-----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, brWnNxkm6TH599q9YaWuLyAQ++0PQBKX+gUV2eTTnG16KHGpzNSJDNq7kat5G2IT KDNmPOVSxTaQBZWkMtrhXg== 0000810742-95-000004.txt : 19950601 0000810742-95-000004.hdr.sgml : 19950601 ACCESSION NUMBER: 0000810742-95-000004 CONFORMED SUBMISSION TYPE: 485A24E PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19950301 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: 485A24E SEC ACT: 1933 Act SEC FILE NUMBER: 033-11963 FILM NUMBER: 95517361 FILING VALUES: FORM TYPE: 485A24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-05007 FILM NUMBER: 95517362 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 485A24E 1 As filed with the Securities and Exchange Commission on March 1, 1995. File Nos. 33-11963 811-5007 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. _____ Post-Effective Amendment No. 8 (X) and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 10 (X) FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) (Exact Name of Registrant as Specified in Charter) 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 321-2000 Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404 (Name and Address of Agent for Service of Process) Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(i) [ ] on (date) pursuant to paragraph (a)(i) [ ] 75 days after filing pursuant to paragraph (a)(ii) [X] on May 1, 1995 pursuant to paragraph (a)(ii) of rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. EXHIBIT INDEX PAGE *Registrant elects to calculate the maximum aggregate offering price pursuant to Rule 24e-2. 18,014,014 shares were redeemed during the fiscal year ended December 31, 1994. 10,672,381 shares were used for reductions pursuant to Paragraph (d) of Rule 24f-2 during the current year. 7,341,633 shares is the amount of redeemed shares used for reduction in this amendment. Pursuant to Rule 457(d) under the Securities Act of 1933, the maximum public offering price of $10.46 per share on February 15, 1995, is the price used as the basis for these calculations. The Fund's maximum public offering price per share varies and, thus, may be higher or lower than $10.46 in the future. While no fee is required for the 7,341,633 shares, the registrant has elected to register, for $100, an additional $289,993 of shares (approximately 27,724 shares at $10.46 per share). As part of its initial Registration Statement, the Registrant has elected to register an indefinite number of shares pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended and hereby continues such election. The Registrant filed the notice required by Rule 24f-2 for its most recent fiscal year on February 23, 1995. Calculation of Registration Fee Under the Securities Act of 1933 Title of Proposed Proposed Amount Securities Amount Maximum Aggregate of Being Being Offering Offering Registration Registered Registered Price Price* Fee* Partnership Interest 7,369,357 Shares $10.46 $289,993 $100 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) CROSS REFERENCE SHEET FORM N-1A Part A: Information Required in Prospectus N-1A Location in Item No. Item Registration Statement 1. Cover Page Cover Page 2. Synopsis "Expense Table" 3. Condensed Financial "Financial Highlights"; Information "Performance" 4. General Description "About the Franklin of Registrant Partners Funds"; "Investment Objective and Policies of Each Fund"; "General Information" 5. Management of the "Management of the Funds"; Fund "Portfolio Operations" 5A. Management's Contained in Registrant's Discussion of Fund Annual Report to Performance Shareholders 6. Capital Stock and "About the Franklin Other Securities Partners Funds"; "Distributions to Shareholders"; "Taxation of the Funds and Their Shareholders"; "How to Get Information Regarding an Investment in the Funds"; "General Information"; "Summary of Partnership Agreements" 7. Purchase of "How to Invest in a Fund"; Securities Being "Other Programs and Offered Privileges Available to Fund Shareholders"; "Exchange Privilege"; "Telephone Transactions"; "Valuation of Fund Shares"; "General Information" 8. Redemption or "How to Sell Shares of the Repurchase Funds"; "Telephone Transactions" 9. Pending Legal Not Applicable Proceedings FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) CROSS REFERENCE SHEET FORM N-1A Part B: Information Required in Statement of Additional Information 10. Cover Page Cover Page 11. Table of Contents "Contents" 12. General Information "About the Funds" (See and History also the Prospectus "About the Franklin Partners Funds"; "General Information") 13. Investment "The Investment Objectives Objectives and and Policies of the Funds" Policies (See also the Prospectus "Investment Objective and Policies of Each Fund") 14. Management of the "Officers and Managing Registrant General Partners" 15. Control Persons and "General Information" Principal Holders of Securities 16. Investment Advisory "Investment Advisory and and Other Services Other Services"; "The Funds' Underwriter" (See also the Prospectus "Management of the Funds"; "Portfolio Operations") 17. Brokerage "The Funds' Policies Allocation Regarding Brokers Used on Portfolio Transactions" 18. Capital Stock and "Additional Information Other Securities Regarding Fund Shares"; "General Information" (See also the Prospectus "How to Invest in a Fund"; "How to Sell Shares of the Funds"; "General Information") 19. Purchase, "Additional Information Redemption and Regarding Fund Shares" Pricing of (See also the Prospectus Securities Being "How to Invest in a Fund"; Offered "How to Sell Shares of the Funds"; "Valuation of Fund Shares"; "Telephone Transactions") 20. Tax Status "Additional Information on Distributions and Taxation" (See also the Prospectus "Taxation of the Funds and Their Shareholders") 21. Underwriters "The Funds' Underwriter" 22. Calculation of "General Information" Performance Data 23. Financial "Financial Statements" Statements FRANKLIN PARTNERS Funds (Registered Trademark) Franklin Tax-Advantaged U.S. Government Securities Fund Franklin Tax-Advantaged High Yield Securities Fund Franklin Tax-Advantaged International Bond Fund PROSPECTUS MAY 1, 1995 777 Mariners Island Blvd., P.O. Box 7777 San Mateo, CA 94403-7777 1-800/DIAL BEN The Franklin Partners Funds (Registered Trademark) (collectively or separately, the "Funds" or "Fund") consists of three separate and distinct funds: Franklin Tax-Advantaged U.S. Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged High Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged International Bond Fund (the "International Bond Fund"), each a California limited partnership. Each Fund is designed to earn income for qualifying non-United States ("U.S.") investors that is not subject to U.S. federal income tax or U.S. tax withholding requirements (including "Non- Resident Alien" tax withholding). The primary investment objective of the Government Fund is current income through investment in obligations of the U.S. government, its agencies or instrumentalities. The assets of this Fund will be primarily invested in obligations of the Government National Mortgage Association ("GNMA"), an agency of the U.S. government. The primary investment objective of the High Yield Fund is to earn a high level of current income, with capital appreciation as a secondary objective. The assets of this Fund will generally be invested in various classes of fixed-income debt securities of U.S. issuers, which may include high risk securities, although securities of non-U.S. issuers also may be acquired. The primary investment objective of the International Bond Fund is to seek current income by investing in debt securities of non- U.S. issuers and foreign currency denominated debt securities of U.S. issuers. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON- INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL DEFAULT AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE HIGH YIELD FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus is intended to set forth in a clear and concise manner information about each Fund that a prospective investor should know before investing. After reading the Prospectus, it should be retained for future reference; it contains information about the purchase and sale of shares and other items which a prospective investor will find useful to have. A Statement of Additional Information concerning the Funds (the "SAI"), dated May 1, 1995, as may be amended from time to time, provides a further discussion of certain areas in this Prospectus and other matters which may be of interest to some investors. It has been filed with the Securities and Exchange Commission ("SEC") and is incorporated herein by reference. A copy is available without charge from the Funds or from the Funds' principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or telephone number shown above (in U.S. only). THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER. CONTENTS PAGE Expense Table Financial Highlights About the Franklin Partners Funds Investment Objective and Policies of Each Fund Risk Considerations Management of the Funds Distributions to Shareholders Taxation of the Funds and Their Shareholders How to Invest in a Fund Other Programs and Privileges Available to Fund Shareholders Exchange Privilege How to Sell Shares of the Funds Telephone Transactions Valuation of Fund Shares How to Get Information Regarding an Investment in the Funds Performance General Information Account Registrations Summary of Partnership Agreements Portfolio Operations Appendix EXPENSE TABLE The purpose of this table is to assist an investor in understanding the various costs and expenses that a shareholder will bear directly or indirectly in connection with an investment in each Fund. These figures are based on restated operating expenses of each Fund for the fiscal year ended December 31, 1994. GOVERNMENT HIGH YIELD INTERNATIONAL FUND FUND BOND FUND SHAREHOLDER TRANSACTION EXPENSES Maximum Sales Charge Imposed on Purchases (as a percentage of 4.25% 4.25% 4.25% offering price) Deferred Sales Charge None* None* None* Exchange Fee (per $5.00** $5.00** $5.00** transaction) ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees 0.49% 0.63% 0.63%*** Maximum 12b-1 Fees 0.07%+ 0.08%+ 0.07%+ Other Expenses 0.08% 0.14% 0.39% Total Fund Operating Expenses 0.64% 0.85% 1.09%*** *Investments of $1 million or more are not subject to front-end sales charge; however, a contingent deferred sales charge of 1% is imposed on certain redemptions within 12 months of the calendar month following such investments. **$5.00 fee imposed only on Timing Accounts as described under "Exchange Privilege." All other exchanges are processed without a fee. ***Represents the amount that would have been 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 0.32% of average net assets. This arrangement may be discontinued by the investment manager at any time. +Annualized. Actual 12b-1 fees incurred by the Government Fund, High Yield Fund and International Bond Fund for the period July 1, 1994 through December 31, 1994 were .03%, .04% and .04%, respectively. Consistent with National Association of Securities Dealers, Inc.'s rules, it is possible that the combination of front-end sales charges and Rule 12b-1 fees could cause long-term shareholders to pay more than the economic equivalent of the maximum front-end sales charges permitted under those same rules. Investors should be aware that the above table is not intended to reflect in precise detail the fees and expenses associated with an individual's own investment in a Fund. Rather the table has been provided only to assist investors in gaining a more complete understanding of fees, charges and expenses. For a more detailed discussion of these matters, investors should refer to the appropriate sections of this Prospectus. EXAMPLE As required by SEC regulations, the following example illustrates the expenses, including the initial sales charge, that apply to a $1,000 investment in a Fund over various time periods assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. As noted in the table above, none of the Funds charge a redemption fee: GOVERNMENT HIGH YIELD INTERNATIONAL FUND FUND BOND FUND 1 Year $ 49 $ 51 $ 53 3 Years 62 68 76 5 Years 77 88 100 10 Years 119 143 170 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. See "Management of the Fund" for a description of each Fund's expenses. In addition, federal regulations require the example to assume an annual return of 5%, but a Fund's actual return may be more or less than 5%. FINANCIAL HIGHLIGHTS Set forth below is a table containing the financial highlights for a share of each Fund from its inception (i.e. effective date of the registration statement for each Fund) throughout the fiscal years ended December 31. Except for the International Bond Fund for the periods ending prior to January 1, 1990, the figures for the years ending subsequent to December 31, 1988 are covered by the report of Coopers & Lybrand L.L.P., the Funds' independent auditors, whose audit report thereon appears in the financial statements in the Funds' Annual Report to Shareholders. The figures for the International Bond Fund for the periods ending prior to January 1, 1990 were audited by Tait, Weller & Baker, the Fund's independent auditors for those periods. The remaining figures, which are also audited, are not covered by the auditors' current report. See the discussion "Reports to Shareholders" under "General Information."
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 1994 11.34 0.794 (0.560) 0.234 (.794) 10.78 2.06 22,725 0.29(4) 7.69 6.46 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 1994 10.91 0.704 (1.150) (.446) (0.704) 9.76 (4.26) 456,421 0.61 6.92 10.20 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 1994 8.97 0.770 (0.990) (0.220) (0.760) 7.99 (2.58) 81,151 0.81 9.36 18.39 * For the period June 9, 1990 (transfer of management) to December 31, 1990. (1) For the period May 4, 1987 (effective date) to December 31, 1987. (2) On June 9, 1990, the investment manager changed from Pilgrim Management Corporation to Franklin Advisers, Inc. (3) Without a fee reduction by the investment manager, the ratio of operating expenses to average net assets for the fiscal years ended December 31, 1988, 1989 and 1990 would have been: .87%, .76% and .76%, respectively, for the U.S. Government Securities Fund; and .98%, .78% and .79%, respectively, for the High Yield Securities Fund. (4) Without a fee reduction by the investment manager, the ratio of operating expenses to average net assets for the fiscal years ended December 31, 1990, 1991, 1992, 1993 and 1994 would have been 1.42%, .89%, .92%, .97%, and 1.06%. respectively. + Annualized ++ Total return measures the change in value of an investment over the periods indicated. It does not include the maximum initial sales charge and assumes reinvestment of dividends at the offering price and capital gains, if any, at net asset value. Effective July 1, 1994, with the implementation of the 12b-1 distribution plans, as discussed in this Prospectus, the existing sales charge on reinvested dividends has been eliminated.
ABOUT THE FRANKLIN PARTNERS FUNDS Each Fund is an open-end, diversified management investment company, registered with the SEC under the Investment Company Act of 1940 (the "1940 Act"), and organized as a limited partnership in the state of California. The form of organization was adopted to preserve, for qualifying non-U.S. investors, the current exemptions from U.S. federal income tax and U.S. federal withholding tax, including U.S. "Non-Resident Alien" tax withholding (principally, the "portfolio interest" exemption for distributions from the Government Fund and the High Yield Fund and the exemption from U.S. income taxation of foreign source income for distributions from the International Bond Fund) that would be available to direct owners of the types of securities in which each Fund invests. Because the Funds are limited partnerships, distributions made by the Funds retain their original character so that qualifying income is not subject to U.S. federal income taxation when received by the Funds' qualifying non-U.S. investors. Each Fund issues only one class of shares in the form of limited partnership interests, and purchasers of shares of a Fund (referred to herein as "shareholders" or "limited partners") are required to become limited partners of that Fund. Shares of a Fund may be purchased (minimum investment $2,500 initially and $100 thereafter) at the then current public offering price 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 the Fund does not have such a Certificate on file, the Fund must withhold the tax from any distributions (including redemption distributions) to the shareholder to the extent that such distributions include income from U.S. sources. In addition, in the absence of a Certificate, to the extent that a Fund has not distributed all of the U.S. source income allocable to the shareholder during the year, the Fund will be required to apply withholding (by liquidating shares at the end of the year) to the undistributed U.S. source income allocated to the shareholder for the year. 3. As a partnership, each Fund will be required to file an annual return with the IRS and the California Franchise Tax Board which identifies each shareholder's allocated share of the Fund's net income and gains for the taxable year, whether or not such income and gains have been distributed. Each Fund will also file an annual form with the IRS with respect to each non-U.S. shareholder (which includes, as an attachment, the Form W-8 [or substitute] furnished by the shareholder) indicating, if applicable, that no amount was withheld with respect to income allocated to such shareholder that qualified for the portfolio interest exemption or any other applicable exemption under the Code. 4. The value of Fund shares directly owned by a non-U.S. individual upon the death of such individual may be subject to U.S. estate taxes (and possibly state inheritance taxes), subject to certain exemptions and to the terms of any applicable treaty between the U.S. and the individual's country of residence. INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND The objective of each Fund is a fundamental policy and may not be changed without shareholder approval. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND The investment objective of this Fund is current income through investment in a portfolio limited to securities which are obligations of the U.S. government, its agencies or instrumentalities. At least 65% of the assets of this Fund will be invested in such securities. The assets of this Fund are expected to be invested primarily in obligations of the Government National Mortgage Association, popularly called GNMAs or Ginnie Maes. Obligations of the U.S. government, its agencies and instrumentalities may also include, 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, including those issued or guaranteed by the Department of Housing and Urban Development, the Farmers Home Administration, the Small Business Administration, the Export-Import Bank, Banks for Cooperatives, the Commodity Credit Corporation, the Federal Deposit Insurance Corporation, Federal Farm Credit Banks, the Federal Financing Bank, Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Land Banks and the Federal Land Bank Association, the Federal Savings and Loan Insurance Corporation, the General Insurance Fund, Government Services Administration, the Product Credit Association, the Student Loan Marketing Association, the Tennessee Valley Authority, and the U.S. Postal Service. To produce income that is not subject to U.S. federal income tax or U.S. withholding tax for its non-U.S. investors, the Fund limits its investments to U.S. government obligations issued after July 18, 1984 in registered form. In the case of GNMAs, the Fund limits itself to GNMA Certificates representing interests in underlying mortgages which were also issued after July 18, 1984 or which meet certain other qualifying conditions under the Code, all of the interest on which will qualify for the "portfolio interest" exemption under the Code. INFORMATION ABOUT GNMAS GNMAs are mortgage-backed securities representing part ownership of a pool of mortgage loans. GNMA Certificates differ from bonds in that principal is scheduled to be paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. The Government Fund 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 UNITED STATES GOVERNMENT. GNMA MAY BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS GUARANTEE. GNMA Certificates are created by an "issuer," which is a Federal Housing Administration ("FHA") approved lender, such as mortgage bankers, commercial banks and savings and loan associations, 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. 