons shall have provided appropriate security for such undertaking, (ii) the Partnership is insured against losses arising out of any such advance payments, or (iii) either a majority of the Managing General Partners who are neither interested persons (as defined in the 1940 Act) of the Partnership nor are parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a full trial- type inquiry), that there is reason to believe that such Covered Person will be found entitled to indemnification under this Section 4.14. 5. LIMITED PARTNERS 5.1 Identity of Limited Partners. The names of the Limited Partners and their last known business or residence addresses, together with the amounts of their contributions and their current Share ownership, shall be set forth in alphabetical order in the Partnership List. 5.2 Admission of Limited Partners. The Managing General Partners may admit a purchaser of Shares as a Limited Partner, upon (i) the execution by such purchaser of such subscription documents and other instruments as the Managing General Partners may deem necessary or desirable to effectuate such admission, which documents, if any shall be required, shall be described in the Partnership's Registration Statement, (ii) the purchaser's acceptance of all the terms and provisions of this Partnership Agreement, including the power of attorney set forth in Section 15.9 hereof, in such manner as shall be specified by the Managing General Partners, and (iii) the addition of such purchaser to the Partnership List. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the admission of new Limited Partners. In no event shall the consent or approval of any of the Limited Partners be required to effectuate such admission. Each purchaser of a Share of the Partnership who becomes a Limited Partner shall be bound by all the terms and conditions of this Partnership Agreement including, without limitation, the allocation of income, gains, losses, deductions and credits as provided in Section 10.3. Notwithstanding anything in this Partnership Agreement to the contrary, the Managing General Partners reserve the right to refuse to admit any person as a Limited Partner if, in their judgment, it would not be in the Partnership's best interests to admit such person. 5.3 Contributions of the Limited Partners. The amount contributed by each Limited Partner to the Partnership shall be the amount actually invested in Shares of the Partnership at their Net Asset Value, which amount shall not include any sales charges and which amount may be less than the offering price paid by such Limited Partner for his Shares to the extent the offering price includes any sales charges. All contributions shall be made in U.S. dollars, which shall be invested in Shares of the Partnership at Net Asset Value. The amount of such contributions and the number of Shares owned by each Partner shall be set forth in the Partnership List. 5.4 Additional Contributions of Limited Partners. No Limited Partner shall be required to make any additional contributions to (or investments in) or lend additional funds to the Partnership, and no Limited Partner shall be liable for any additional assessment therefor. A Limited Partner may make an additional contribution (or investment), however, at his option through the purchase of additional Shares subject to the same terms and conditions as his initial contribution. 5.5 Use of Contributions. The aggregate of all capital contributions shall be, and hereby are agreed to be, available to the Partnership to carry out the objects and purposes of the Partnership. 5.6 Redemption by Limited Partners. A Limited Partner may redeem his Shares at any time in accordance with Section 8. The Managing General Partners shall cause the Partnership List to be amended daily on each day that its Transfer Agent is open for business to reflect the withdrawal of any Limited Partner or the return, in whole or in part, of the contribution of any Limited Partner. 5.7 Minimum Contribution and Mandatory Redemption. The Managing General Partners shall determine the minimum amounts required for the initial or additional contributions of a Limited Partner, which amounts may, from time to time, be changed by the Managing General Partners. Additionally, the Managing General Partners may, from time to time, establish a minimum total investment for Limited Partners, and there is reserved to the Partnership the right to redeem automatically the interest of any Limited Partner the value of whose investment is less than such minimum upon the giving of at least 30 days' notice to such Limited Partner, provided that such minimum total investment is not greater than the investment of any Limited Partner at the time the new minimum total investment becomes effective. The amounts which the Managing General Partners shall fix from time to time for initial or additional contributions and the amount of the minimum total investment shall be stated in the Partnership's current Registration Statement. 5.8 Limited Liability. (a) No Limited Partner shall be liable for any debts or obligations of the Partnership and each Limited Partner shall be indemnified by the Partnership against any such liability; provided, however, that contributions of a Limited Partner and his share of any undistributed assets of the Partnership shall be subject to the risks of the operations of the Partnership and subject to the claims of the Partnership's creditors, and provided further, that after any Limited Partner has received the return of any part of his contribution or any distribution of assets of the Partnership, he will be liable to the Partnership for: (i) any money or other property wrongfully distributed to him; and (ii) any sum, not in excess of the amount of such distribution, necessary to discharge any liabilities of the Partnership to creditors who extended credit or whose claims arose before such returns or distributions were made, but only to the extent that the assets of the Partnership are not sufficient to discharge such liabilities. The obligation of a Limited Partner to return all or any part of a distribution made to him shall be the sole obligation of such Limited Partner and not of the General Partners. (b) If an action is brought against a Limited Partner to satisfy an obligation of the Partnership, the Partnership, upon notice from the Limited Partner about the action, will either pay the claim itself or, if the Partnership believes the claim to be without merit, will undertake the defense of the claim itself. (c) The General Partners shall not have any personal liability to any Holder of Shares or to any Limited Partner for the repayment of any amounts standing in the account of a Limited Partner including, but not limited to, contributions with respect to such Shares. Any such payment shall be solely from the assets of the Partnership. The General Partners shall not be liable to any Holder of Shares or to any Limited Partner by reason of any change in the Federal income tax laws as they apply to the Partnership and the Limited Partners, whether such change occurs through legislative, judicial or administrative action, so long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the Limited Partners. 5.9 No Power to Control Operations. A Limited Partner shall have no right to and shall take no part in control of the Partnership's operations or activities but may exercise the rights and powers of a Limited Partner under this Partnership Agreement, including without limitation, the voting rights and the giving of consents and approvals provided for in Section 9 hereof. The exercise of such rights and powers are deemed to be matters affecting the basic structure of the Partnership and not the control of its business. 6. SHARES OF PARTNERSHIP INTEREST All interests in the Partnership, including contributions by the General Partners, pursuant to Section 4.3 and by the Limited Partners, pursuant to Section 5.3, shall be expressed in units of participation herein referred to as "Shares" (which term includes fractional Shares). Each Share shall represent an equal proportionate interest in the income and assets of the Partnership with each other Share outstanding. 