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 for 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 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 the net asset value per share of the Government Fund. 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 income otherwise exempt under the Code and, therefore, would generally be subject to U.S. tax and withholding requirements. Various investment services publish ratings of some of the types of securities in which the High Yield Fund may invest. Higher yields are ordinarily available from securities in the lower rated categories of the NRSROs (that is, securities rated Baa or lower by Moody's or BBB or lower by S&P - see the Appendix to this Prospectus) or from unrated securities of comparable quality. These ratings, which represent the opinions of the 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 accompany an investment in this Fund than would be the case in a more conservative income-type investment company. In addition, this Fund will be more dependent on the investment manager's judgment, analysis and experience in achieving its investment objective than is the case for funds that invest in higher quality bonds. As in any other investment, there is no assurance that the Fund's objectives will be obtained. On December 31, 1994, fiscal year end, the High Yield Fund held no defaulted securities. FOR ADDITIONAL RISK FACTORS, SEE THE SECTION 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. federal income tax and withholding requirements. See "The Investment Objectives and Policies of the Funds" in the SAI for a more detailed discussion of the International Bond Fund's authorized hedging activities. In addition to the risks resulting from fluctuations in currency exchange rates and the attendant risks involved in using hedging techniques, there are certain risks involved in a U.S. investment company's investment in the securities of non-U.S. issuers. These risks include devaluation of currencies, imposition of non-U.S. withholding taxes on Fund income, reduced availability in the U.S. of public information concerning non-U.S. issuers, future political and economic developments and the imposition of currency exchange regulations or other foreign governmental laws or restrictions, and the fact that non-U.S. companies are not generally subject to the same type of accounting, auditing and financial reporting standards or other regulatory practices and requirements that are applicable to U.S. domestic companies. Moreover, securities of many non-U.S. issuers may be less liquid than the securities of comparable U.S. issuers and their prices more volatile, and the International Bond Fund will incur transaction costs in converting assets from one currency to another. In addition, with respect to certain foreign countries, there is the possibility of expropriation or the nationalization of issuers of securities held by the International Bond Fund, confiscatory taxation and limitations on the use or removal of monies (e.g., currency blockages) or other Fund assets. Although the International Bond Fund is not limited with respect to the maturity of its portfolio securities, it is anticipated that the majority of the Fund's investments will be intermediate to long-term investments that mature in ten years or more. Although certain risks are involved in forward foreign exchange contracts, foreign currency options, foreign currency futures and related options on such futures (as discussed above and in the SAI), the investment manager believes that, because the International Bond Fund will only engage in these transactions for hedging purposes, the use of these strategies will not subject the Fund to the risks frequently associated with the speculative use of forward contracts, options and futures transactions. In addition, the International Bond Fund will not invest funds in foreign currency positions, the principal amount of which taken through options on foreign currencies, foreign currency futures contracts, forward foreign currency contracts and options on foreign currency futures contracts with respect to any particular foreign currency would exceed the sum of the principal amount of securities denominated in such foreign currency owned or committed to be purchased by the Fund. Tax requirements may further limit the International Bond Fund's ability to engage in these hedging transactions and strategies. There were no securities in the portfolio of the International Bond Fund which were in default on their contractual provisions at fiscal year end. In order to comply with guidelines concerning each Fund's investment activities and to strengthen its position that it is not engaged in a U.S. trade or business, a Fund may have to refrain from the sale or purchase of particular securities under circumstances in which such securities would otherwise have been sold or purchased. Conversely, in order to protect the value of its investments, a Fund may have to take actions which are not consistent with the guidelines and may weaken its tax position. The effect of the guidelines is more pronounced for the High Yield Fund and the International Bond Fund because of the nature of their investments. See the tax section of this Prospectus for further information. FURTHER RISK DISCUSSION IS INCLUDED UNDER THE CAPTION "RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES." SOME OF THE FUNDS' OTHER INVESTMENT POLICIES LONG-TERM INVESTMENTS. It is not the policy of any Fund to purchase or sell securities for trading purposes as such activity may cause the Fund to be deemed to be engaged in a trade or business in the U.S. for U.S. federal income tax purposes. Rather, it is the policy of each Fund to purchase securities for long-term investment to generate income. To the extent consistent with guidelines each Fund follows in order not to be deemed to be engaged in a trade or business in the U.S., however, each Fund may make changes in its investments in accordance with management's appraisal of the factors affecting the market and the national economy in order to protect the Fund from losses in the value of its investments. REPURCHASE AGREEMENTS. Each Fund, 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 currencies, imposition of withholding taxes on Fund income, reduced availability in the U.S. of public information concerning non-U.S. issuers, future political and economic developments and the imposition of currency exchange regulations or other governmental laws or restrictions, and the fact that non-U.S. companies are not generally subject to the same type of accounting, auditing and financial reporting standards or other regulatory practices and requirements that are applicable to U.S. companies. Moreover, securities of many non-U.S. issuers may be less liquid than the securities of comparable U.S. issuers and their prices more volatile, and the Fund will incur transaction costs in converting assets from one currency to another. Brokerage commissions and custody fees for non-U.S. securities are also generally higher than those in the U.S. In addition, with respect to certain countries, there is the possibility of expropriation or the nationalization of issuers of securities held by a Fund, confiscatory taxation, and limitations on the use or removal of monies (e.g., currency blockages) or other Fund assets. The High Yield Fund will ordinarily purchase securities of non- U.S. issuers which are traded in the U.S. or purchase American Depositary Receipts ("ADRs"), which are certificates issued by U.S. banks representing the right to receive securities of a non- U.S. issuer deposited with that bank or a correspondent bank. ADRs purchased by the High Yield Fund will be "sponsored," that is, establishment of the issuing facility is brought about by the participation of the issuer and the depository institution pursuant to a deposit agreement which sets out the rights and responsibilities of the issuer, the depositary and the ADR holder. The Fund may purchase the securities of non-U.S. issuers, located in developed countries only, directly in non-U.S. markets. Investments in non-U.S. securities, where delivery takes place outside the U.S., will have to be made in compliance with any applicable currency restrictions and other tax laws and laws limiting the amount and types of such investments. Securities which are acquired by the High Yield Fund or the International Bond Fund outside the U.S. and which are publicly traded in the U.S. or on a recognized non-U.S. securities exchange or securities market are not considered by the Fund to be illiquid assets so long as (i) the securities, if resold, may be sold in one or more such trading markets, (ii) the Fund reasonably believes it can readily dispose of the securities for cash in one or more of such markets, and (iii) current market quotations are readily available. Consistent with each Fund's intention to produce income that is not subject to U.S. federal income tax or U.S. withholding tax for qualifying non-U.S. investors, each Fund will generally invest in debt securities of U.S. issuers that are issued after July 18, 1984 in registered form or in debt securities of non- U.S. issuers that are not engaged in U.S. trade or business so that the income generated by such investments may be treated as "portfolio interest" or "non-U.S. source" income, respectively. (See "Taxation of the Funds and Their Shareholders.") The Funds are subject to a number of additional investment restrictions, some of which may be changed only with the approval of shareholders, which further limit their activities to some extent. A list of these restrictions and more information concerning the policies discussed herein are included in the SAI. Each Fund's total return, as calculated pursuant to the formula prescribed by the SEC, for the one- and five-year periods ended on December 31, 1994 and since inception was as follows: ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION Government Fund -8.17% 6.16% 7.70%* High Yield Fund -6.58% 10.03% 8.36%* International Bond Fund -2.12% n/a 7.47** *Inception May 4, 1987 **From change of investment manager on June 9, 1990 Further information regarding performance is contained in the "Performance" section of this Prospectus. RISK CONSIDERATIONS HIGH YIELDING, FIXED-INCOME SECURITIES Corporate debt securities are subject to the risk of an issuer's inability to meet principal and interest payments on the obligations (credit risk) and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (market risk). Lower rated or unrated securities are more likely to react to developments affecting market and credit risk in making investment decisions as to corporate debt obligations for the High Yield Fund. Bonds rated BB or below by S&P or Baa or below by Moody's (or comparable unrated securities) are considered by S&P and Moody's, on balance, to be speculative and questionable as to payment of principal and interest thereon. They will generally involve more credit risk than securities in the higher rating categories. The market values of such securities tend to reflect individual corporate developments to a greater extent than do values of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Such lower rated securities also tend to be more sensitive to economic conditions than higher rated securities. Even securities rated BBB by S&P or Baa by Moody's, ratings which are considered investment grade, possess some speculative characteristics. Companies that issue high yielding, fixed-income securities are often highly leveraged and may not have more traditional methods of financing available to them. Therefore, the risk associated with acquiring the securities of such issuers is generally greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of high yielding securities may experience financial stress. During these periods, such issuers may not have sufficient cash flow to meet their interest payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. To date the International Bond Fund has not held any securities which have defaulted. As of December 31, 1994, none of the High Yield Fund's portfolio was in default. No issues held by the High Yield Fund defaulted in the past fiscal year and a total of one issue defaulted over the prior three years. In general, securities which default lose much of their value in the time period prior to the actual default so that a Fund's net assets are impacted prior to the default. The High Yield and International Bond Funds may retain an issue which has defaulted because such issue may present an opportunity for subsequent price recovery. The high yield bond market is relatively new and much of its growth prior to 1990 paralleled a long economic expansion. The recent recession disrupted the market for high yield bonds and adversely affected the value of outstanding bonds and the ability of issuers of such bonds to repay principal and interest. Those adverse effects may continue even as the economy recovers. High yielding, fixed-income securities frequently have call or buy-back features which would permit an issuer to call or repurchase the securities from a Fund. Although such securities are typically not callable for a period from three to five years after their issuance, when calls are exercised by the issuer during periods of declining interest rates, a Fund must replace such called securities with lower yielding securities, decreasing the net investment income to such Fund and thus distributions to shareholders. The premature disposition of a high yielding security due to a call or buy-back feature, the deterioration of the issuer's creditworthiness, or a default may also make it more difficult for a Fund to manage the timing of its receipt of income, which may have tax implications. A Fund's investment in deferred interest bonds or bonds that provide for payment of interest-in-kind, if any, may cause the Fund to recognize and allocate income to shareholders prior to the receipt of cash payments. The Fund may also be required under the Code and Treasury regulations to accrue income for income tax purposes on defaulted obligations and allocate such income to the Fund's shareholders even though the Fund is not currently receiving interest or principal payments on such obligations. The High Yield and International Bond Funds may have difficulty disposing of certain high yielding securities because there may be a thin trading market for a particular security at any given time. The market for lower rated, fixed-income securities generally tends to be concentrated among a smaller number of dealers than is the case for securities which trade in a broader secondary retail market. Generally, purchasers of these securities are predominantly dealers and other institutional buyers, rather than individuals. To the extent the secondary trading market for a particular high yielding, fixed-income security does exist, it is generally not as liquid as the secondary market for higher-rated securities. Reduced liquidity in the secondary market may have an adverse impact on market price and such Fund's ability to dispose of particular issues, when necessary, to meet the Fund's liquidity needs or in response to a specific economic event, such as the deterioration in the creditworthiness of the issuer. Reduced liquidity in the secondary market for certain securities may also make it more difficult for the Funds to obtain market quotations based on actual trades for purposes of valuing each Fund's portfolio. Current values for these high yield issues are obtained from pricing services and/or a limited number of dealers and may be based upon factors other than actual sales. (See "Valuation of Fund Shares.") The High Yield Fund and the International Bond Fund may acquire such securities that are sold without registration under the federal securities laws and therefore carry restrictions on resale. While many recent high yielding securities have been sold with registration rights, covenants and penalty provisions for delayed registration, if a Fund were required to sell such restricted securities before the securities have been registered, it may be deemed an underwriter of such securities as defined in the Securities Act of 1933, which entails special responsibilities and liabilities. The Funds may incur special costs in disposing of such securities; however, the Funds will generally incur no costs when the issuer is responsible for registering the securities. The High Yield and International Bond Funds may acquire such securities during an initial underwriting. Such securities involve special risks because they are new issues. The Funds have no arrangement with their underwriters or any other person concerning the acquisition of such securities, and the investment manager will carefully review the credit and other characteristics pertinent to such new issues. Factors adversely impacting the market value of high yielding securities will adversely impact the net asset value of the High Yield Fund and the International Bond Fund. For example, adverse publicity regarding lower rated bonds, which appeared during 1989 and 1990, along with highly publicized defaults of some high yield issuers, and concerns regarding a sluggish economy which continued in 1993, depressed the prices for many such securities. In addition, each Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings. The Funds will rely on the investment manager's judgment, analysis and experience in evaluating the creditworthiness of an issuer. In this evaluation, the investment manager will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, deferred interest and pay-in- kind bonds. Such bonds carry an additional risk in that, unlike bonds which pay interest throughout the period to maturity, the Funds will realize no cash until the cash payment date and, if the issuer defaults, the Funds may obtain no return at all on their investment. Zero coupon, deferred interest and pay-in-kind bonds involve additional special considerations. Zero coupon or deferred interest securities are debt obligations which do not entitle the holder to any periodic payments of interest prior to maturity or a specified date when the securities begin paying current interest (the "cash payment date") and therefore are generally issued and traded at a discount from their face amounts or par value. The discount varies depending on the time remaining until maturity or the cash payment date, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity or cash payment date of the security approaches. The market prices of zero coupon securities are generally more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non-zero coupon or deferred interest securities having similar maturities and credit quality. Pay-in-kind bonds are securities which pay interest through the issuance of additional bonds. The Funds will be deemed to receive interest over the life of such bonds and income will be allocated to the shareholders as if interest were paid on a current basis, although no cash interest payments are received by the Funds until the cash payment date or until the bonds mature. For tax imposed restrictions on trading, see "U.S. Tax Treatment of Non-U.S. Investors" under "Taxation of the Funds and Their Shareholders." Because of the High Yield Fund's policy of investing in higher yielding, higher risk securities, an investment in the High Yield Fund is accompanied by a higher degree of risk than is present with an investment in higher rated, lower yielding securities. Accordingly, an investment in the High Yield Fund should not be considered a complete investment program, and should be carefully evaluated for its appropriateness in light of the investor's overall investment needs and goals. Persons on fixed incomes, such as retired persons, should also consider the increased risk of loss to principal which is present with an investment in higher risk securities such as those in which the High Yield Fund invests. The International Bond Fund may also invest a portion of its assets in comparable securities, although the International Bond Fund currently does not intend to invest more than 5% of its assets in such securities. ASSET COMPOSITION TABLE During fiscal year ended December 31, 1994, the High Yield Fund had an average of 92.69% of its assets invested in bonds rated below investment grade (Baa or lower by Moody's) and 0% in bonds which had not been rated by Moody's. A total of 93.78% of the High Yield Fund's assets were invested in bonds. A credit rating by an NRSRO evaluates only the safety of principal and interest of the bond, and does not consider the market value risk associated with an investment in such a bond. As stated earlier, ratings published by ratings services, such as Moody's, will be considered in connection with the investment of the assets of the High Yield Fund, although such ratings will not be determinative. The table below shows the percentage invested in each of the specific rating categories by Moody's and those that are not rated. The information was prepared based on a dollar weighted average of the Fund's portfolio composition based on month-end assets for each of the 12 months in the fiscal year ended December 31, 1994. A description of each rating category by Moody's is included in the Appendix. HIGH YIELD FUND Aaa Aa A Baa 1.09% Ba 20.03% B 70.34% Caa 2.15% Ca 0.17% Unrated 0% 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"), a publicly owned holding company, the principal shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately 20% and 16%, respectively, of Resources' outstanding shares. Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each Fund's investment manager. Advisers is a wholly-owned subsidiary of Resources. Through its subsidiaries, Resources is engaged in various aspects of the financial services industry. Advisers acts as investment manager or administrator to 33 U.S. registered investment companies (111 separate series) with aggregate assets of over $73 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, 1994. 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 $41.8 billion for U.S. registered management investment companies. Under the subadvisory agreement, TICI will provide, subject to the Manager's discretion, a portion of the investment advisory services for which the Manager is responsible pursuant to its management agreement relating to the International Bond Fund. For its services, TICI will receive from Advisers a monthly fee based on the value of the International Bond Fund's net assets as of the close of business on the last business day of each month: 1/2 of 5/96 of 1% of the average daily net assets of the Fund up to and including $100 million; 1/2 of 1/24 of 1% of the average daily net assets over $100 million up to and including $250 million; and 1/2 of 9/240 of 1% of average daily net assets in excess of $250 million. This will not be a separate expense of the Fund but will be paid from the investment advisory fees received by Advisers. PLANS OF DISTRIBUTION Each Fund has adopted a distribution plan (the "Plan" or "Plans") pursuant to Rule 12b-1 under the 1940 Act. Under the Plans, each Fund may reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the Fund's shares. Such expenses may include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with a Fund, Distributors or its affiliates. The maximum amount which each Fund may pay to Distributors or others for such distribution expenses is 0.15% per annum of the average daily net assets of the Fund, payable on a quarterly basis. All expenses of distribution and marketing in excess of 0.15% per annum will be borne by Distributors, or others who have incurred them, without reimbursement from the Fund. The Plan for each Fund also covers any payments to or by the Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers or Distributors, to the extent such payments are deemed to be for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1. The payments under the Plans are included in the maximum operating expenses which may be borne by each Fund. 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 in the Franklin Templeton Funds, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. 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%). To the extent the High Yield Fund and the International Bond Fund generate income or capital gains from debt obligations purchased or issued outside of the U.S., such Funds may be required to pay taxes in foreign countries on such income or gains. Non-U.S. investors in those Funds may be able to obtain a credit or other relief from such taxes under the tax laws of their own countries or under treaties between their countries and the countries imposing such taxes on the Funds. U.S. Tax Treatment of Non-U.S. Investors. A non-U.S. investor (i.e., an investor other than a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust as defined in the Code) investing in a Fund who was deemed to be engaged in a trade or business in the U.S. would be subject to U.S. federal income tax on any ordinary income and capital gains realized by the Fund to the extent such income and gains were deemed to be effectively connected with the conduct of such trade or business. (U.S. taxation of such income and gains would not be avoided under the terms of an applicable U.S. income tax treaty because such investor would be deemed to have a permanent establishment in the U.S.) Each Fund, however, has obtained an opinion of its counsel to the effect that neither the Funds, nor their shareholders solely by virtue of their investment in the Funds, should be deemed to be engaged in a trade or business in the U.S. if the Funds adhere to their stated investment objectives, policies and restrictions and to certain guidelines concerning their investment activities. Each Fund intends to comply with these restrictions and guidelines. Assuming that the Funds comply with the guidelines, any non-U.S. investor of a Fund should not be deemed to be engaged in a trade or business in the U.S. solely by virtue of an investment in the Fund. Investors should also note that their investments in other funds in the Franklin Group of Funds (Registered Trademark) or in other U.S. investments generally would not, by themselves, cause them to be deemed to be engaged in a trade or business in the U.S.; however, it is possible that an investor could be deemed to be engaged in a trade or business in the U.S. if the investor engages in frequent trading (as opposed to investment) activity and generally does not hold U.S. investments for any substantial period of time. If a Fund were deemed to be engaged in a U.S. trade or business by the IRS or a court of law, then its non-U.S. shareholders would be subject to U.S. federal income tax and the Fund would be obligated to withhold tax at the highest rate applicable to a particular class of shareholders on effectively connected taxable income allocable to each non-U.S. shareholder within that class (see the SAI). Assuming that a non-U.S. investor is not engaged in a trade or business in the U.S., ordinary income realized by each Fund will not be subject to U.S. federal income tax (including "Non- Resident Alien" withholding taxes), if (i) the ordinary income consists of interest income which qualifies for the "portfolio interest" exemption under Sections 871(h) and 881(c) of the Code (or is otherwise exempt from U.S. tax withholding), (ii) the investor has furnished a valid and effective original or certified copy of an original Form W-8 (or substitute) to the Funds and has renewed the Form W-8 as required, (iii) the Funds have no actual knowledge that the investor is in fact a U.S. person and (iv) the investor is not (a) a "10-percent shareholder," as defined in Section 871(h)(3) of the Code, of the issuer of a security held by the Fund which generates the portfolio interest income, (b) a controlled foreign corporation related to such issuer, or (c) a bank deemed to be receiving such interest (other than interest on an obligation of the U.S.) on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business. The Funds have been advised that interest income will qualify for the "portfolio interest" exemption if it is paid with respect to a debt obligation issued after July 18, 1984 in registered form with respect to which the U.S. person who would otherwise be required to withhold U.S. federal income tax from such interest under Section 1441 or 1442 of the Code (i.e., the Fund) has received a valid and effective statement (such as that contained in the Application) that the beneficial owner of the obligation (i.e., the shareholder) is not a U.S. person. A Fund's investments in zero coupon or deferred interest securities or in pay-in-kind bonds are subject to special tax rules concerning the amount, timing and character of the income allocations made to shareholders by causing the Fund to recognize income prior to the receipt of cash payments. This income will qualify for the "portfolio interest" exemption, provided that the other requirements relating to the exemption are satisfied. Certain foreign exchange gains and losses realized by the High Yield Fund and the International Bond Fund may be treated as ordinary income and losses rather than capital gains and losses. Such ordinary income does not appear to be subject to U.S. federal income tax (including withholding taxes) for a non-U.S. investor who is not engaged in a trade or business in the U.S. With respect to the High Yield Fund and the International Bond Fund, a non-U.S. investor who is not engaged in a trade or business in the U.S. will also not be subject to U.S. federal income tax (including withholding taxes) on ordinary income realized by the Fund which constitutes "non-U.S. source" income. The Fund has been advised that interest income will be deemed to be "non-U.S. source" income if it is received with respect to securities issued by governments other than the U.S. or by a non- U.S. corporation unless the corporation is engaged in a trade or business in the U.S. Interest on securities of all non-U.S. corporations engaged in a trade or business in the U.S. is generally treated at least in part as U.S. source income, although such interest may be exempt from U.S. withholding taxes by virtue of qualifying for the portfolio interest exemption. A non-U.S. investor who is not engaged in a U.S. trade or business will generally not be subject to U.S. federal income tax (including withholding taxes) on the allocated share of net short- term or long-term capital gains realized by a Fund or on proceeds from the redemption of Fund shares, provided that the investor is not treated as a U.S. resident under the Code. In the case of an individual, a non-U.S. investor is one who has been physically present in the U.S. for less than 31 days during the current calendar year. An individual who is physically present in the U.S. for at least 31 but less than 183 days during the current calendar year will still be treated as a non-U.S. investor, provided that the total number of days physically present in the current calendar year and the two preceding calendar years does not exceed 183 days (counting all of the days in the current calendar year, only one-third of the days in the first preceding calendar year and only one-sixth of the days in the second preceding calendar year). An individual who is physically present in the U.S. for 183 days or more during the current calendar year is generally not treated as a non-U.S. investor. In addition, lawful permanent residents or green card holders may not be treated as non-U.S. investors. Investors should contact their tax advisors for more specific information regarding the determination of U.S. residency status for tax purposes. Redemption proceeds will also not be subject to U.S. tax if they constitute non-U.S. source income by virtue of the investor's non- U.S. status. Even if proceeds of redemptions are not subject to U.S. tax under the rules just described, the Funds may still be required to withhold on the portion of such proceeds which represents the investor's allocable share of income or gains of the Funds which would otherwise be subject to withholding. Non-U.S. investors who do not furnish a valid and effective Form W-8 (or substitute) may be subject to U.S. withholding taxes on their allocated shares of income and gains realized by the Funds and on proceeds from redemptions of their shares. Regardless of whether a valid and effective Form W-8 (or substitute) is furnished, non-U.S. investors will be subject to U.S. withholding taxes on their allocated shares of income realized by the Funds from sources other than (i) "portfolio interest," (ii) "U.S. source" income otherwise exempt from withholding, (iii) "non-U.S. source" income, and (iv) net realized capital gains, unless such withholding taxes are reduced or eliminated under the terms of an applicable U.S. income tax treaty and the investor complies with all procedures for claiming the benefits of such a treaty. It is the intention of each Fund to withhold amounts required by the Code with respect to non-qualifying income and/or non-qualifying investors either at the time of distribution or by subsequent redemption of shares in the investor's account. Investors may also be subject to taxation on income and gain earned from their investment in the Fund imposed by state and local jurisdictions or by their country of residence for tax purposes. In addition, the value of shares owned by a U.S. or non- U.S. shareholder may be subject to U.S. federal estate tax (and state inheritance tax) upon the death of the shareholder. The foregoing discussion is only a summary and does not address potential tax liability under the tax laws of any country other than the U.S. A complete discussion will depend on the jurisdiction in which the investor resides for tax purposes. The foregoing discussion also assumes the investor is generally not subject to U.S. tax or withholding with respect to other income or activities unrelated to an investment in the Funds or to U.S. state tax or withholding. Should an investor become subject to U.S. or state tax or withholding, the tax consequences of owning, exchanging, or redeeming shares of the Funds will be significantly different and an investor in this circumstance should consult a tax adviser. U.S. Tax Treatment of U.S. Investors. Each shareholder of a Fund who is treated under the Code as a U.S. citizen or resident or a U.S. corporation, partnership, estate or trust will be subject to U.S. federal income tax on such shareholder's distributive share of each item of income, deduction, credit, gain or loss realized by the Fund, notwithstanding the fact that such income may not have been distributed and that a portion of such income may consist of "portfolio interest" or other income which would be exempt from U.S. tax if allocated to a non-U.S. person. Fund shareholders may not use Fund losses to offset "passive activity income" from other investments or "passive activity losses" from other investments to offset Fund income. State Tax Considerations. As a general rule, partnerships are not considered to be separate taxable entities under state law. Title 31 of the U.S. Code exempts U.S. government obligations and the interest they pay from taxation under state, municipal or local authority. To the extent the Government Fund earns interest income on obligations of the U.S., its agencies or instrumentalities (other than GNMAs and other indirect obligations of the U.S.), such income is generally exempt from state and local income tax. Income generated from investment in GNMAs, however, is subject to state and local income tax in most states. It is possible that certain states such as California could take the position that nonresident shareholders of the Funds (including shareholders who are not subject to U.S. federal income taxation) are subject to tax in such states on their shares of Fund income derived from sources within the respective states as a result of Fund activities conducted in the state. The Funds intend to file a partnership tax return and Forms K-1 in the state of California, but to take the position with respect to other states that they are under no obligation to file any other tax or information returns in such states because their activities in any such state would not be extensive enough to support the exercise of taxing jurisdiction by such state. The Funds believe that shareholders who are not residents of California should not be subject to income tax in California because the activities of the Funds would not rise to the level of conduct of a trade or business in California. If a Fund were determined to be conducting a trade or business (rather than merely investing), however, the Fund would be required to withhold California income tax at the rate of 11% of the income amounts allocable to non-U.S. shareholders and 7% of income amounts allocable to U.S. shareholders who reside outside California. Prospective investors in the Funds may wish to consult their own tax advisers about the risks of taxation of their distributive shares of Fund income and gains in states other than their states or countries of residence and the availability of tax credits in their own states or countries for taxes paid to such states. In the event non-U.S. investors in the Funds are subject to state taxation of their distributive shares of Fund income and gains, such income may be exempt from state taxation to the extent it consists of interest on direct obligations of the U.S. See the SAI for more information concerning taxation of shareholders. HOW TO INVEST IN A FUND Partnership interests (referred to herein as "shares") of the Funds are continuously offered through securities dealers which execute an agreement with Distributors, the principal underwriter of the shares of the Funds. The use of the term "securities dealer" shall include other financial institutions which, pursuant to an agreement with Distributors (directly or through affiliates), handle customer orders and accounts with each Fund. Such reference, however, is for convenience only and does not indicate a legal conclusion of capacity. The minimum initial investment is $2,500 and subsequent investments must be $100 or more. These minimums may be waived when the shares are being purchased through plans established by the Franklin Templeton Group. The Funds and Distributors reserve the right to refuse any order for the purchase of shares, and all orders must be paid for in U.S. dollars. A Fund may impose a $10 charge for each returned item, against any shareholder account which, in connection with the purchase of Fund shares, submits a check or a draft which is returned unpaid to such Fund. PURCHASE PRICE OF FUND SHARES Shares of each Fund are offered at the public offering price which is the net asset value per share, plus a sales charge, next computed (1) after the shareholder's securities dealer receives the order which is promptly transmitted to the Fund, or (2) after receipt of an order by mail from the shareholder directly in proper form (which generally means a completed Application accompanied by a negotiable check in U.S. funds). The sales charge is a variable percentage of the offering price depending upon the amount of the sale. 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 DEALER CONCESSION AS A AS A AS A PERCENTAGE PERCENTAGE OF PERCENTAGE OF OF SIZE OF TRANSACTION OFFERING NET AMOUNT OFFERING AT OFFERING PRICE PRICE INVESTED PRICE *,*** Less than $100,000 4.25% 4.44% 4.00% $100,000 but less 3.50% 3.63% 3.25% than $250,000 $250,000 but less 2.75% 2.83% 2.50% than $500,000 $500,000 but less 2.15% 2.20% 2.00% than $1,000,000 $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 Distributor,from 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." 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 except Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin 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) 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. Distributors, or one of its affiliates, out of its own resources, may also provide additional compensation to securities dealers in connection with sales of shares of the Franklin Templeton Funds. Compensation may include financial assistance to securities dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising, sales campaigns and/or shareholder services and programs regarding one or more of the Franklin Templeton Funds, and other dealer-sponsored programs or events. In some instances, this compensation may be made available only to certain securities dealers whose representatives have sold or are expected to sell significant amounts of shares of Franklin Templeton Funds. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Dealers may not use sales of the Funds' shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc. None of the aforementioned additional compensation is paid for by the Funds or their shareholders. Certain officers and Managing General Partners of the Funds are also affiliated with Distributors. A detailed description is included in the SAI. All investors should complete the Application included with this Prospectus and submit a signed (or duly certified copy thereof) Form W-8 (or substitute) or W-9, as applicable. For joint accounts, each joint owner must furnish a separate Form W-8 (or substitute). BY PURCHASING FUND SHARES, THE INVESTOR AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF THE PARTNERSHIP AGREEMENT AND SPECIAL POWER OF ATTORNEY AND ACCEPTS ALL THE TERMS, REPRESENTATIONS AND WARRANTIES CONTAINED IN THE APPLICATION. QUANTITY DISCOUNTS IN SALES CHARGES Shares may be purchased under a variety of plans which provide for a reduced sales charge. To be certain to obtain the reduction of the sales charge, the investor or the dealer should notify Distributors at the time of each purchase of shares which qualifies for the reduction. In determining whether a purchase qualifies for any of the discounts, investments in any of the Franklin Templeton Investments may be combined with those of the investor's spouse and children under the age of 21. In addition, the aggregate investments of a trustee or other fiduciary account (for an account under exclusive investment authority) may be considered in determining whether a reduced sales charge is available, even though there may be a number of beneficiaries of the account. In addition, an investment in the Funds may qualify for a reduction in the sales charge under the following programs: 1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of existing investments in the Franklin Templeton Investments may be combined with the amount of the current purchase in determining the sales charge to be paid. 2. LETTER OF INTENT. An investor may immediately qualify for a reduced sales charge on a purchase of shares of a Fund by completing the Letter of Intent section of the Application (the "Letter of Intent" or "Letter"). By completing the Letter, the investor expresses an intention to invest during the next 13 months a specified amount which if made at one time would qualify for a reduced sales charge and grants to Distributors a security interest in the reserved shares and irrevocably appoints Distributors as attorney-in-fact with full power of substitution to surrender for redemption any or all shares for the purpose of paying any additional sales charge due. Purchases under the Letter will conform with the requirements of Rule 22d-1 under the 1940 Act. The investor or the investor's securities dealer must inform Investor Services or Distributors that this Letter is in effect each time a purchase is made. AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the amount of the total intended purchase will be reserved in shares of the Fund in which you invest, registered in the investor's name, to assure that the full applicable sales charge will be paid if the intended purchase is not completed. The reserved shares will be included in the total shares owned as reflected on periodic statements; income and capital gain distributions on the reserved shares will be paid as directed by the investor. The reserved shares will not be available for disposal by the investor until the Letter of Intent has been completed or the higher sales charge paid. For more information, see "Additional Information Regarding Purchases" in the SAI. GROUP PURCHASES An individual who is a member of a qualified group may also purchase shares of the Funds at the reduced sales charge applicable to the group as a whole. The sales charge is based upon the aggregate dollar value of shares previously purchased and still owned by the group, plus the amount of the current purchase. For example, if members of the group had previously invested and still held $80,000 of a Fund's shares and now were investing $25,000, the sales charge would be 3.50%. Information concerning the current sales charge applicable to a group may be obtained by contacting Distributors. A "qualified group" is one which (i) has been in existence for more than six months; (ii) has a purpose other than acquiring shares of the Funds at a discount; and (iii) satisfies uniform criteria which enable Distributors to realize economies of scale in its costs of distributing shares. A qualified group must have more than 10 members, be available to arrange for group meetings between representatives of the Funds or Distributors and the members, agree to include sales and other materials related to the Funds in its publications and mailings to members at reduced or no cost to Distributors, and seek to arrange for payroll deduction or other bulk transmission of investments to the Funds. If an investor selects a payroll deduction plan, subsequent investments will be automatic and will continue until such time as the investor notifies the Funds and the investor's employer to discontinue further investments. Due to the varying procedures used to prepare, process and forward the payroll deduction information to 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 without the imposition of either a front-end sales charge ("net asset value") or a contingent deferred sales charge by (1) officers, trustees, directors, managing general partners and full-time employees of the Funds, any of the Franklin Templeton Funds, or of the Franklin Templeton Group, and by their spouses and family members; and (2) companies exchanging shares with or selling assets pursuant to a merger, acquisition or exchange offer; and (3) insurance company separate accounts for pension plan contracts; (4) accounts managed by the Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that fund under an employee benefit plan qualified under Section 401 of the Internal Revenue Code of 1986, as amended, in shares of a Fund; (6) certain unit investment trusts reinvesting their distributions from the trusts in the Fund; (7) registered securities dealers and their affiliates, for their investment account only, and (8) registered personnel and employees of securities dealers and by their spouses and family members, in accordance with the internal policies and procedures of the employing securities dealer. Shares of the Funds may be purchased at net asset value by persons who have redeemed, within the previous 120 days, their shares of a Fund or another fund of the Franklin Templeton Funds which were purchased with a front-end sales charge or assessed a contingent deferred sales charge on redemption. An investor may reinvest an amount not exceeding the redemption proceeds. While credit will be given for any contingent deferred sales charge paid on the shares redeemed, a new contingency period will begin. Shares of the Funds redeemed in connection with an exchange into another fund (see "Exchange Privilege") are not considered "redeemed" for this privilege. In order to exercise this privilege, a written order for the purchase of shares of the Fund must be received by such Fund or the Fund's Shareholder Services Agent within 120 days after the redemption. The 120 days, however, do not begin to run on redemption proceeds placed immediately after redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at net asset value may also be handled by a securities dealer or other financial institution, who may charge the shareholder a fee for this service. The redemption is a taxable transaction but reinvestment without a sales charge may affect the amount of gain or loss recognized and the tax basis of the shares reinvested. If there has been a loss on the redemption, the loss may be disallowed if a reinvestment in the same fund is made within a 30-day period. Information regarding the possible tax consequences of such a reinvestment is included in the tax section of this Prospectus and the SAI. Dividends and capital gains received in cash by the shareholder may also be used to purchase shares of the Fund or another of the Franklin Templeton Funds at net asset value and without the imposition of a contingent deferred sales charge within 120 days of the payment date of such distribution. To exercise this privilege, a written request to reinvest the distribution must accompany the purchase order. Additional information may be obtained from Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under "Distributions to Shareholders." Shares of the Funds may be purchased at net asset value and without the imposition of a contingent deferred sales charge by investors who have, within the past 60 days, redeemed an investment in 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 respective Fund. 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). 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. 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 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 included with this Prospectus 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 account provided that the net asset value of the shares held by the shareholder is at least $5,000. There are no service charges for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount which the shareholder may withdraw is $50 per withdrawal transaction, although this is merely the minimum amount allowed under the plan and should not be mistaken for a recommended amount. The plan may be established on a monthly, quarterly, semi- annual or annual basis. Income distributions to the shareholder's account are received in additional shares at net asset value. Payments will then be made from the liquidation of shares at net asset value on the day of the transaction (which is generally the first business day of the month in which the payment is scheduled) with payment generally received by the shareholder three to five days after the date of liquidation. By completing the "Special Payment Instructions for Distributions" section of the Application included with this Prospectus, a shareholder may direct the selected withdrawals to another of the Franklin Templeton Funds, to another person, or directly to a checking account. If the bank at which the account is maintained is a member of the Automated Clearing House, the payments may be made automatically by electronic funds transfer. If this last option is requested, the shareholder should allow at least 15 days for initial processing. Withdrawals 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 (Registered Trademark) OR THE TEMPLETON GROUP MAY BE SUBJECT TO U.S. TAX AND WITHHOLDING REQUIREMENTS AND THAT FREQUENT USE OF THIS EXCHANGE PROCEDURE, TOGETHER WITH OTHER TRADING ACTIVITIES, COULD CAUSE THEM TO BE DEEMED TO BE ENGAGED IN A U.S. TRADE OR BUSINESS AND THEREFORE SUBJECT TO U.S. TAXATION. The Franklin Templeton Funds consist of a number of mutual funds with various investment objectives or policies. The shares of most of these mutual funds are offered to the public with a sales charge. If 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, Franklin Templeton Funds which are eligible for sale in the shareholder's state, or country, of residence and in conformity with such fund's stated eligibility requirements and investment minimums. Investors should review the prospectuses of the fund they wish to exchange from and the fund they wish to exchange into for all specific requirements or limitations on exercising the exchange privilege, for example, minimum holding periods or applicable sales charges. Exchanges are made on the basis of the net asset values of the funds involved, except as set forth below. Exchanges of shares of a fund which were purchased without a sales charge will be charged a sales charge in accordance with the terms of the prospectus of the fund being purchased, unless the investment on which no sales charge was paid was transferred in from a fund on which the investor paid a sales charge. Exchanges of shares of a Fund which were purchased with a lower sales charge to a fund which has a higher sales charge will be charged the difference, unless the shares were held in the Fund for at least six months prior to executing the exchange. When an investor requests the exchange of the total value of a Fund account, accrued but unpaid income distributions will be reinvested in such Fund at net asset value on the date of the exchange, and then the entire share balance will be exchanged into the new fund in accordance with the procedures set forth above. Because the exchange is considered a redemption and purchase of shares, shareholders who are otherwise subject to U.S. tax may realize a gain or loss for federal income tax purposes. Backup withholding and information reporting may also apply. 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. 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 12-month 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. 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. 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 (f) the authority of a representative of a corporation, partnership, association, or other entity has not been established to the satisfaction of the Fund. Signature(s) must be guaranteed by an "eligible guarantor institution" as defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally, eligible guarantor institutions include (1) national or state banks, savings associations, savings and loan associations, trust companies, savings banks, industrial loan companies and credit unions; (2) national securities exchanges, registered securities associations and clearing agencies; (3) securities dealers which are members of a national securities exchange or a clearing agency or which have minimum net capital of $100,000; or (4) institutions that participate in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized signature guarantee medallion program. A notarized signature will not be sufficient for the request to be in proper form. Liquidation requests of corporate, partnership, trust and custodianship accounts, and accounts under court jurisdiction require the following documentation to be in proper form: Corporation - (1) Signature guaranteed letter of instruction from the authorized officer(s) of the corporation and (2) a corporate resolution. Partnership - (1) Signature guaranteed letter of instruction from a general partner and (2) pertinent pages from the partnership agreement identifying the general partners or a certification for a partnership agreement. Trust - (1) Signature guaranteed letter of instruction from the trustee(s), and (2) a copy of the pertinent pages of the trust document listing the trustee(s) or a Certification for Trust if the trustee(s) are not listed on the account registration. Custodial (other than a retirement account) - Signature guaranteed letter of instruction from the custodian. Accounts under court jurisdiction - Check court documents and the applicable law of the state or country of residence since these accounts have varying requirements, depending upon the state or country of residence. For any information required about a proposed liquidation, a shareholder may call Franklin's Shareholder Services Department or the securities dealer may call Franklin's Dealer Services Department. Payment for redeemed shares will be sent to the shareholder within seven days after receipt of the request in proper form, except that a Fund may delay the mailing of the redemption check, or a portion thereof, until clearance of the check used to purchase Fund shares, which may take up to 15 days or more. Although the use of a certified or cashier's check will generally reduce this delay, shares purchased with these checks will also be held pending clearance. Shares purchased by federal funds wire are available for immediate redemption. In addition, the right of redemption may be suspended or the date of payment postponed if the Exchange is closed (other than customary closing) or upon the determination of the SEC that trading on the Exchange is restricted or an emergency exists, or if the SEC permits it, by order, for the protection of shareholders. Of course, the amount received may be more or less than the amount invested by the shareholder, depending on fluctuations in the market value of securities owned by the Funds. Payments by the Funds will be made only in U.S. dollars. REDEMPTIONS BY TELEPHONE Shareholders who complete the Franklin/Templeton Telephone Redemption Authorization Agreement (the "Agreement"), included with this Prospectus, may redeem shares of the Funds by telephone. 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. 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. 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 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 identification, 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 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. 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 Funds by calling the automated Franklin TeleFACTS" 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. SHAREHOLDERS MAY REQUEST, CONFIRMATION STATEMENTS, YEAR END STATEMETNS, MONEY FUND DRAFTS, AND, DEPOSIT SLIPS THROUGH THE SYSTEM. To assist shareholders and securities dealers wishing to speak directly with a representative, the following is a list of the various Franklin departments, telephone numbers and hours of operation to call. The same numbers may be used when calling from a rotary phone: HOURS OF OPERATION (PACIFIC TIME) (MONDAY THROUGH DEPARTMENT NAME TELEPHONE NO. FRIDAY) Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m. Services Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m. Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m. 8:30 a.m. to 5:00 p.m. (Saturday) Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m. TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m. In order to ensure that the highest quality of service is being provided, telephone calls placed to or by representatives in all of Franklin's service departments may be accessed, recorded and monitored. These calls can be determined by the presence of a regular beeping tone. PERFORMANCE Advertisements, sales literature and communications to shareholders may contain various measures of 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 REPORTS TO SHAREHOLDERS The Funds' fiscal years end on December 31. Annual Reports containing audited financial statements of the Funds, including the auditors' report, and Semi-Annual Reports containing unaudited financial statements are automatically sent to shareholders. Additional copies may be obtained, without charge, upon request to the Trust at the telephone number or address set forth on the cover page of this prospectus. Additional information on Fund performance is included in the Funds' Annual Report and the SAI. REDEMPTIONS BY THE FUNDS The Funds reserve the right to redeem, at net asset value, shares of any shareholder whose account has been in existence for at least 12 months and has a value of less than $2,000, but only where the value of such account has been reduced by the shareholder's prior voluntary redemption of shares and has been inactive (except for the reinvestment of distributions) for a period of at least six months, provided advance notice is given to the shareholder. More information is included in the SAI. Although each Fund is offering only its own shares, it is possible that one Fund might become liable for any misstatements in this Prospectus about one of the other Funds. The Managing General Partners of each Fund have considered this factor in approving the use of a single, combined Prospectus. Prior to June 9, 1990, the International Bond Fund was managed by Pilgrim Management Corporation ("PMC") and was one of the three mutual funds constituting the Pilgrim Foreign Investors Funds. At a special meeting of shareholders held on June 7, 1990, shareholders of the International Bond Fund voted to approve a change in management which resulted in the appointment of Advisers as investment manager of such Fund, which then changed its name from Pilgrim International Bond Fund. Distribution or redemption checks sent to shareholders do not earn interest or any other income during the time such checks remain uncashed and neither the Funds nor their affiliates will be liable for any loss to the shareholder caused by the shareholder's failure to cash such check(s). "Cash" payments to or from a Fund may be made by check, draft or wire. The Funds have no facility to receive, or pay out, cash in the form of currency. ACCOUNT REGISTRATIONS ` An account registration should reflect the investor's intentions as to ownership. Where there are two co-owners on the account, the account will be registered as "Owner 1" and "Owner 2"; the "or" designation is not used except for money market fund accounts. If co-owners wish to have the ability to redeem or convert on the signature of only one owner, a limited power of attorney may be used. Accounts should not be registered in the name of a minor either as sole or co-owner of the account. Transfer or redemption for such an account may require court action to obtain release of the funds until the minor reaches the legal age of majority. The account should be