7. PURCHASE AND EXCHANGE OF SHARES 7.1 Purchase of Shares. The Partnership may offer Shares on a continuing basis to investors. Except for the initial purchase of Shares by the initial Limited Partner and the General Partners, all Shares issued shall be issued and sold at the Net Asset Value (plus such sales charge or other charge as may be applicable to the purchase of the Shares) next computed after receipt of a purchase order in accordance with the Partnership's Registration Statement in effect at the time the order is received. Only investors who agree to be admitted, and who are eligible for admission, as Limited Partners pursuant to Section 5.2 shall be eligible to purchase Shares (unless such investor has already been admitted as a Partner). Orders for the purchase of Shares shall be accepted on any day that the Partnership's Transfer Agent is open for business (which shall normally be limited to those days when the New York Stock Exchange is open for business). The form in which purchase orders may be presented shall be as set forth in the Partnership's Registration Statement in effect at the time the order is received. The Managing General Partners on behalf of the Partnership reserve the right to reject any specific order and to suspend the Partnership's offering of new Shares at any time. Payment for all Shares must be made in U.S. dollars. 7.2 Net Asset Value. The Net Asset Value per Share of the Partnership shall be determined as of 4:15 p.m. New York City time on each day the New York Stock Exchange is open for trading or as of such other time or times as the Managing General Partners may determine in accordance with the provisions of the 1940 Act. The Net Asset Value per Share shall be expressed in U.S. dollars and shall be computed by dividing the value of all the assets of the Partnership, less its liabilities, by the number of Shares outstanding (including Shares held by General Partners). Portfolio securities will be valued at their fair value using methods determined in good faith by the Managing General Partners in accordance with the 1940 Act. The Partnership may suspend the determination of the Net Asset Value during any period when the New York Stock Exchange is closed, other than customary weekend and holiday closings, during periods when trading on the Exchange is restricted as determined by the Securities and Exchange Commission (the "Commission") or during any emergency as determined by the Commission which makes it impracticable for the Partnership to dispose of its securities or value its assets, or during any other period permitted by order of the Commission for the protection of investors. 7.3 Exchange of Shares. Shares of the Partnership may be exchanged for (i.e., redeemed and reinvested in) shares of any other partnership in the Partnership Group without incurring any additional sales charge or other charge. Orders for exchanges will be executed only on days that each partnership's Transfer Agent is open for business (which shall normally be limited to those days when the New York Stock Exchange is open for business) and will be executed at the respective net asset value of the partnerships involved next computed after receipt of an exchange order in accordance with the Partnership's Registration Statement in effect at the time the order is received. 8. REDEMPTION OR REPURCHASE OF SHARES 8.1 Redemption of Shares. The Partnership will redeem from any Partner all or any portion of the Shares owned by him provided that the Partner delivers to the Partnership or its designated agent notice of such redemption, stating the number of Shares to be redeemed, together with a properly endorsed Share certificate(s) where certificate(s) have been issued, in good order for transfer and in proper form as determined by the Managing General Partners and the Partnership's Transfer Agent. The Partner shall be entitled to payment in U.S. Dollars of the Net Asset Value of his Shares (as set forth in Section 7.2 hereof). Any such redemption shall be in accordance with Section 4 with respect to General Partners or Section 5 with respect to Limited Partners. Any distribution upon redemption pursuant to this Section 8.1 shall, in accordance with Section 10.4 below, constitute a return in full of the redeeming Partner's contribution attributable to the Shares which are redeemed regardless of the amount distributed with respect to such Shares. No consent of any of the Partners shall be required for the withdrawal or return of a Limited Partner's contribution. The Managing General Partners shall have sole discretion to determine the amount of cash to be distributed to a withdrawing Partner. All redemptions shall be recorded on the Partnership List, which shall be amended daily on each day that the Partnership's Transfer Agent is open for business. The Managing General Partners may suspend redemptions and defer payment of the redemption price at any time, subject to the Rules and Regulations of the Securities and Exchange Commission. 8.2 Payment for Redeemed Shares. Payments for Shares redeemed or repurchased by the Partnership will be made in U.S. Dollars within seven days after receipt by the Partnership's Transfer Agent of a written redemption request in proper form as specified in Section 8.1 above. If a redemption request is received with respect to Shares for which the Partnership has not yet received good payment, the Partnership may delay the mailing of a redemption check until such time as it has assured itself that good payment has been collected for the purchase of such Shares. 9. MATTERS AFFECTING THE PARTNERSHIP'S BASIC STRUCTURE 9.1 Rights of Limited Partners. (a) As provided in the Partnership Act, the Limited Partners shall have the right to vote together with the General Partners in accordance with the provisions of this Section 9 only upon the following matters affecting the basic structure of the Partnership, which include the voting, approval, consent or similar rights required under the 1940 Act for voting security holders: (i) the right to remove General Partner(s); (ii) the right to elect new General Partner(s), except in the circumstance where the last remaining or surviving General Partner has been removed; (iii) the right to approve or terminate investment advisory, underwriting and distribution contracts and plans; (iv) the right to ratify or reject the appointment and to terminate the employment of the independent public accountants of the Partnership; (v) the right to approve or disapprove the sale of all or substantially all of the assets of the Partnership; (vi) the right to approve the incurrence of indebtedness by the Partnership other than in the ordinary course of business; (vii) the right to approve transactions in which the General Partners have an actual or potential conflict of interest with the Limited Partners or the Partnership; (viii)the right to terminate the Partnership, as provided in Section 12 hereof; (ix) the right to elect to continue the operations of the Partnership, except in circumstances where the last remaining or surviving General Partner has been removed; and (x) the right to amend this Partnership Agreement, including, without limitation, the right to approve or disapprove proposed changes in the investment and operating limitations set forth in Section 3.3 and the right to approve or disapprove proposed changes in the nature of the Partnership's activities as such activities are described herein; provided, however, that no such amendment shall conflict with the 1940 Act so long as the Partnership intends to remain registered thereunder, nor affect the liability of the General Partners without their consent nor the limited liability of the Limited Partners as provided under Section 5.8 above. Notwithstanding the foregoing, the right of Limited Partners to vote on matters affecting the basic structure of the Partnership as designated herein shall not be construed as a requirement that all such matters be submitted to the Limited Partners for their approval or be so approved to the extent such approval is not required by the Partnership Act, the 1940 Act or this Partnership Agreement. (b) Notwithstanding the foregoing, no vote, approval or other consent shall be required of the Limited Partners with respect to any matter not affecting the basic structure of the Partnership, including, without limitation, the following: (i) any change in the amount or character of the contribution of any Limited Partner; (ii) any change in the procedures for the purchase or redemption of Shares, (iii) the substitution or deletion of a Limited Partner; (iv) the admission of any additional Limited Partner; (v) the retirement, resignation, death or incompetency of a Managing General Partner; (vi) any addition to the duties or obligations of the General Partners, or any reduction in the rights or powers granted to the General Partners herein, for the benefit of the Limited Partners; (vii) the correction of any false or erroneous statement, or change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners, in this Partnership Agreement; (viii) the addition of any omitted provision or amendment of any provision to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof; or (ix) such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership. (c) The Limited Partners shall have no right or power to cause the termination and dissolution of the Partnership except as set forth in this Partnership Agreement. No Limited Partner shall have the right to bring an action for partition against the Partnership. 9.2 Action of the Partners. Actions which require the vote of the Limited Partners under Section 9.1 of this Partnership Agreement shall be taken at a meeting of both the General and Limited Partners, or by consent without a meeting as provided in Section 9.10. All Partners' meetings shall be held at such place as the Managing General Partners shall designate. The Partners may vote at any such meeting in person or by proxy. 9.3 Meetings. Meetings of the Partnership for the purpose of taking any action which the Limited Partners are permitted to take under this Partnership Agreement may be called by a majority vote of the Managing General Partners or by Limited Partners representing 10% or more of the outstanding Shares. Written notice of such meeting shall be given in accordance with Section 9.4. 9.4 Notices. (a) Whenever Partners are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than ten (10), nor more than sixty (60), days before the date of the meeting to each Partner entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted, and no other business may be transacted. (b) Notice of a Partners' meeting or any report shall be given either personally or by mail or other means of written communication, addressed to the Partner at the address of the Partner appearing on the books of the Partnership or given by the Partner to the Partnership for the purpose of notice, or, if no address appears or is given, at the place where the principal executive office of the Partnership is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this subsection, executed by a General Partner, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the Partner at the address of the Partner appearing on the books of the Partnership is returned to the Partnership marked to indicate that the notice or report to the Partner could not be delivered at such address, all future notices or reports shall be deemed to have been duly given without further mailing if they are available for the Partner at the principal executive office of the Partnership for a period of one year from the date of the giving of the notice or report to all other Partners. (c) Upon written request to the General Partners by any person entitled to call a meeting of Partners, the General Partners immediately shall cause notice to be given to the Partners entitled to vote that a meeting will be held at a time requested by the person calling the meeting, not less than ten (10), nor more than sixty (60), days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person entitled to call the meeting may give the notice. 9.5 Validity of Vote for Certain Matters. Any Partner approval at a meeting, other than unanimous approval by those entitled to vote, with respect to the matters set forth in Section 9.1(a) shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice. 9.6 Adjournment. When a Partners' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Partner of record entitled to vote at the meeting in accordance with Section 9.4. 9.7 Waiver of Notice and Consent to Meeting. The transactions of any meeting of Partners, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All waivers, consents, and approvals shall be filed with the Partnership records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of the meeting, except when the person objects, at the beginning because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice of the meeting but not so included, if the objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any meeting of Partners need be specified in any written waiver of notice, except as provided in Section 9.6. 9.8 Quorum. The presence in person or by proxy of more than forty percent (40%) of the outstanding Shares on the record date for any meeting constitutes a quorum at such meeting. The Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by a majority vote of those Partners present (except as otherwise may be required by the 1940 Act or the Partnership Act). In the absence of a quorum, any meeting of Partners may be adjourned from time to time by the vote of a majority in interest of the Limited Partners represented either in person or by proxy, but no other business may be transacted except as provided in this Section 9.8. The Managing General Partners may adjourn such meeting to such time or times as determined by the Managing General Partners. 9.9 Required Vote. Any action which requires the vote of the Limited Partners may be taken by the General Partners with (i) the Majority Vote of the then outstanding Shares or (ii) if at a meeting, with a majority vote of those Shares present if the quorum requirements of Section 9.8 hereof have been satisfied (except as otherwise may be required by the 1940 Act or the Partnership Act); provided, however, that the admission of a General Partner shall require the affirmative vote of at least a majority of the then outstanding Shares, and provided further, that the admission of a General Partner or an election to continue the operations of the Partnership after a General Partner ceases to be a General Partner (other than by removal) when there is no remaining or surviving General Partner shall require the affirmative vote of all the Limited Partners. 9.10 Action by Consent Without a Meeting. Any action which may be taken at any meeting of the Partners may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by Partners having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting. In the event the Limited Partners are requested to consent on a matter without a meeting, each Partner shall be given notice of the matter to be voted upon in the same manner as described in Section 9.4. In the event any General Partner, or Limited Partners representing 10% or more of the outstanding Shares request a meeting for the purpose of discussing or voting on the matter, notice of such meeting shall be given in accordance with Section 9.4 and no action shall be taken until such meeting is held. Unless delayed in accordance with the provisions of the preceding sentence, any action taken without a meeting will be effective ten (10) days after the required minimum number of voters have signed the consent; however, the action will be effective immediately if the General Partners and Limited Partners representing at least 90% of the Shares of the Partners have signed the consent. 9.11 Record Date. (a) In order that the Partnership may determine the Partners of record entitled to notices of any meeting or to vote, or entitled to receive any distribution or to exercise any rights in respect of any other lawful action, the Managing General Partners, or Limited Partners representing more than 10% of the Shares then outstanding, may fix, in advance, a record date which is not more than sixty (60) or less than ten (10) days prior to the date of the meeting and not more than sixty (60) days prior to any other action. If no record date is fixed: (i) The record date for determining Partners entitled to notice of or to vote at a meeting of Partners shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (ii) The record date for determining Partners entitled to give consent to Partnership action in writing without a meeting shall be the first day on which the first written consent is given. (iii) The record date for determining Partners for any other purpose shall be at the close of business on the day on which the Managing General Partners adopt it, or the sixtieth (60th) day prior to the date of the other action, whichever is later. (b) The determination of Partners of record entitled to notice of or to vote at a meeting of Partners shall apply to any adjournment of the meeting unless the Managing General Partners, or the Limited Partners who called the meeting, fix a new record date for the adjourned meeting, but the Managing General Partners, or the Limited Partners who called the meeting, shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. (c) Any Holder of a Share prior to the record date for a meeting shall be entitled to vote at such meeting, provided such person becomes a Partner prior to the date of the meeting. 