registered in the name of one "Adult" as custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to Minors Act. A trust designation such as "trustee" or "in trust for" should only be used if the account is being established pursuant to a legal, valid trust document. Use of such a designation in the absence of a legal trust document may cause difficulties and require court action for transfer or redemption of the funds. Shares, whether in certificate form or not, registered as joint tenants or "Jt Ten" shall mean "as joint tenants with rights of survivorship" and not "as tenants in common." Except as indicated, a shareholder may transfer an account in one of the Funds carried in "nominee" name by the shareholder's securities dealer to a comparably registered Fund account maintained by another securities dealer. Both the delivering and receiving securities dealers must have executed dealer agreements on file with Distributors. Unless a dealer agreement has been executed and is on file with Distributors, the Fund will not process the transfer and will so inform the shareholder's delivering securities dealer. To effect the transfer, a shareholder should instruct the securities dealer to transfer the account to a receiving securities dealer and sign any documents required by the securities dealer(s) to evidence consent to the transfer. Under current procedures the account transfer may be processed by the delivering securities dealer and the Fund after the Fund receives authorization in proper form from the shareholder's delivering securities dealer. In the future it may be possible to effect such transfers electronically through the services of the NSCC. The Fund may conclusively accept instructions from an owner or the owner's nominee listed in publicly available nominee lists, regardless of whether the account was initially registered in the name of or by the owner, the nominee, or both. If a securities dealer or other representative is of record on an investor's account, the investor will be deemed to have authorized the use of electronic instructions on the account, including, without limitation, those initiated through the services of the NSCC, to have adopted as instruction and signature any such electronic instructions received by the Funds and the Shareholder Services Agent, and to have authorized them to execute the instructions without further inquiry. At the present time, such services which are available, or which are anticipated to be made available in the near future, include the "NSCC's Networking," "Fund/SERV," and "ACATS" systems. Any questions regarding an intended registration should be answered by the securities dealer handling the investment, or by calling Franklin's Fund Information Department. SUMMARY OF PARTNERSHIP AGREEMENTS Each Fund is a California limited partnership. The Government Fund and the High Yield Fund were organized on January 27, 1987 and the International Bond Fund was organized on September 4, 1986. As limited partnerships, the Funds are not required to hold annual meetings and do not intend to do so. Each Fund, however, will hold meetings of partners for such purposes as electing new or additional general partners, changing fundamental investment policies, approving an investment management agreement or a distribution plan and, at the request of shareholders owning 10% or more of the shares of a Fund, replacing its general partners. All shares of each Fund are of one class, have one vote and, when issued, are fully paid, nonassessable and redeemable. All shares of each Fund have equal voting, distribution and liquidation rights but have no subscription, preemptive or conversion rights. There is no cumulative voting. The full text of the Partnership Agreement of each Fund is set forth in the SAI. The following statements summarize and explain certain provisions of each Partnership Agreement and are qualified in their entirety by the terms of each Fund's respective Partnership Agreement. VOTING RIGHTS OF PARTNERS. Each Fund's shareholders, or limited partners, have the voting, approval, consent or similar rights required under the 1940 Act for voting security holders. Shareholders of each Fund have the exclusive right to vote on matters affecting that Fund as set forth in the Partnership Agreement. A meeting of the shareholders may be called by the Managing General Partners or by limited partners holding 10% or more of the outstanding shares. Shareholders on the record date of a meeting will be entitled to vote at that meeting if they are admitted as limited partners prior to the meeting date. General Partners. The general partners of each Fund consist of a number of individuals, referred to as Managing General Partners, and one corporate general partner, referred to as the Non- Managing General Partner (together, the "General Partners"). The Managing General Partners have complete and exclusive control over the management, conduct and operation of each Fund. The General Partners have been elected for an indefinite term by the shareholders of each Fund. If at any time the number of Managing General Partners is reduced to less than three, the remaining Managing General Partners shall, within 120 days, call a meeting for the purpose of electing an additional Managing General Partner(s) so as to restore their number to at least three. Each Partnership Agreement provides that the General Partners are not personally liable to any shareholder of the Fund for the repayment of any amounts standing in the account of any shareholder, and that any such payment shall be solely from the assets of each respective Fund, except liability incurred by reason of the General Partners' willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office. Each Partnership Agreement also provides that the General Partners will not be liable to any shareholder by reason of any failure to withhold income tax or any change in any federal or state tax laws applicable to the Fund or its shareholders as long as the General Partners have acted in good faith and in a manner reasonably believed to be in the best interests of the shareholders. A General Partner is generally entitled to indemnification from each Fund against liabilities and expenses to which the General Partner may become subject in the capacity of a General Partner of that Fund, including any liability resulting from failure to withhold income tax or any change in applicable income tax laws, provided the General Partner has acted in good faith and for a purpose which such partner reasonably believed to be in the best interests of the Fund or its shareholders. Such indemnification is limited to the assets of that respective Fund. LIABILITY OF LIMITED PARTNERS. Generally, limited partners are not personally liable for obligations of the partnership of which they are shareholders unless they participate in the control of the partnership's activities. Under the terms of each Partnership Agreement, each Fund's limited partners do not have the right to participate in the control of the Fund's activities, but they may exercise the right to vote on matters affecting the basic structure of the Fund, including matters requiring shareholder approval under the 1940 Act. Under California law, the liability of each limited partner (in the capacity of a limited partner) for the losses, debts and obligations of the Fund is generally limited to the partner's capital contribution (which is the price of such partner's shares net of all sales charges) and the partner's share of any undistributed income or assets of the Fund. A limited partner may, however, under certain circumstances, be required to return amounts previously distributed for the benefit of the Fund's creditors. Each Fund intends to include in its contracts a provision limiting the claims of creditors to the Fund's assets and may carry insurance in such amounts as the Managing General Partners, in their judgment, consider reasonable to cover potential liabilities of the Fund. In addition, the Partnership Agreement for each Fund provides for indemnification out of the Fund's property for any shareholder held personally liable for any obligation of the Fund. Each Partnership Agreement also provides that the Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of liability as a limited partner is limited to circumstances in which the Fund itself would be unable to meet its obligations. The Manager believes that, in view of the above and in view of the character of the operations of each Fund as an investment company, the risk of personal liability to shareholders is extremely remote. ADMISSION OF LIMITED PARTNERS. In order to be admitted as a limited partner, a purchaser of shares is either required to complete a partnership subscription agreement, including a special power of attorney, in the form set forth in the Application, or to take action indicating acceptance thereof. Admission of a purchaser as a limited partner also requires the consent of the Managing General Partners and the addition of the purchaser to the Partnership List of the Fund. The Partnership List is a current list of all shareholders who are partners, their addresses and the amount of their contributions and current share ownership. The Managing General Partners of each Fund, while recognizing that they have the right to withhold their consent, have stated that they intend to give such consent as a matter of course to eligible investors and the Partnership List will be updated daily on each business day. PROHIBITION OF ASSIGNMENT OF SHARES. A limited partner of any Fund does not have the right to voluntarily transfer or assign shares to any other person other than to secure a loan. In the event that any person who is holding shares as collateral becomes the owner of such shares due to foreclosure or otherwise, such person shall not have the right to be substituted as a limited partner but shall have the right (upon presentation of satisfactory evidence to the Managing General Partners of the right to succeed to the interests of the Limited Partner): (1) to redeem the shares and (2) to receive distributions with respect to such shares. Under limited circumstances, a successor in interest of a limited partner shall have the right to be substituted as a limited partner. TERM OF EXISTENCE - DISSOLUTION. The Government Fund and the High Yield Fund will continue until December 31, 2050, and the International Bond Fund will continue until December 31, 2036 but shall be dissolved before such date if and when: (1) the shareholders of a Fund approve the prior dissolution of the Fund; (2) a Fund disposes of all of its assets; (3) a General Partner withdraws and the remaining General Partners do not elect to continue the operations of the Partnership; or (4) there are no remaining General Partners (unless the shareholders agree by unanimous vote to continue the Fund in circumstances where the last remaining General Partner was not removed by them, and new General Partners are promptly elected by the shareholders). Except by requiring a Fund to redeem outstanding shares as described under "How to Sell Shares of a Fund," limited partners have no right to the return of any part of their contributions to any Fund until dissolution of the Fund. Distributions by each Fund, whether upon redemption, dissolution or otherwise, will be in proportion to the number of outstanding shares held without regard to the dollar amount contributed to the Fund or the amount of any profits of the Fund received. OTHER PROVISIONS. Each Partnership Agreement also provides procedures for the pricing, purchase and redemption of shares of each Fund as described in this Prospectus, as well as procedures relating to the giving of notices, the calling of meetings and the solicitation of shareholder consents. In addition, each Partnership Agreement contains provisions relating to the maintenance of books and records by each Fund, the allocation for U.S. tax purposes of items of income, gain, loss, deduction and credit, and the procedures by which amendments to a Partnership Agreement may be effected. Limited partners have the right to obtain current copies of the Partnership List, the Partnership Agreement and certain other records of each Fund of which they are shareholders for their personal use only. The Partnership List and other records of each Fund, although available to other limited partners upon request and to certain other persons in connection with Fund matters, are not matters of public record. PORTFOLIO OPERATIONS The following persons are primarily responsible for the day-to- day management of the Funds' portfolios: GOVERNMENT FUND Jack Lemein Roger Bayston Anthony Coffey HIGH YIELD FUND Chris Molumphy Betsy Hofman-Schwab Martin Wiskemann INTERNATIONAL BOND FUND Neil S. Devlin Thomas J. Dickson Edward B. Jamieson Serena Perin BIOGRAPHICAL INFORMATION Roger Bayston Portfolio Manager Franklin Advisers, Inc. Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business Administration degree from the University of California at Los Angeles. He earned his Bachelor of Science degree from the University of Virginia. Prior to joining Franklin, Mr. Bayston was an Assistant Treasurer for Bankers Trust Company. Following completion of the Masters degree program, Mr. Bayston joined Franklin in 1991. Mr. Bayston has managed the Government Fund since 1991. Anthony Coffey Portfolio Manager Franklin Advisers, Inc. Mr. Coffey holds a Master of Business Administration degree from the University of California at Los Angeles. He earned his Bachelor of Arts degree from Harvard University. Prior to joining Franklin in 1989, Mr. Coffey was an associate with the Analysis Group. He is a member of several securities industry committees and has managed the Government Fund since 1989. Neil S. Devlin Portfolio Manager Templeton Investment Counsel, Inc. Mr. Devlin holds a Bachelor of Arts degree in economics and philosophy from Brandeis University. He is currently a level II CVA candidate. Prior to joining Templeton in 1987, Mr. Devlin was a portfolio manager and a bond analyst with Constitutional Capital Management of Boston and a bond trader ad research analyst for the Bank of New England. He has managed the International Bond Fund since January 1995. Thomas J. Dickson Portfolio Manager Templeton Investment Counsel, Inc. Mr. Dickson received his Bachelor of Science degree in managerial economics from the University of California at Davis. Mr. Dickson joined Franklin in 1992 and moved to Templeton in 1994. He started managing the International Bond Fund since January 1995. Betsy Hofman-Schwab Portfolio Manager Franklin Advisers, Inc. Ms. Hofman-Schwab holds a Master of Business Administration degree from the College of Notre Dame in California. She earned her Bachelor of Science degree in finance at the College of Notre Dame in California. She has been with Franklin since 1981 and has managed the High Yield Fund since its inception. Edward B. Jamieson Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Jamieson holds a bachelor of arts degree from Bucknell University and a master's degree in accounting and finance from the University of Chicago Graduate School of Business. Mr. Jamieson has been with Advisers since 1987 and for the year prior thereto, he was treasurer of Beatrice Consumer Products, Inc. From 1981 to 1985 he was an executive with Pepsico, Inc.'s Corporate Treasury where he served as Director of International Treasury. He has managed the International Bond Fund since 1990. Jack Lemein Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Lemein holds a bachelor of science degree in finance from the University of Illinois. Mr. Lemein has been in the securities industry since 1967. He is a member of several securities industry-related committees and associations. Mr. Lemein joined Franklin in 1984 and has managed the Government Fund since its inception. Chris Molumphy Portfolio Manager Franklin Advisers, Inc. Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business Administration degree in finance from the University of Chicago. He earned his Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a member of several securities industry associations. He has managed the High Yield Fund since joining Franklin in 1988. Serena Perin Portfolio Manager Templeton Investment Counsel, Inc. Ms. Perin holds a Bachelor of Arts degree in business economics from Brown University. She served as a research assistant to a member of Parliament in London, England. Ms. Perin is a member of several securities industry associations. She has managed the International Bond Fund since joining Franklin in November 1991. Ms. Perin moved to Templeton in 1994. R. Martin Wiskemann Senior Vice President and Portfolio Manager Franklin Advisers, Inc. Mr. Wiskemann holds a degree in business administration from the Handelsschule of the State of Zurich, Switzerland. He has been in the securities business for more than 30 years, managing mutual fund equity and fixed-income portfolios, and private investment accounts. He is a member of several securities industry associations. He joined Franklin in 1972 and has managed the High Yield Fund since its inception. APPENDIX DESCRIPTION OF BOND RATINGS* MOODY'S AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make long-term risks appear somewhat larger than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA: Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA: Bonds which are rated Ba are judged to have predominantly speculative elements and their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. S&P AAA: Bonds rated AAA are the highest grade debt obligations. This rating indicates an extremely strong capacity to pay principal and interest. AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A: Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. *Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so. FRANKLIN PARTNERS FUNDS (REGISTERED TRADEMARK) FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1995 777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN MATEO, CA 94403-7777 1-800/DIAL BEN CONTENTS PAGE About the Funds (See also the Prospectus "About the Franklin Partners Funds" ) The Investment Objectives and Policies of the Funds (See also the Prospectus "Investment Objective and Policies of Each Fund") Additional Information on Distributions and Taxation Officers and Managing General Partners Investment Advisory and Other Services (See also the Prospectus "Management of the Funds") The Funds' Policies Regarding Brokers Used on Portfolio Transactions Additional Information Regarding Fund Shares (See also the Prospectus "How to Invest in a Fund," "How to Sell Shares of a Fund," "Valuation of Fund Shares") The Funds' Underwriter General Information Financial Statements Appendix A Appendix B Appendix C The Franklin Partners Funds (Registered Trademark) (collectively, the "Funds" or separately, the "Fund") consist of three separate and distinct funds: Franklin Tax-Advantaged U.S. Government Securities Fund (the "Government Fund"), Franklin Tax-Advantaged High Yield Securities Fund (the "High Yield Fund"), and Franklin Tax-Advantaged International Bond Fund (the "International Bond Fund"), each a California limited partnership. A Prospectus for the Funds dated May 1, 1995, as may be amended from time to time, which provides the basic information a prospective investor should know before investing in the Funds, may be obtained without charge from the Funds or from the Funds' principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the address listed above. THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUNDS, AND SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' PROSPECTUS. ABOUT THE FUNDS Each Fund is a separate and distinct management investment company, registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (the "1940 Act"). Each Fund issues only one class of shares, in the form of partnership interests, and purchasers of shares of a Fund are required to become limited partners of such Fund. THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS As noted in the Prospectus, each Fund has its own investment objective, which is a fundamental policy, and follows policies designed to achieve that objective. In addition, unless otherwise noted, the following restrictions have been adopted as fundamental policies for the Funds, which means that they may not be changed without the approval of a majority of the shares of the applicable Fund. THE GOVERNMENT FUND AND THE HIGH YIELD FUND MAY NOT: 1. Borrow money or mortgage or pledge any of the assets of the Fund, except that the Funds may borrow from banks for temporary or emergency purposes in an amount up to 5% of total asset value. 2. Buy any securities on "margin" or sell any securities "short." 