9.12 Proxies. A Partner may vote at any meeting of the Partnership by a proxy executed in writing by the Partner. All such proxies shall be filed with the Partnership before or at the time of the meeting. The law of California pertaining to corporate proxies will be deemed to govern all Partnership proxies as if they were proxies with respect to shares of a California corporation. A proxy may be revoked by the person executing the proxy in a writing delivered to the Managing General Partners at any time prior to its exercise. Notwithstanding that a valid proxy is outstanding, powers of the proxy holder will be suspended if the person executing the proxy is present at the meeting and elects to vote in person. 9.13 Number of Votes. All Shares have equal voting rights. Each Partner shall have the right to vote the number of Shares standing of record in such Partner's name as of the record date set forth in the notice of meeting. 10. DISTRIBUTIONS AND ALLOCATION OF PROFITS AND LOSSES 10.1 Fees of General Partners. As compensation for services rendered to the Partnership, each Managing General Partner may be paid a fee during each year, which fee shall be fixed by the Managing General Partners. All the General Partners shall be entitled to reimbursement of reasonable expenses incurred by them in connection with their performance of their duties as General Partners. Neither payment of compensation or reimbursement of expenses to a General Partner hereunder nor payment of fees to any Affiliate of a General Partner for the performance of services to the Partnership shall be deemed a distribution for purposes of Section 10.2, nor shall any such payment affect such person's right to receive any distribution to which he would otherwise be entitled as a Holder of Shares. 10.2 Distributions of Income and Gains. Subject to the provisions of the Partnership Act and the terms of Section 10.4 hereof, the Managing General Partners in their sole discretion shall determine the amounts, if any, to be distributed to Holders of Shares, the record date for purposes of such distributions and the time or times when such distributions shall be made. Distributions of income may be in cash (U.S. Dollars) or in additional full and fractional Shares of the Partnership valued at the Net Asset Value on the record date. With respect to capital gains, the Managing General Partners may determine at least annually what portion, if any, of the Partnership's capital gains will be distributed and any such distribution may be in cash or in additional full and fractional Shares of the Partnership at the Net Asset Value on the record date. Notwithstanding the foregoing, the Managing General Partners shall not be required to make any distribution of income or capital gains for any taxable year. 10.3 Allocation of Income, Gains, Losses, Deductions and Credits. The net income, gains, losses, deductions and credits of the Partnership shall be allocated equally among the outstanding Shares of the Partnership on a regular basis to be determined by the Managing General Partners. The net income earned by the Partnership shall consist of the interest accrued on portfolio securities, less expenses, since the most recent determination of income. Original issue discount will be treated as an income item. Market discount and premiums will be treated as capital items except as otherwise required for Federal income tax purposes. Expenses of the Partnership will be accrued on a regular basis to be determined by the Managing General Partners. A Holder of a Share shall be allocated with the proportionate part of such items actually realized by the Partnership for each such full accrual period during which such Share was owned by such Holder. A person shall be deemed to be a Holder of a Share on a specific day if he is the record holder of such Share on such day (regardless of whether or not such record holder has yet been admitted as a Partner). 10.4 Returns of Contributions. Except upon dissolution of the Partnership by expiration of its terms or otherwise pursuant to Section 12 hereof (which shall be the time for return to each Partner of his contributions, subject to the priorities therein), and except upon redemption of Shares of the Partnership as provided in Section 8, no Partner has the right to demand return of any part of his contribution. The Managing General Partners may, however, from time to time, elect to permit partial returns of contributions to Holders of Shares, provided that: (a) all liabilities of the Partnership to persons other than General and Limited Partners have been paid or, in the good faith determination of the Managing General Partners, there remains property of the Partnership sufficient to pay them; and (b) the Managing General Partners cause the Partnership List to be amended to reflect a reduction in contributions. In the event that the Managing General Partners elect to make a partial return of contributions to Holders of Shares, such distribution shall be made pro rata to all of the Holders of Shares in accordance with the number of Shares held by each. Each General and Limited Partner, by becoming such, consents to any such pro rata distribution therefore or thereafter duly authorized and made in accordance with such provisions and to any distribution through redemption of Shares pursuant to Section 8 above. 10.5 Capital Accounts. In addition to any capital accounts required to be maintained for accounting purposes in accordance with generally accepted accounting principles, the Partnership shall maintain two Capital Accounts for each Partner, one for book purposes and the other for tax purposes. Each such Capital Account shall be maintained in accordance with the requirements of Treasury Regulations Section 1.704-1(b). Each such Capital Account shall be credited with the Partner's capital contributions and share of profits, shall be charged with such Partner's share of losses, distributions and withholding taxes (if any) and shall otherwise appropriately reflect transactions of the Partnership and the Partners. At the end of each day, the book Capital Accounts of all Partners shall be adjusted to reflect unrealized appreciation or depreciation in the value of the Partnership's assets which accrued on that day. Further adjustments shall then be made to reflect any purchases and redemptions of Shares by the Partners. The intent of these adjustments is to achieve consistency and equivalence between book Capital Accounts and the Net Asset Value per Share used to determine the value of the Shares purchased, redeemed or liquidated in accordance with industry practice for investment partnerships such as the Partnership. Adjustments to tax Capital Accounts to take into account allocations of gains and losses realized by the Partnership for tax purposes shall be made in the manner described in Section 10.6. A Substituted Limited Partner shall be deemed to succeed to the book and tax Capital Accounts of the Partner whom such Substituted Limited Partner replaced. 10.6 Allocations for Tax Purposes. (a) General. For each fiscal year, items of income, deduction, loss or credit from normal operations (other than from the disposition or deemed disposition of assets of the Partnership) shall be allocated for income tax purposes among the Partners in proportion to the amounts distributed to them during such year pursuant to Sections 10.3 and 10.4 hereof. The Partners' tax Capital Accounts shall be adjusted to reflect allocations of such items of income, deduction, loss or credit. (b) Special Allocations. Allocations of gains and losses from the disposition or deemed disposition of assets of the Partnership to Partners for tax purposes shall be made in accordance with the following method which is intended to ensure that allocations for tax purposes reflect the economic experience of the Partners with respect to their interests in the Partnership: (i) With respect to each Partner, a daily account of unrealized appreciation/depreciation and realized gain/loss shall be maintained. Each day's net unrealized appreciation/depreciation in the assets of the Partnership and each day's net realized gains/losses of the Partnership shall be allocated to the Partners in proportion to their book Capital Account balances at the beginning of such day. Any entry of realized gain or loss into any Partner's account for net realized gains/losses shall result in an equal and offsetting adjustment to the Partner's account for net unrealized appreciation/ depreciation for that day. Purchases of Shares and partial or complete redemptions of Shares shall be regarded as occurring at the end of each day, after entries and adjustments in the Partners' accounts for net unrealized appreciation/depreciation and net realized gains/losses have been made. The amounts for each Partner's share of net unrealized appreciation/depreciation and net realized gains/losses, together with adjustments made to reflect purchases or redemptions of Shares, shall be combined to arrive at each Partner's ending book Capital Account balance for the day. (ii) At the end of each year, the daily amounts of net unrealized appreciation/depreciation and net realized gains/losses shall be aggregated to arrive at a total amount for net unrealized appreciation/depreciation and a total amount for net realized gains/losses for each Partner for the year. These two amounts shall be combined to arrive at each Partner's "Investment Experience." Net gains realized by the Partnership shall be allocated among the Partners whose Investment Experience is positive, and each such Partner's allocable share of such gains for tax purposes shall be equal to a fraction the numerator of which is the Partner's Investment Experience and the denominator of which is the total Investment Experience of the Partners whose Investment Experience is positive. Net losses realized by the Partnership shall be allocated among the Partners whose Investment Experience is negative, and each such Partner's allocable share of such losses shall be computed in the manner described in the previous sentence, except that the word "negative" shall be substituted for the word "positive." Each Partner's tax Capital Account shall then be adjusted to reflect such Partner's allocable share of Partnership realized gains or losses for such year. The Partners' accounts for unrealized appreciation/depreciation and net realized gains/losses, adjusted appropriately to reflect the allocation of the net gain realized or the net loss realized, shall be carried over to the next year. (iii) In the event of a partial or complete redemption of Shares which results in a distribution in excess of a Partner's tax Capital Account, the Partnership may make an election to adjust the basis of Partnership assets under Section 754 of the Code, and the Partnership may increase the tax basis of its Partnership assets in accordance with Section 743(b) and 755 of the Code by the difference between the amount of the distribution made to the redeeming Partner in redemption of his Shares and his tax Capital Account. (c) Minimum Gain Chargeback. In the event that there is a net decrease in the Partnership's Minimum Gain during any taxable year and any Partner has a negative book Capital Account (after taking into account reductions for items described in paragraphs (4), (5) and (6) of Treasury Department Regulations Section 1.704-1(b)(2)(ii)(d)) and such negative balance exceeds the sum of (i) the amount that such Partner is obligated to restore upon liquidation of the Partnership and (ii) such Partner's share of the Minimum Gain at the end of such taxable year, such Partner shall be allocated Partnership profits for such year (and, if necessary, subsequent years) in an amount necessary to eliminate such excess negative balance as quickly as possible. Allocations of profits to such Partners having such excess negative book Capital Accounts shall be made in proportion to the amounts of such excess negative book Capital Account balances. The term "Minimum Gain" means the excess of the outstanding balances of all nonrecourse indebtedness which is secured by property of the Partnership over the adjusted basis of such property for federal income tax purposes, as computed in accordance with the provisions of Treasury Department Regulations Section 1.704-1(b)(4)(iv)(c). A Partner's share of Minimum Gain shall be computed in accordance with Treasury Department Regulations Section 1.704-1(b)(4)(iv)(f). (d) Qualified Income Offset. Notwithstanding anything in Sections 10.3 and 10.6 to the contrary, in the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Department Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(d)(5) or 1.704- 1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the deficit balance in his book Capital Account (in excess of (i) the amount he is obligated to restore upon liquidation of the Partnership or upon liquidation of his interest in the Partnership and his share of the Minimum Gain) created by such adjustments, allocations or distributions as quickly as possible. 11. ASSIGNMENT OF SHARES; SUCCESSOR IN INTEREST; SUBSTITUTION OF PARTNERS 11.1 Prohibition on Assignment. Except for redemptions as provided in Section 8, a Partner shall not have the right to sell, transfer or assign his Shares to any other person, but may pledge them as collateral. 11.2 Rights of the Holders of Shares as Collateral or Judgment Creditor. In the event that any person who is holding Shares as collateral or any judgment creditor becomes the owner of such Shares due to foreclosure or otherwise, such person shall not have the right to be substituted as a Limited Partner, but shall only have the rights, upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Limited Partner, set forth immediately below: (a) To redeem the Shares in accordance with the provisions of Section 8 hereof; and (b) To receive any distributions made with respect to such Shares. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his ownership of Shares, the owner shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. Such owner shall be liable to return any excess distributions pursuant to Section 5.8(a). However, such owner shall have none of the rights or obligations of a Substituted Limited Partner unless and until he is admitted as such. 11.3 Death, Incompetency, Bankruptcy or Termination of the Existence of a Partner. In the event of the death or an adjudication of incompetency or bankruptcy of an individual Partner (or, in the case of a Partner that is a corporation, association, partnership, joint venture or trust, an adjudication of bankruptcy, dissolution or other termination of the existence of such Partner), the successor in interest of such Partner (including without limitation the Partner's executor, administrator, guardian, conservator, receiver or other legal representative), upon the presentation of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, shall have the rights set forth below: (a) to redeem the Shares of the Partner in accordance with the provisions of Section 8 hereof; (b) to receive any distributions made with respect to such Shares; and (c) to be substituted as a Limited Partner upon compliance with the conditions of the admission of a Limited Partner as provided in Sections 5 and 11 hereof. Upon receipt by the Partnership of evidence satisfactory to the Managing General Partners of his right to succeed to the interests of the Partner, the successor in interest shall become a Holder of Record of the subject Shares and his name shall be recorded on the books of record of the Partnership maintained for such purpose either by the Partnership or its Transfer Agent. 11.4 Substituted Limited Partners. (a) A person shall not become a Substituted Limited Partner unless the Managing General Partners consent to such substitution (which consent may be withheld in their absolute discretion) and receive such instruments and documents (including those specified in Section 5.2), and a reasonable transfer fee as the Managing General Partners shall require. (b) The original Limited Partner shall cease to be a Limited Partner, and the person to be substituted shall become a Substituted Limited Partner, as of the date on which the person to be substituted has satisfied the requirements set forth above and as of the date the Partnership List is amended to reflect his admission as a Substituted Limited Partner. The Managing General Partners agree to cause such amendments to the Partnership List to be processed daily on each day that its Transfer Agent shall be open for business. Thereafter the original Limited Partner shall have no rights or obligations with respect to the Partnership insofar as the Shares transferred to the Substituted Limited Partner are concerned. (c) Unless and until a person becomes a Substituted Limited Partner, his status and rights shall be limited to the rights of a Holder of Shares pursuant to Sections 11.3(a) and 11.3(b). A Holder of Shares who does not become a Substituted Limited Partner shall have no right to inspect the Partnership's books or to vote on any of the matters on which a Limited Partner would be entitled to vote. A Holder of Shares who has become a Substituted Limited Partner has all the rights and powers, and is subject to the restrictions and liabilities of a Limited Partner under this Agreement. (d) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to and bound by the provisions of this Partnership Agreement as if originally a party to this Partnership Agreement. 12. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP 12.1 Dissolution. The Partnership shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (a) the stated term of the Partnership has expired unless the Partners by a Majority Vote have previously amended the Partnership Agreement to state a different term; (b) the Partnership has disposed of all of its assets; (c) A General Partner has ceased to be a General Partner and the remaining General Partners do not elect to continue the operations of the Partnership; (d) There is only one General Partner remaining and such General Partner has ceased to be a General Partner as set forth in Section 4.8; provided, however, that if the last remaining or surviving General Partner ceases to be a General Partner other than by removal, the Limited Partners may agree by unanimous vote to continue the operations of the Partnership and to admit one or more General Partners in accordance with the Partnership Agreement; (e) a decree of judicial dissolution has been entered by a court of competent jurisdiction; or (f) the Partners by a Majority Vote have voted to dissolve the Partnership. 12.2 Liquidation. (a) In the event of dissolution as provided in Section 12.1, the assets of the Partnership shall be distributed as follows: (i) all of the Partnership's debts and liabilities to persons (including Partners to the extent permitted by law) shall be paid and discharged, and any reserve deemed necessary by the Managing General Partners for the payment of such debts shall be set aside; and (ii) the balance of the assets of the Partnership (and any reserves not eventually used to satisfy debts of the Partnership) shall be distributed pro rata to the Partners in accordance with the number of Shares held by each. (b) Upon dissolution, each Partner shall look solely to the assets of the Partnership for the return of his capital contribution and shall be entitled only to a distribution of Partnership property and assets in return thereof. If the Partnership property remaining after the payment or discharge of the debts and liabilities of the Partnership is insufficient to return the capital contribution of each Limited Partner, such Limited Partner shall have no recourse against any General Partner, the assets of any other partnership of which any General Partner is a partner, or any other Limited Partner. The winding up of the affairs of the Partnership and the distribution of its assets shall be conducted exclusively by the Managing General Partners, who are authorized to do any and all acts and things authorized by law for these purposes. In the event of dissolution where there is no remaining General Partner, and there is a failure to appoint a new General Partner, the winding up of the affairs of the Partnership and the distribution of its assets shall be conducted by such person as may be selected by Majority Vote, which person is hereby authorized to do any and all acts and things authorized by law for these purposes. 12.3 Termination. Upon the completion of the distribution of Partnership assets as provided in this Section and the termination of the Partnership, the General Partner(s) or other person acting as liquidator (or the Limited Partners, if necessary) shall cause the Certificate of Limited Partnership of the Partnership to be cancelled and shall take such other actions as may be necessary to legally terminate the Partnership. 13. BOOKS, RECORDS, ACCOUNTS AND REPORTS 13.1 Books and Records. (a) The Partnership shall continuously maintain an office in the State of California, at which the following books and records shall be kept: (i) A Partnership List (or copy thereof) which shall be a current list of the full name and last known business or residence address of each Partner, set forth in alphabetical order together with the contribution and the share in profits and losses of each Partner, which list shall separately identify the interests of General and Limited Partners. (ii) A copy of the Certificate of Limited Partnership and all certificates of amendments thereto, together with executed copies of any powers of attorney pursuant to which any such certificate has been executed. (iii) Copies of the Partnership's Federal, state and local income tax or information returns and reports, if any, for the six most recent taxable years. (iv) Copies of this Partnership Agreement and all amendments thereto. (v) Financial statements of the Partnership for the six most recent fiscal years. (vi) The Partnership's books and records for at least the current and past three fiscal years. (b) The Partnership shall also maintain at its principal office such additional books and records as are necessary for the operation of the Partnership. 13.2 Limited Partners' Rights to Records. (a) Upon the request of a Limited Partner, the Managing General Partners shall promptly deliver to the Limited Partner, at the Partnership's expense, a copy of the items set forth in Section 13.1(a)(i), (ii) and (iv). (b) Each Limited Partner shall have the right upon reasonable request to each of the following: (i) To inspect and copy during normal business hours, at the Limited Partner's expense, any of the Partnership's records required to be kept pursuant to the Partnership Act. (ii) To obtain from the Managing General Partners promptly after becoming available, at the Limited Partner's expense, a copy of any Federal, state and local income tax or information returns required to be filed by the Partnership for each year. (c) The Managing General Partners shall promptly furnish to a Limited Partner a copy of any amendment to this Partnership Agreement executed by the Managing General Partners pursuant to a power of attorney from the Limited Partner. (d) The Managing General Partners shall send to each Partner within ninety (90) days after the end of each taxable year such information as is necessary to complete Federal and state income tax or information returns or such information as is required by the Tax Code. (e) At any time that the Partnership shall have more than 35 Limited Partners: (i) The Managing General Partners shall cause an annual report to be sent to each of the Partners not later than 120 days after the close of the Partnership's fiscal year. That report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year. (ii) Limited Partners representing at least 5% of the outstanding Shares of the Partnership may make a written request to the Managing General Partners for an income statement of the Partnership for the initial three-month, six-month or nine- month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the Partnership as of the end of that period. The statement shall be delivered or mailed to the Limited Partners within thirty (30) days thereafter. (iii) The financial statements referred to in this subsection shall be accompanied by the report thereon, if any, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the Managing General Partners that such financial statements were prepared without audit from the books and records of the Partnership. (f) The Managing General Partners shall cause to be transmitted to each Partner such other reports and information as shall be required by the 1940 Act, the Partnership Act or the Tax Code. 13.3 Accounting Basis and Fiscal Year. The Partnership's books and records (i) shall be kept on a basis chosen by the Managing General Partners in accordance with the accounting methods followed by the Partnership for Federal income tax purposes and otherwise in accordance with generally accepted accounting principles applied in a consistent manner, (ii) shall reflect all Partnership transactions, (iii) shall be appropriate and adequate for the Partnership's business and for the carrying out of all provisions of this Partnership Agreement, and (iv) shall be closed and balanced at the end of each Partnership fiscal year. The fiscal year of the Partnership shall be the calendar year. 13.4 Tax Returns. The Managing General Partners, at the Partnership's expense, shall cause to be prepared any income tax or information returns required to be made by the Partnership and shall further cause such returns to be timely filed with the appropriate authorities. 13.5 Filings with Regulatory Agencies. The Managing General Partners, at the Partnership's expense, shall cause to be prepared and timely filed with appropriate Federal and state regulatory and administrative bodies, all reports required to be filed with such entities under then current applicable laws, rules and regulations. 13.6 Tax Matters and Notice Partner. The Managing General Partners shall designate one or more General Partners as the "Tax Matters Partner" and the "Notice Partner" of the Partnership in accordance with Sections 6231(a)(7) and (8) of the Tax Code, and each such Partner shall have no personal liability arising out of his good faith performance of his duties in such capacity. The "Tax Matters Partner" is authorized, at the Partnership's sole cost and expense, to represent the Partnership and each Limited Partner in connection with all examinations of the Partnership affairs by tax authorities, including any resulting administrative and judicial proceedings. Each Limited Partner agrees to cooperate with the Managing General Partners and to do or refrain from doing any and all things reasonably required by the Managing General Partners to conduct such proceeding. The Managing General Partners shall have the right to settle any audits without the consent of the Limited Partners. 14. AMENDMENTS OF PARTNERSHIP DOCUMENTS 14.1 Amendments in General. Except as otherwise provided in this Partnership Agreement, the Partnership Agreement may be amended only by the General Partners. 14.2 Amendments Without Consent of Limited Partners. In addition to any amendments otherwise authorized herein and except as otherwise provided, amendments may be made to this Partnership Agreement from time to time by the General Partners without the consent of any of the Limited Partners, including, without limitation, amendments: (i) to reflect the retirement, resignation, death or incompetency of a Managing General Partner; (ii) to add to the duties or obligations of the General Partners, or to surrender any right or power granted to the General Partners herein, for the benefit of the Limited Partners; (iii) to correct any false or erroneous statement, or to make a change in any statement in order to make such statement accurately represent the agreement among the General and Limited Partners; (iv) to supply any omission or to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or (v) to make such amendments as may be necessary to conform this Partnership Agreement to the requirements of the Partnership Act, the 1940 Act, the Tax Code or any other law or regulation applicable to the Partnership, as now or hereafter in effect. 14.3 Amendments Needing Consent of Affected Partners. Notwithstanding any other provision of this Partnership Agreement, without the consent of the Partner or Partners to be affected by any amendment to this Agreement, this Agreement may not be amended to (i) convert a Limited Partner's interest into a General Partner's interest, (ii) modify the limited liability of a Limited Partner, (iii) alter the interest of a Partner in income, gain, loss, deductions, credits, and distributions, or (iv) increase, add or alter any obligation of any Limited Partner. 14.4 Amendments to Certificate of Limited Partnership. (a) The Managing General Partners shall cause to be filed with the Secretary of State, within thirty (30) days after the happening of any of the following events, an amendment to the Certificate of Limited Partnership reflecting the occurrence of any of the following events: (i) A change in the name of the Partnership. (ii) A change in either of the following: (A) The street address of the Partnership's principal executive office. (B) If the principal executive office is not in California, the street address of an office in California. (iii) A change in the address of or the withdrawal of any of the General Partners, or a change in the address of the agent for service of process, unless a corporate agent is designated, or appointment of a new agent for service of process. (iv) The admission of a new General Partner and that Partner's address. (v) The discovery by the General Partner of any false or erroneous material statement contained in the Certificate of Limited Partnership. (b) Any Certificate of Limited Partnership filed or recorded in jurisdictions other than California shall be amended as required by applicable law. (c) The Certificate of Limited Partnership may also be amended at any time in any other manner deemed appropriate by the General Partner. 14.5 Amendments After Change of Law. This Agreement and any other Partnership documents may be amended and refiled, if necessary, by the Managing General Partners without the consent of the Limited Partners if there occurs any change that permits or requires an amendment of this Agreement under the Act or of any other Partnership document under applicable law, so long as no Partner is adversely affected (or consent is given by such Partner). 15. MISCELLANEOUS PROVISIONS 15.1 Notices. (a) Any written notice, offer, demand or communication required or permitted to be given by any provision of this Partnership Agreement, unless otherwise specified herein, shall be deemed to have been sufficiently given for all purposes if delivered personally to the party to whom the same is directed or if sent by first class mail addressed (i) if to a General Partner, to the principal place of business and office of the Partnership specified in this Agreement and (ii) if to a Limited Partner, to such Limited Partner's address as set forth in the Partnership List; provided, however, that notice given by any other means shall be deemed sufficient if actually received by the party to whom it is directed. (b) Any such notice that is sent by first class mail shall be deemed to be given two (2) days after the date on which the same is mailed. (c) The Managing General Partners may change the Partnership's address for purposes of this Partnership Agreement by giving written notice of such change to the Limited Partners, and any Limited Partner may change his address for purposes of this Partnership Agreement by giving written notice of such change to the Managing General Partners, in the manner herein provided for the giving of notices. 15.2 Section Headings. The Section headings in this Partnership Agreement are inserted for convenience and identification only and are in no way intended to define or limit the scope, extent or intent of this Partnership Agreement or any of the provisions hereof. 15.3 Construction. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. If any language is stricken or deleted from this Partnership Agreement, such language shall be deemed never to have appeared herein and no other implication shall be drawn therefrom. The language in all parts of this Partnership Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the General Partners or the Limited Partners. 15.4 Severability. If any covenant, condition, term or provision of this Partnership Agreement is illegal, or if the application thereof to any person or in any circumstance shall to any extent be judicially determined to be invalid or unenforceable, the remainder of this Partnership Agreement, or the application of such covenant, condition, term or provision to persons or in circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby, and each remaining covenant, condition, term and provision of this Partnership Agreement shall be valid and enforceable to the fullest extent permitted by law. 15.5 Governing Law. This Partnership Agreement shall be construed and enforced in accordance with, and governed by, California law. 15.6 Counterparts. This Partnership Agreement may be executed in one or more counterparts, each of which shall, for all purposes, be deemed an original and all of such counterparts, taken together, shall constitute one and the same Partnership Agreement. 15.7 Entire Agreement. This Partnership Agreement and the separate subscription agreements of each Limited Partner and General Partner constitute the entire agreement of the parties as to the subject matter hereof. All prior agreements among the parties as to the subject matter hereof, whether written or oral, are merged herein and shall be of no force or effect. This Partnership Agreement cannot be changed, modified or discharged orally but only by an agreement in writing. There are no representations, warranties, or agreements other than those set forth in this Partnership Agreement and such separate subscription agreements, if any. 15.8 Cross-References. All cross-references in this Partnership Agreement, unless specifically directed to another agreement or document, refer to provisions in this Partnership Agreement. 15.9 Power of Attorney to the General Partners. (a) Each Partner hereby makes, constitutes and appoints each Managing General Partner and any person designated by the Managing General Partners, with full substitution, his agent and attorney-in-fact in his name, place and stead, to take any and all actions and to make, execute, swear to and acknowledge, amend, file, record and deliver the following documents and any other documents deemed by the Managing General Partners necessary for the operations of the Partnership: (i) any Certificate of Limited Partnership or Certificate of Amendment thereto, required or permitted to be filed on behalf of the Partnership, and any and all certificates as necessary to qualify or continue the Partnership as a limited partnership or partnership wherein the Limited Partners thereof have limited liability in the states where the Partnership may be conducting activities, and all instruments which effect a change or modification of the Partnership in accordance with this Partnership Agreement; (ii) this Partnership Agreement and any amendments thereto in accordance with this Partnership Agreement; (iii) any other instrument which is now or which may hereafter be required or advisable to be filed for or on behalf of the Partnership; (iv) any document which may be required to effect the continuation of the Partnership, the admission of an additional Limited Partner or Substituted Limited Partner, or the dissolution and termination of the Partnership (provided such continuation, admission or dissolution and termination is in accordance with the terms of this Partnership Agreement), or to reflect any reductions or additions in the amount of the contributions of Partners, in each case having the power to execute such instruments on his behalf, whether the undersigned approved of such action or not; and (v) any document containing any investment representations and/or representations relating to the citizenship, residence and tax status required by any state or Federal law or regulation. (b) This Power of Attorney is a special Power of Attorney coupled with an interest, and shall not be revoked and shall survive the transfer by any Limited Partner of all or part of his interest in the Partnership and, being coupled with an interest, shall survive the death or disability or cessation of the existence as a legal entity of any Limited Partner; except that where the successor in interest has been approved by said attorney for admission to the Partnership as a Substituted Limited Partner, this Power of Attorney shall survive the transfer for the sole purpose of enabling said attorney to execute, acknowledge and file any instrument necessary to effectuate such substitution. (c) Each Limited Partner hereby gives and grants to his said attorney under this Power of Attorney full power and authority to do and perform each and every act and thing whatsoever requisite, necessary or appropriate to be done in or in connection with this Power of Attorney as fully to all intents and purposes as he might or could do if personally present, hereby ratifying all that his said attorney shall lawfully do or cause to be done by virtue of this Power of Attorney. (d) The existence of this Power of Attorney shall not preclude execution of any such instrument by the undersigned individually on any such matter. A person dealing with the Partnership may conclusively presume and rely on the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. (e) The appointment of each Managing General Partner and each designee of that General Partner as attorney-in-fact pursuant to this power of attorney automatically shall terminate as to such person at such time as he ceases to be a General Partner and from such time shall be effective only as to the substitute General Partner admitted in accordance with this Partnership Agreement and his designees. 15.10 Further Assurances. The Limited Partners will execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purposes of this Partnership Agreement. 15.11 Successors and Assigns. Subject in all respects to the limitations on transferability contained herein, this Partnership Agreement shall be binding upon, and shall inure to the benefit of, the heirs, administrators, personal representatives, successors and assigns of the respective parties hereto. 15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives during the term of the Partnership and during the period of its liquidation following any dissolution, any right that he may have to maintain any action for partition with respect to any of the assets of the Partnership. 15.13 Creditors. None of the provisions of this Partnership Agreement shall be for the benefit of or enforceable by any of the creditors of the Partnership or the Partners. 15.14 Remedies. The rights and remedies of the Partners hereunder shall not be mutually exclusive, and the exercise by any Partner of any right to which he is entitled shall not preclude the exercise of any other right he may have. 15.15 Custodian. All assets of the Partnership shall be held by a custodian meeting the requirements of the 1940 Act, and may be registered in the name of the Partnership or such custodian or nominee. The terms of the custodian agreement shall be determined by the Managing General Partners. 15.16 Use of Name "Franklin. "Franklin Partners, Inc., as the Partnership's Non-Managing General Partner, hereby consents to the use by the Partnership of the name "Franklin" as part of the Partnership's name; provided, however, that such consent shall be conditioned upon the employment of Franklin Advisers or one of its affiliates (collectively "Franklin") as an investment adviser of the Partnership. The name "Franklin" or any variation thereof may be used from time to time in other connections and for other purposes by Franklin and other investment companies that have obtained consent to use the name "Franklin." Franklin shall have the right to require the Partnership to cease using the name "Franklin" as part of the Partnership's name if the Partnership ceases, for any reason, to employ Franklin as its investment adviser. Future names adopted by the Partnership for itself, insofar as such names include identifying words requiring the consent of Franklin, shall be the property of Franklin and shall be subject to the same terms and conditions. 15.17 Authority. Each individual executing this Agreement on behalf of a partnership, corporation, or other entity warrants that he is authorized to do so and that this agreement will constitute the legal binding obligation of the entity which he represents. 15.18 Signatures. The signature of a Managing General Partners or an Officer or agent of the Partnership duly appointed by the Managing General Partners shall be sufficient to bind the Partnership to any agreement or on any document, including, but not limited to, documents drawn or agreements made in connection with the acquisition or disposition of any assets. 15.19 Arbitration. The parties hereby submit all controversies, claims and matters of difference to arbitration before a single arbitrator in Los Angeles, California, according to the rules and practices of the American Arbitration Association from time to time in force. This submission and agreement to arbitrate shall be specifically enforceable. Without limiting the generality of the foregoing, the following shall be considered controversies for this purpose: (a) all questions relating to the breach of any obligation, warranty, agreement or condition hereunder; (b) failure of any party to deny or reject a claim or demand of any other party; and (c) all questions as to whether the right to arbitrate any question exists. Arbitration may proceed in the absence of any party if written notice (pursuant to the American Arbitration Association's rules and regulations) of the proceedings has been given to such party. The parties agree to abide by all awards rendered in such proceedings. Such awards shall be final and binding on all parties to the extent and in the manner provided by California statute. All awards may be filed with the Clerk of the Superior Court in Los Angeles, California, as a basis of judgment and of the issuance of execution for its collection and, at the election of the party making such filing, with the clerk of one or more other courts, state or Federal, having jurisdiction over the party against whom such an award is rendered or his property. -----END PRIVACY-ENHANCED MESSAGE-----