3. Lend any funds or other assets, except by the purchase of publicly distributed bonds, debentures, notes or other debt securities and except that both Funds may enter into repurchase agreements. 4. Act as underwriter of securities issued by other persons except insofar as a Fund may be technically deemed an underwriter under the federal securities laws in connection with the disposition of portfolio securities. 5. Invest more than 5% of the value of its gross assets in the securities of any one issuer, except that this limitation does not apply to investments in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. 6. Purchase the securities of any issuer, if, as a result, a Fund would own more than 10% of any class of the outstanding voting securities of such issuer. 7. Purchase from or sell to its officers and general partner, or any firm of which any officer or general partners is a member, as principal, any securities, except that a Fund may deal with such persons or firms as brokers and pay a customary brokerage commission; retain securities of any issuer, if to the knowledge of a Fund, one or more of its officers, general partners or investment adviser, own beneficially more than one-half of 1% of the securities of such issuer and all such officers and general partners together own beneficially more than 5% of such securities. 8. Purchase any securities issued by a corporation which has not been in continuous operation for three years, but such period may include the operation of a predecessor. This is not a fundamental policy and may be changed by a Fund's Managing General Partners without shareholder approval. 9. Acquire, lease or hold real estate (except such as may be necessary or advisable for the maintenance of its offices) or interests in oil, gas or other mineral exploration or development programs (does not preclude investment in marketable securities of companies engaged in such activities, provided that such securities do not constitute "United States ("U.S.") real property interests" for U.S. federal income tax purposes). 10. Invest in commodities and commodity contracts, puts, calls, straddles, spreads or any combination thereof. (Does not preclude authorized transactions in foreign currencies.) 11. Invest in companies for the purpose of exercising control or management. 12. Concentrate more than 25% of the market value of its assets in the securities of companies engaged in any one industry (does not apply to investment in the securities of the U.S. government, its agencies or instrumentalities). 13. Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit a Fund from (a) making any permitted borrowing, mortgages or pledges, or (b) entering into repurchase transactions. This is not a fundamental policy of the Funds and may be changed by the Funds' Managing General Partners without shareholder approval. THE INTERNATIONAL BOND FUND MAY NOT: 1. With respect to at least 75% of its total assets, invest in the securities of any one issuer (other than the U.S. government and its agencies and instrumentalities), if immediately after and as a result of such investment (a) more than 5% of the total assets of the Fund would be invested in such issuer or (b) more than 10% of the outstanding voting securities of such issuer would be owned by the Fund. 2. Make loans to others, except through the purchase of debt securities in accordance with its investment objectives and policies or to the extent the entry into a repurchase agreement is deemed to be a loan. 3. (a) Borrow money, except temporarily for extraordinary or emergency purposes from a bank and then not in excess of 25% of its total assets (at the lower of cost or fair market value). Any such borrowing will be made only if immediately thereafter there is an asset coverage of at least 300% of all borrowings, and no additional investments may be made while any such borrowings are in excess of 5% of total assets. (b) Mortgage, pledge or hypothecate any of its assets except in connection with any such borrowings. 4. Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite securities. (Does not preclude the Fund from obtaining such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. Does not preclude permissible foreign currency hedging transactions.) 5. Buy or sell interests in oil, gas or mineral exploration or development programs, or real estate. (Does not preclude investments in marketable securities of companies engaged in such activities to the extent such securities do not constitute U.S. real property interests for U.S. federal income tax purposes.) 6. Purchase or hold securities of any issuer, if, at the time of purchase or thereafter, any of the Managing General Partners or officers of the Fund or its investment adviser own beneficially more than 1/2 of 1%, and such Managing General Partners or officers holding more than 1/2 of 1% together own beneficially more than 5% of the issuer's securities. 7. Invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with predecessors, of at least three years of continuous operation. This is not a fundamental policy and may be changed by the Fund's Managing General Partners without prior shareholder approval. 8. Purchase or sell commodities or commodity contracts or invest in put, call, straddle or spread options. (Does not preclude transactions in foreign exchange for hedging purposes, including forward foreign exchange transactions, the purchase or sale of foreign currency options, foreign currency futures transactions and the purchase or sale of options on foreign currency futures, or transactions in foreign exchange in connection with the investment of cash balances held outside of the U.S.) 9. Invest more than 10% of its assets in securities with legal or contractual restrictions on resale, securities which are not readily marketable, and repurchase agreements with more than seven days to maturity. 10. Invest in any issuer for purposes of exercising control or management. 11. Concentrate more than 25% of the market value of its assets in the securities of companies engaged in any one industry. (Does not apply to investment in the securities of the U.S. government, its agencies or instrumentalities.) 12. Issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Fund from (a) making any permitted borrowings, mortgages or pledges, or (b) entering into repurchase transactions. In order to change any of the foregoing fundamental restrictions, approval must be obtained by the applicable Fund's shareholders. Such approval requires the affirmative vote of the lesser of (i) 67% or more of voting securities present at a meeting if the holders of more than 50% of voting securities are represented at that meeting or (ii) holders of more than 50% of the outstanding voting securities. RISK FACTORS PERTAINING TO THE HIGH YIELD FUND AND THE INTERNATIONAL BOND FUND SECURITIES OF NON-U.S. ISSUERS. The Government Fund will not acquire the securities of non-U.S. issuers under any circumstances. The High Yield Fund and the International Bond Fund will not acquire outside of the U.S. the securities of non- U.S. issuers under circumstances where, at the time of acquisition, such Funds have reason to believe that they could not resell the securities in a public market. (Investors should recognize, however, that securities of non-U.S. issuers are often bought or sold with less frequency and volume, and therefore may have greater price volatility than is the case with many U.S. securities.) Notwithstanding the fact that such Funds intend to acquire the securities of non-U.S. issuers only where there are public markets, investments by the Funds in the securities of such issuers may be considered as tending to increase the risks with respect to the liquidity of the Funds' portfolios and their ability to meet a large number of shareholder's redemption requests should there be economic or political turmoil in a country in which such Funds had a substantial portion of their assets invested or should relations between the United States and other countries deteriorate markedly. The interest payable on the securities of non-U.S. issuers held by the High Yield Fund and the International Bond Fund may be subject to withholding taxes in countries other than the U.S. and, while individual investors may be able to claim some credit or deduction for such taxes with respect to their allocated shares of such tax payments, the general effect of these taxes will be to reduce the Funds' income. In addition the expense ratio of the High Yield Fund and the International Bond Fund may also be slightly higher than the expenses of the Government Fund due to special costs associated with maintaining custody of foreign securities, the higher commission rates charged on many foreign exchanges, and other factors. SPECIAL CONSIDERATIONS RELATING TO FOREIGN EXCHANGE. The value in U.S. dollars of the assets of the High Yield Fund and the International Bond Fund that are invested in securities of non- U.S. issuers may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations, and each Fund may incur costs in connection with conversions between various currencies. The Funds may conduct their currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in a particular currency exchange market or through forward foreign currency exchange contracts and currency futures contracts entered into for hedging purposes as explained below. HEDGING AND FOREIGN CURRENCY TRANSACTIONS. The High Yield Fund and the International Bond Fund may engage in the following strategies to hedge their portfolios against risk associated with currency fluctuations. Use of these strategies may be limited by requirements of the Funds to purchase and hold their securities for long-term investment and to meet other tax requirements imposed by the Internal Revenue Code and U.S. Treasury regulations. These strategies include the use of currency options, currency futures, options on such futures and forward foreign currency exchange contracts. While such strategies' intention would be to reduce the volatility of the net asset value of the Funds' shares, the Funds' net asset value would still fluctuate and no assurance could be given of the effectiveness of such transactions. Hedging against currency fluctuations does not eliminate price fluctuations in the hedged securities that are attributable to interest rate changes and other factors. The use of futures transactions involves the risk of imperfect correlation between movements in the price of futures contracts and movements in the price of the currencies which are the subject of the hedge. These strategies also involve the risk that a Fund may not be able to close an option or futures position, or that a Fund could lose its margin deposit or collateral in the event of bankruptcy of the broker with whom the Fund has an open position. Although certain risks are involved in forward foreign currency exchange contracts, currency options, currency futures and options on such futures, the Funds' investment manager believes that, because the Funds will only engage in these transactions for hedging purposes, the use of these strategies will not subject the Funds to the risks frequently associated with the speculative use of forward contracts, options and futures transactions. Moreover, the High Yield Fund and the International Bond Fund may not purchase or sell foreign currency futures or options on such futures if the sum of the initial margin deposits on all of the Funds' futures positions and the premiums paid for related options would exceed 5% of a Fund's total assets. Each Fund is also required to maintain in a segregated account cash and high quality liquid debt securities in an amount equal to the currency to be purchased by the Fund under a forward, futures or option on a futures contract providing for such purchase. Foreign exchange gains and gains realized by each Fund from its hedging activities may be subject to U.S. tax and withholding requirements. The following is a description of the hedging instruments the High Yield Fund and the International Bond Fund may utilize with respect to foreign currency exchange rate fluctuation risks: A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties at a price set at the time of the contract. These contracts are individually negotiated and privately traded directly between currency traders (usually large commercial banks) and their customers. The High Yield Fund and the International Bond Fund are authorized to deal in forward contracts with respect to the currencies in which their portfolio securities are (or will be) denominated as a hedge against contractual agreements to purchase or sell a specified security at a specified future date (up to one year) and price at the time of the contract. Each Fund's dealings in forward contracts will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the forward purchase or sale of currency with respect to receivables or payables of a Fund accruing in connection with the purchase and sale of its portfolio securities denominated in a particular currency. Position hedging is the forward sale of currency with respect to portfolio security positions denominated or quoted in such currency. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the High Yield Fund or the International Bond Fund to hedge against a devaluation that is so generally anticipated that neither Fund is able to contract to sell the currency at a price above the devaluation level it anticipates. Listed currency options give the purchaser of such options the right to buy or sell a particular currency at a fixed price on a future date. Listed options are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) which are issued by a clearing corporation and have standardized strike prices and expiration dates. By way of illustration, a Fund may use currency options to hedge the stated value in U.S. dollars of an investment in a Japanese yen-denominated security. In such circumstances, for example, the Fund may purchase a currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a "straddle"). By selling the call option in this illustration, the Fund relinquishes the opportunity to profit from increases in the relative value of the yen to the dollar. Each Fund will cover currency call options which it has written by maintaining in a segregated account cash or securities denominated in the currency that is the subject of the call option, in an amount equal to the value of the optioned currency. The High Yield Fund and the International Bond Fund will cover currency put options which they have written by maintaining in a segregated account cash or high quality liquid debt securities in an amount equal to the value of currency which such Fund is required to purchase under the put option. The exchanges on which options on currencies are traded have generally established limitations governing the maximum number of call or put options on the same underlying currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). "Trading limits" are imposed on the maximum number of contracts which any person may trade on a particular trading day. The Funds' investment manager does not believe that these trading and position limits will have any adverse impact on the portfolio strategies for hedging the portfolio of either the High Yield Fund or the International Bond Fund. Currency futures are standardized contracts traded on commodities exchanges which involve an obligation to purchase or sell a predetermined amount of currency at a predetermined date at a specified price. The High Yield Fund and the International Bond Fund would incur brokerage costs and would be required to make and maintain "margin" deposits in connection with transactions in futures contracts, as described below. The Funds would also be required to segregate assets to cover futures contracts requiring the purchase of foreign currencies. Options on currency futures entitle the Funds to assume a position in an underlying currency futures contract. Futures contracts and options for futures contracts are traded on boards of trades or futures exchanges regulated by the Commodity Futures Trading Commission, a U.S. government agency. At the time a futures contract or related futures option transaction is entered into, cash or U.S. government securities equal to the market value of the Fund's obligation under the contract or option transaction (less any related margin deposits) is deposited in a segregated account with the Fund's custodian bank to collateralize the position and thereby ensure that such position is unleveraged. The segregated account is marked to market daily. The Funds will not engage in such hedging transactions if the sum of the initial margin deposits on all of the Fund's futures positions and premiums paid for related futures options would exceed 5% of the Fund's total assets. The use of futures and options contracts by the High Yield Fund and the International Bond Fund involves the risk of imperfect correlation between movements in the price of such contracts and movements in the price of securities and currencies which are the subject of the hedge. If the price of the contract moves more or less than the price of the security or currency, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the securities which are the subject of the hedge. Neither the High Yield Fund nor the International Bond Fund will speculate in forward foreign currency exchange contracts, currency options, currency futures or options on such futures and will engage in transactions in such contracts and options solely for the purpose of hedging against currency risk, as described herein. Accordingly, the aggregate value of the currency which is the subject of such contracts and options will not exceed the market value of the securities it owns and which are denominated in such currency, or the expected acquisition price of securities which it has committed or anticipates to purchase and which are denominated in such currency. In the case of securities which have been sold by the High Yield Fund or the International Bond Fund but not yet delivered, the aggregate value of the currency which is the subject of such contracts and options will not exceed the proceeds of such sale denominated in such currency. The Funds intend to enter into options and futures transactions only if there appears to be a liquid secondary market for such options or futures. There can be no assurance, however, that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an option or futures position. The inability to close options and futures positions also could have an adverse impact on a Fund's ability to hedge its portfolio effectively. In addition, there is the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom a Fund has an open position in a foreign currency option, a futures contract or a futures option. The High Yield Fund and the International Bond Fund may also, for hedging purposes, purchase currencies in the form of bank deposits as well as other non-U.S. dollar denominated money market instruments, including, but not limited to, banker's acceptances, certificates of deposits, commercial paper, short- term government and corporate obligations and repurchase agreements. Each Fund's dealing in foreign exchange transactions will be limited to the transactions described above and may be further limited by tax restrictions. Neither Fund is required to enter into such transactions with regard to its positions and transactions in the securities of non-U.S. issuers, and will not do so unless deemed appropriate by each Fund's investment manager. In addition, while these transactions may minimize the risk to the value of each Fund's portfolio securities resulting from adverse currency movements with respect to the U.S. dollar, they do not eliminate fluctuations in the underlying prices of the securities. Such transactions may limit potential gain from a favorable change in the relationship between the U.S. dollar and other currencies. Unanticipated changes in currency exchange rates may result in poorer overall performance for the High Yield Fund and the International Bond Fund than if they had not engaged in such foreign exchange transactions. OTHER POLICIES. There are no restrictions or limitations on investments in obligations of the U.S., or of corporations chartered by Congress as federal government instrumentalities for any of the Funds. The underlying assets of each Fund may be retained in cash, including cash equivalents which are Treasury bills, commercial paper and short-term bank obligations such as certificates of deposit, banker's acceptances and repurchase agreements, subject to certain tax restrictions. It is intended, however, that only so much of the underlying assets of each Fund be retained in cash as is deemed necessary for normal operation of such Fund. Each Fund may invest in securities that cannot be offered to the public for sale without first being registered under the Securities Act of 1933 ("restricted securities"), or in other securities which, in the opinion of the Managing General Partners, may be otherwise illiquid. It is the policy of each Fund, however, that illiquid securities may not constitute, at the time of purchase or at any time, more than 10% of the value of the total net assets of the Fund in which they are held. Generally, an "illiquid" security is any security that cannot be disposed of promptly and in the ordinary course of business at approximately the amount at which the Fund has valued the security. Notwithstanding this limitation, the Funds' Managing General Partners have authorized each Fund to invest in restricted securities where such investment is consistent with such Fund's investment objective and has authorized such securities to be considered to be liquid to the extent the Manager determines that there is a liquid institutional or other market for such securities. For example, restricted securities which may be freely transferred among qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and for which a liquid institutional market has developed will be considered liquid even though such securities have not been registered pursuant to the Securities Act of 1933. The Managing General Partners will review any determination by the Manager to treat a restricted security as a liquid security on an ongoing basis, including the Manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the Manager and the Managing General Partners will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent a Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in that Fund may be increased if qualified institutional buyers become uninterested in purchasing these securities or the market for these securities contracts. SECURITIES TRANSACTIONS It is intended that portfolio changes in each Fund will be made as infrequently as possible. Such changes will be based on market and economic factors generally, and special considerations affecting any particular security such as the limitation of loss or realization of price appreciation at a time believed to be opportune. Subject to the policy of each Fund not to purchase or sell securities for trading purposes and to certain tax restrictions, however, changes in particular portfolio holdings may be made if a security has reached its anticipated level of performance or when required for operational or other reasons. The sale of securities held for relatively short periods and reinvestment of the proceeds will result in increased brokerage and transaction costs to the Funds. ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXATION DISTRIBUTIONS As explained more fully in the following paragraphs, the daily allocation of income by each Fund will be in a "defined amount" equal to the daily distributable net investment income of such Fund for that day. The daily distributable net investment income for a particular day will be equal to the interest income for that day, less the daily expenses for that day. For the purpose of computing its book net income, each Fund will account for net investment income in accordance with generally accepted accounting principles (see "Significant Accounting Policies" in the Notes to the Financial Statements). ADDITIONAL INFORMATION REGARDING U.S. TAX TREATMENT OF U.S. INVESTORS A shareholder's adjusted basis in his partnership interest in a Fund (i.e., his aggregate shares in the Fund) will generally be the aggregate prices paid for such shares (including sales charges), increased by the amounts of such shareholder's distributive share of items of income and gain of the Fund and reduced, but not below zero, by the amounts of such shareholder's distributive share of Fund losses and the amount of any cash distributions (including distributions upon redemption of shares) received by such shareholder. Subject to the limitations discussed below, each shareholder will generally be permitted to deduct his distributive share of Fund losses to the extent of his adjusted basis in his Fund shares. For purposes of the "passive activity loss" rules, an individual shareholder's share of the Fund's income or loss will be treated as "portfolio" income or loss. Thus, income from the Fund may not be offset by losses from "passive activities" of the shareholder, and losses from the Fund will not reduce the shareholder's income from "passive activities." An individual shareholder's share of certain expenses of the Fund will be treated as a "miscellaneous itemized deduction" and will be deductible only by a shareholder who itemizes deductions and only to the extent that the shareholder's total miscellaneous itemized deductions from all sources exceed 2% of the shareholder's adjusted gross income. An individual shareholder whose adjusted gross income exceeds a specified amount (generally $114,700 in 1995) must reduce the otherwise allowable itemized deductions by an amount equal to 3% of the excess adjusted gross income. U.S. shareholders of a Fund will not be subject to federal income tax on cash distributions received in redemption of Fund shares to the extent such distributions do not exceed the shareholders' adjusted basis in their Fund shares. Redemptions of shares may be subject to 31% backup withholding in the case of non-exempt U.S. shareholders who have failed to furnish the Fund with their correct taxpayer identification numbers on Form W-9. Each item of partnership income or gain will retain its character for tax purposes when allocated to the shareholders. TAX CONSEQUENCES OF BEING DEEMED ENGAGED IN A U.S. TRADE OR BUSINESS As stated in the Prospectus, each Fund has obtained an opinion of its counsel, Thelen, Marrin, Johnson & Bridges, to the effect that neither the Fund nor its non-U.S. shareholders solely by virtue of their investment in the Fund should be deemed to be engaged in a trade or business in the U.S. if the Fund adheres to its stated investment objectives, policies and restrictions and to certain guidelines and operating procedures concerning its investment activities. These opinions are based upon case law and other authorities in effect as of the date of this Statement of Additional Information. In the event this position is challenged, it is the intention of each Fund to contest the challenge. A final determination by a court of law, however, to the effect that a Fund is engaged in a U.S. trade or business would have material tax consequences for the Fund's shareholders. Such a determination would nullify the applicability of the "portfolio interest" exemption and cause all income of the Fund to be deemed to be effectively connected with such trade or business (including such "portfolio interest" and capital gains realized by the Fund or the shareholders) and therefore subject to U.S. federal income tax and U.S. tax withholding requirements. OFFICERS AND MANAGING GENERAL PARTNERS The Managing General Partners of each Fund have the responsibility for the overall management of that Fund, including general supervision and review of its investment activities. The Managing General Partners, in turn, elect the officers of each Fund who are responsible for administering the day-to-day operations. The affiliations of the officers and Managing General Partners of each Fund and their principal occupations for the past five years are listed below. Managing General Partners who are deemed to be "interested persons" of a Fund, as defined in the 1940 Act, are indicated by an asterisk (*). Frank H. Abbott, III 1045 Sansome St. San Francisco, CA 94111 Managing General Partner President and Director, Abbott Corporation (an investment company); Director, Mother Lode Gold Mines Consolidated; and director, trustee or managing general partner, as the case may be, of 30 of the investment companies in the Franklin Group of Funds. Harris J. Ashton General Host Corporation Metro Center, 1 Station Place Stamford, CT 06904-2045 Managing General Partner President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and director, trustee or managing general partner, as the case may be, of 54 of the investment companies in the Franklin Templeton Group of Funds. *Kenneth V. Domingues 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President - Financial Reporting and Accounting Standards and Managing General Partner Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and Franklin Templeton Distributors, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and Officer and/or managing general partner, as the case may be, of 36 of the investment companies in the Franklin Group of Funds. S. Joseph Fortunato Park Avenue at Morris County P. O. Box 1945 Morristown, NJ 07962-1945 Managing General Partner Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host Corporation; director, trustee or managing general partner, as the case may be, of 56 of the investment companies in the Franklin Templeton Group of Funds. David W. Garbellano 111 New Montgomery St., #402 San Francisco, CA 94105 Managing General Partner Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science Corporation (a venture capital company); and director, trustee or managing general partner, as the case may be, of 29 of the investment companies in the Franklin Group of Funds. *Charles B. Johnson 777 Mariners Island Blvd. San Mateo, CA 94404 Chairman of the Board and Managing General Partner President and Director, Franklin Resources, Inc.; Chairman of the Board and Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services, Inc. and General Host Corporation; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 55 of the investment companies in the Franklin Templeton Group of Funds. *Charles E. Johnson 777 Mariners Island Blvd. San Mateo CA 94404 Managing General Partner Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President and Director, Templeton Worldwide, Inc. and Franklin Institutional Services Corporation; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and officer and/or director or trustee, as the case may be, of 24 of the investment companies in the Franklin Templeton Group of Funds. *Rupert H. Johnson, Jr. 777 Mariners Island Blvd. San Mateo, CA 94404 President and Managing General Partner Executive Vice President and Director, Franklin Resources, Inc. and Franklin Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in the Franklin Templeton Group of Funds. Gordon S. Macklin 8212 Burning Tree Road Bethesda, MD 20817 Managing General Partner Chairman, White River Corporation (information services); Director, Fund American Enterprises Corporation, Martin Marietta Corporation, MCI Communications Corporation, MedImmune, Inc. (biotechnology), Infovest Corporation (information services), and Fusion Systems Corporation (industrial technology); and director, trustee or managing general partner, as the case may be, of 51 of the investment companies in the Franklin Templeton Group of Funds; formerly, Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President, National Association of Securities Dealers, Inc. Harmon E. Burns 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President Executive Vice President, Secretary and Director, Franklin Resources, Inc.; Executive Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee of 41 of the investment companies in the Franklin Templeton Group of Funds. Martin L. Flanagan 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Chief Financial Officer Senior Vice President, Chief Financial Officer and Treasurer, Franklin Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services, Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and officer of 60 of the investment companies in the Franklin Templeton Group of Funds. Deborah R. Gatzek 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President and Secretary Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 36 of the investment companies in the Franklin Group of Funds. Diomedes Loo-Tam 777 Mariners Island Blvd. San Mateo, CA 94404 Treasurer and Principal Accounting Officer Employee of Franklin Advisers, Inc.; and officer of 36 of the investment companies in the Franklin Group of Funds. Edward V. McVey 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President Senior Vice President/National Sales Manager, Franklin Templeton Distributors, Inc.; and officer of 31 of the investment companies in the Franklin Group of Funds. R. Martin Wiskemann 777 Mariners Island Blvd. San Mateo, CA 94404 Vice President Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of America; and officer and/or director, as the case may be, of 19 of the investment companies in the Franklin Group of Funds. Managing General Partners of the Government Fund and the High Yield Fund not affiliated with the investment manager are currently paid fees of $150 per quarter plus $150 per meeting attended from each Fund and are reimbursed for expenses incurred in connection with attending such meetings. During the fiscal year ended December 31, 1994, fees totalling $7,650 were paid by the Government Fund to Messrs. Abbott ($1,650), Ashton ($1,500), Fortunato ($1,500), Garbellano ($1,500) and Macklin ($1,500). During the fiscal year ended December 31, 1994, fees totalling $8,400 were paid by the High Yield Fund to Messrs. Abbott ($1,800), Ashton ($1,650), Fortunato ($1,650), Garbellano ($1,650) and Macklin ($1,650). As indicated above, certain of the Managing General Partners and officers hold positions with other companies in the Franklin Group of Funds (Registered Trademark) and the Templeton Group of Funds. For the calendar year ended December 31, 1994, Messrs. Abbott, Ashton, Fortunato, Garbellano and Macklin received total fees of $176,870,$319,925, $336,065, $153,300 and $303,685, respectively, from the various Franklin and Templeton Funds for which they serve as directors, trustees or managing general partners and for which they spent significant time in preparation for and attendance at the meetings which are scheduled at least once per month. The Managing General Partners of the International Fund are not currently, but may in the future, be paid fees and receive reimbursement of expenses for attending meetings. No officer or Managing General Partner received any other compensation directly from the Funds. As of February 10, 1995, the Managing General Partners and officers, as a group, together with Franklin Partners, Inc. as the Non- Managing General Partner, owned 596,495 or 1.3% of the total outstanding shares of the Government Fund, 122,064 or 1.2% of the outstanding shares of the High Yield Fund and 34,839 or 1.7% of the total outstanding shares of the International Bond Fund. Officers and Managing General Partners, as a group, owned of record and beneficially approximately 54 shares of the High Yield Fund, 96 shares of the International Bond Fund and 41 shares of the Government Fund or less than 1% of each Fund's outstanding shares. In addition, many of the Funds' Managing General Partners own shares in various of the other funds in the Franklin Group of Funds and the Templeton Group of Funds. Certain officers or Managing General Partners who are shareholders of Franklin Resources, Inc. may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. 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 $114 billion in assets for over 3.7 million shareholders. The preceding table indicates those officers and Managing General Partners who are also affiliated persons of Distributors and Advisers. Pursuant to a management agreement with each Fund, the Manager provides investment research and portfolio management services, including the selection of securities for each Fund to purchase, hold or sell and the selection of brokers through whom each Fund's portfolio transactions are executed. The Manager's activities are subject to the review and supervision of each Fund's Managing General Partners to whom the Manager renders periodic reports of each Fund's investment activities. The Manager, at its own expense, furnishes each Fund with office space and office furnishings, facilities and equipment required for managing the business affairs of each Fund; maintains all internal bookkeeping, clerical, secretarial and administrative personnel and services; and provides certain telephone and other mechanical services. The Manager is covered by fidelity insurance on its officers, directors and employees for the protection of each Fund. Each Fund bears all of the expenses not assumed by the Manager. See the Statement of Operations in the financial statements in the Funds' Annual Report for additional details of these expenses. Pursuant to the management agreements, each Fund is obligated to pay the Manager a fee computed at the close of business on the last business day of each month equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the first $100 million of net assets of each Fund; 1/24 of 1% (approximately 1/2 of 1% per year) of net assets of each Fund in excess of $100 million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of each Fund in excess of $250 million. For fiscal years ended December 31, 1992, 1993 and 1994, the High Yield Fund paid $249,995, $340,356 and $481,741 in management fees and the Government Fund paid $1,185,915, $2,331,382 and $2,608,074 for the respective years. For the fiscal years ended December 31, 1992, 1993 and 1994, the management fees which would have been accrued by Advisers for the International Bond Fund were $59,203, $100,033 and $141,108, respectively. Advisers, however, agreed in advance to waive its management fees, and the International Bond Fund paid no management fees for those periods. The Manager has limited its management fees and has assumed responsibility for making payments, if necessary, to offset certain operating expenses otherwise payable by the International Bond Fund. This action by the Manager to limit its management fees and to assume responsibility for payment of the expenses related to the operations of the International Bond Fund may be terminated by the Manager at any time. The management agreements for each Fund specify that the management fee will also be reduced to the extent necessary to comply with the most stringent limits on the expenses which may be borne by a Fund prescribed by any state in which a Fund's shares are offered for sale. The most stringent current limit requires the Manager to reduce or eliminate such fee to the extent that aggregate operating expenses of each Fund (excluding interest, taxes, brokerage commissions and extraordinary expenses such as litigation costs) would otherwise exceed in any fiscal year 2 1/2% of the first $30 million of net assets of each Fund, 2% of the next $70 million of net assets of each Fund and 1 1/2% of average annual net assets of each Fund in excess of $100 million. Expense reductions have not been necessary based on state requirements. The management agreements are in effect until April 30, 1996. Thereafter, they may continue in effect 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 securities, and in either event by a majority vote of each Fund's Managing General Partners who are not parties to the management agreements or interested persons of any such party (other than as Managing General Partners of the Funds), cast in person at a meeting called for that purpose. Each management agreement may be terminated without penalty at any time by the Fund or by the Manager on 60 days' written notice and will automatically terminate in the event of their assignment, as defined in the 1940 Act. Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder servicing agent for each Fund and acts as each Fund's transfer agent and distribution-paying agent. Investor Services is compensated by each Fund on the basis of a fixed fee per account. Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco, California 94104, acts as custodian of the securities and other assets of each Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as custodian in connection with transfer services through bank automated clearing houses. The custodians do not participate in decisions relating to the purchase and sale of portfolio securities. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105, are the independent auditors for each Fund. During the fiscal year ended December 31, 1994, their auditing services consisted of rendering an opinion on the financial statements included in the Funds' Annual Report. THE FUNDS' POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS Under the current management agreements with Advisers, the selection of brokers and dealers to execute transactions in each Fund's portfolios is made by the Manager in accordance with criteria set forth in the management agreements and any directions which each Fund's Managing General Partners may give. When placing a portfolio transaction, the Manager attempts to obtain the best net price and execution of the transaction. On portfolio transactions which are done on a securities exchange, the amount of commission paid by a Fund is negotiated between the Manager and the broker executing the transaction. The Manager seeks to obtain the lowest commission rate available from brokers which are felt to be capable of efficient execution of the transactions. The determination and evaluation of the reasonableness of the brokerage commissions paid in connection with portfolio transactions are based to a large degree on the professional opinions of the persons responsible for the placement and review of such transactions. These opinions are formed on the basis of, among other things, the experience of these individuals in the securities industry and information available to them concerning the level of commissions being paid by other institutional investors of comparable size. The Manager will ordinarily place orders for the purchase and sale of over- the-counter securities on a principal rather than agency basis with a principal market maker unless, in the opinion of the Manager, a better price and execution can otherwise be obtained. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The Funds will seek to obtain prompt execution of orders at the most favorable net price. The amount of commission is not the only relevant factor to be considered in the selection of a broker to execute a trade. If it is felt to be in a Fund's best interests, the Manager may place portfolio transactions with brokers who provide the types of services described below, even if it means the Fund will have to pay a higher commission than would be the case if no weight were given to the broker's furnishing of these services. This will be done only if, in the opinion of the Manager, the amount of any additional commission is reasonable in relation to the value of the services. Higher commissions will be paid only when the brokerage and research services received are bona fide and produce a direct benefit to the Fund or assist the Manager in carrying out its responsibilities to the Fund, or when it is otherwise in the best interest of the Fund to do so, whether or not such data may also be useful to the Manager in advising other clients. When it is felt that several brokers are equally able to provide the best net price and execution, the Manager may decide to execute transactions through brokers who provide quotations and other services to each Fund, specifically including the quotations necessary to determine the value of each Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services, and through brokers who supply research, statistical and other data to each Fund and Manager in such amount of total brokerage as may reasonably be required. It is not possible to place a dollar value on the special executions or on the research services received by Advisers from dealers effecting transactions in portfolio securities. The allocation of transactions in order to obtain additional research services permits Advisers to supplement its own research and analysis activities and to receive the views and information of individuals and research staff of other securities firms. As long as it is lawful and appropriate to do so, the Manager and its affiliates may use this research and data in their investment advisory capacities with other clients. Provided that each Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares may also be considered as a factor in the selection of broker dealers to execute a Fund's portfolio transactions. Because Distributors is a member of the National Association of Securities Dealers, it is sometimes entitled to obtain certain fees when the Funds tender portfolio securities pursuant to a tender-offer solicitation. As a means of recapturing brokerage for the benefit of the Funds, any portfolio securities tendered by a Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to Advisers under the management agreements will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection therewith. If purchases or sales of securities of each Fund and one or more other investment companies or clients supervised by the Manager are considered at or about the same time, transactions in such securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the Manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. It is recognized that in some cases this procedure could possibly have a detrimental effect on the price or volume of the security so far as each Fund is concerned. In other instances it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Funds. The High Yield Fund and the International Bond Fund anticipate that brokerage transactions involving the securities of non-U.S. issuers will be conducted primarily on the principal stock exchange of such countries. Most foreign stock exchange transactions are executed at fixed commission rates. Fixed commissions on foreign stock exchange transactions are generally higher than negotiated commissions on United States transactions, although the Funds will endeavor to achieve the best net results in effecting their portfolio transactions. There is generally less government supervision and regulation of stock exchanges and brokers outside the United States. During the fiscal years ended December 31, 1993 and 1994, the Funds paid no brokerage commissions. For fiscal year 1992, the High Yield Fund paid $594 in brokerage commissions while the Government Fund and the International Bond Fund paid none. As of December 31, 1994, the Funds did not own securities of their regular broker-dealers. ADDITIONAL INFORMATION REGARDING FUND SHARES All checks, drafts, wires and other payment mediums used for purchasing or redeeming shares of the Fund must be denominated in U.S. dollars. The Fund reserves the right, in its sole discretion, to either (a) reject any order for the purchase or sale of shares denominated in any other currency, or (b) to honor the transaction or make adjustments to a shareholder's account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. In connection with exchanges (see Prospectus "Exchange Privilege"), it should be noted that since the proceeds from the sale of shares of an investment company generally are not available until the fifth business day following the redemption, the funds into which Fund shareholders are seeking to exchange reserve the right to delay issuing shares pursuant to an exchange until said fifth business day. The redemption of shares of a Fund to complete an exchange for shares of any of the invesment companies will be effected at the closed of business on the day the request is in proper form at the net asset value then effective. Shares are eligible to receive distributions beginning on the first business day following settlement of the purchase transaction, through the date on which the Fund writes a check or sends a wire on redemption transactions. All shares will be redeemed in cash (paid by check in U.S. dollars). The value of shares on redemption or repurchase may be more or less than the investor's cost or capital contribution, depending upon the market value of the respective Fund's portfolio securities at the time of redemption or repurchase. Distribution checks which are returned to a Fund marked "unable to forward" by the postal service will be deemed to be a request by the shareholder to change the distribution option and the proceeds will be reinvested in additional shares at net asset value until new instructions are received. Each Fund may deduct from a shareholder's account the costs of its efforts to locate the shareholder if the shareholder's mail is returned as undeliverable or the Fund is otherwise unable to locate the shareholder or verify the current mailing address. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for their location services. Under agreements with certain banks in Taiwan, Republic of China, the Funds' shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to Distributors, or an affiliate of Distributors, to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. Shares of the Funds may be offered to investors in Taiwan through securities firms known locally as Securities Investment Consulting Enterprises. In conformity with local business practices in Taiwan, shares of each Fund will be offered with the following schedule of sales charges: SALES SIZE OF PURCHASE IN CHARGE U.S. DOLLARS Up to $100,000 3% $100,000 to $400,000 2% Over $400,000 0% PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS Orders for the purchase of shares of a Fund received in proper form prior to 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 the securities dealer. 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. REDEMPTIONS IN KIND Each Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of such Fund's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Securities and Exchange Commission. In the case of requests for redemption in excess of such amounts, the Managing General Partners reserve the right to make payments in whole or in part in securities or other assets of the Fund from which the shareholder is redeeming, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets. Should the Fund do so, a shareholder may incur brokerage fees in converting the securities to cash. The Funds do not intend to redeem illiquid securities in kind; however, should it happen, shareholders may not be able to timely recover their investment and may also incur brokerage costs in selling such securities. REDEMPTIONS BY THE FUNDS Due to the relatively high cost of handling small investments, each Fund reserves the right to redeem, involuntarily, at net asset value the shares of any shareholder whose account has been in existence for at least 12 months and (i) whose account contains less than $2,000, or such lesser amount to be determined by the Managing General Partners upon notice to all shareholders, and (ii) who has not made an investment (other than the reinvestment of any distributions) within the six months preceding notice of the Fund's intention to take this action. In the event it is determined that such a redemption should be made by a Fund, six months' notice of the Fund's intention to redeem will be given, during which period the shareholder can increase the value of the account to the minimum amount, thereby avoiding redemption. 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 SAI, the Funds are informed that the Exchange observes the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Each Fund's portfolio securities are valued as stated in the Prospectus. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times prior to the close of the Exchange. The value of such securities used in computing the net asset value of a Fund's shares are determined as of such times. Occasionally, events affecting the value of such securities may occur between the times at which they are determined and 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 may be terminated by either party on 90 days' written notice. Until April 30, 1994, distributions were reinvested at the offering price (which includes the sales charge) and Distributors allowed 50% of the entire commission to the securities dealer of record, if any, on an account. Starting with any distributions paid after April 30, 1994, such reinvestment will be at net asset value. In connection with the offering of the High Yield Fund's shares, aggregate underwriting commissions for the fiscal years ended 1992, 1993 and 1994 were $341,120, $691,683 and $400,528, respectively. After allowances to dealers, Distributors retained $22,661, $32,168 and $24,102, during the respective periods. In connection with the offering of the Government Fund's shares, aggregate underwriting commissions for the fiscal years ended 1992, 1993 and 1994 were $4,805,768, $6,282,489 and $2,067,833, respectively. After allowances to dealers, Distributors retained $109,843, $190,128 and $150,068, during the respective periods. For fiscal years ended December 31, 1992, 1993 and 1994, underwriting commissions for the International Bond Fund were $265,867, $303,473 and $219,143, respectively, of which $9,039, $12,255 and $12,763 was retained by Distributors for the respective periods. Distributors received no other compensation from the Funds for acting as underwriter. DISTRIBUTION PLANS The Funds have approved Distribution Plans pursuant to Rule 12b-1 under the 1940 Act (the "Plans") whereby each Fund may pay up to a maximum of 0.15% per annum of its average daily net assets for expenses incurred in the promotion and distribution of its shares. In implementing each Plan, the Managing General Partners have determined that initially the annual fees payable thereunder will be equal to the sum of: (i) the amount obtained by multiplying 0.15% by the average daily net assets represented by shares of a Fund that were acquired by investors on or after the Effective Date of each Plan ("New Assets"), and (ii) the amount obtained by multiplying 0.05% by the average daily net assets represented by shares of each Fund that were acquired before the Effective Date of each Plan ("Old Assets"). Such fees will be paid to the current securities dealers of record on the shareholder's account. In addition, until such time as the maximum payment of 0.15% is reached on a yearly basis, up to an additional 0.02% will be paid to Distributors under each Plan. The payments to be made to Distributors will be used by Distributors to defray other marketing expenses that have been incurred in accordance with each Plan, such as advertising. The fees are a Fund expense so that all shareholders regardless of when they purchased their shares will bear expenses under the Plans at the same rate. That rate initially will be at least 0.07% (0.05% plus 0.02%) of average daily net assets and, as Fund shares are sold on or after the Effective Date, will increase over time. Thus, as the proportion of Fund shares purchased on or after the Effective Date 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. The approval of the Managing General Partners would be required to change the method of calculating the payments to be made under each Plan. Pursuant to the Plans, Distributors or others will be entitled to be reimbursed each quarter (up to the maximum as stated above) for actual expenses incurred in the distribution and promotion of each Fund's shares, including, but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates. In addition to the payments to which Distributors or others are entitled under the Plans, the Plans also provide that to the extent each Fund, the Manager or Distributors or other parties on behalf of the Fund, the Manager or Distributors, make payments that are deemed to be payments for the financing of any activity primarily intended to result in the sale of shares of the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been made pursuant to the Plans. In no event shall the aggregate asset-based sales charges which include payments made under the Plans, plus any other payments deemed to be made pursuant to the Plans, exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., Article III, Section 26(d)4. The terms and provisions of the Plans relating to required reports, term, and approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed expenses incurred in a particular year to be carried over to or reimbursed in subsequent years. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks will not be entitled to participate in the Plans as a result of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. Such banking institutions, however, are permitted to receive fees under the Plans for administrative servicing or for agency transactions. If a bank were prohibited from providing such services, its customers who are shareholders would be permitted to remain shareholders of the Fund, and alternate means for continuing the servicing of such shareholders would be sought. In such an event, changes in the services provided might occur and such shareholders might no longer be able to avail themselves of any automatic investment or other services then being provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these changes. Securities laws of states in which the Fund's shares are offered for sale may differ from the interpretations of federal law expressed herein, and banks and financial institutions selling shares of the Fund may be required to register as dealers pursuant to state law. The Plans have been approved by the Managing General Partners of the Funds, including those Managing General Patners who are not interested persons, as defined in the 1940 Act. The Plans are effective through June 30, 1995 and renewable annually by a vote of the Managing General Partners, including a majority vote of the Managing General Partners who are non-interested persons of the Funds and who have no direct or indirect financial interest in the operation of the Plans, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such Managing General Partners be done by the non- interested Managing General Partners. The Plans and any related agreement may be terminated at any time, without any penalty, by vote of a majority of the non- interested Managing General Partners on not more than 60 days' written notice, by Distributors on not more than 60 days' written notice, by any act that constitutes an assignment of the Management Agreement with the Manager, or by vote of a majority of each Fund's outstanding shares. Distributors or any dealer or other firm may also terminate their respective distribution or service agreement at any time upon written notice. The Plans and any related agreements may not be amended to increase materially the amount to be spent for distribution expenses without approval by a majority of each Fund's outstanding shares, and all material amendments to the Plans or any related agreements shall be approved by a vote of the non- interested Managing General Partners, cast in person at a meeting called for the purpose of voting on any such amendment. Distributors is required to report in writing to the Managing General Partners at least quarterly on the amounts and purpose of any payment made under the Plan and any related agreements, as well as to furnish the Managing General Partners with such other information as may reasonably be requested in order to enable the Managing General Partners to make an informed determination of whether the Plan should be continued. For the fiscal year ended December 31, 1994, the total amount paid by the Government Fund, High Yield Fund and the International Bond Fund pursuant to the Plans were $174,620, $29,926, and $8,166, which were used for the following purposes. GOVERNMENT FUND DOLLAR AMOUNT Advertising $15,716 Printing and mailing of $12,223 prospectuses to other than current shareholders. Payments to underwriters $24,447 Payments to brokers or dealers $122,234 HIGH YIELD FUND DOLLAR AMOUNT Advertising $3,292 Printing and mailing of $2,693 prospectuses to other than current shareholders. Payments to underwriters $4,190 Payments to brokers or dealers $19,751 INTERNATIONAL BOND FUND DOLLAR AMOUNT Advertising $1,551 Printing and mailing of $1,143 prospectuses to other than current shareholders. Payments to underwriters $1,470 Payments to brokers or dealers $4,001 GENERAL INFORMATION Each Fund is organized as a California limited partnership pursuant to the California Revised Limited Partnership Act. The full text of the Agreement of Limited Partnership of each Fund is set forth herein as Appendix A (Government Fund), Appendix B (High Yield Fund) and Appendix C (International Bond Fund). The California Revised Limited Partnership Act does not specifically authorize the exercise by limited partners of the voting rights required by the 1940 Act which are specified in each Partnership Agreement. Although there are no authoritative judicial decisions on this matter and no absolute assurances can be given on this point, it is the opinion of counsel to each Fund that the existence or exercise of these voting rights will not subject the limited partners of any Fund to liability as general partners under California laws. There is not, however, specific statutory or other authority for the existence or exercise of some or all these voting rights in most other jurisdictions. As a result, to the extent that a Fund is subject to the jurisdiction of courts in these other jurisdictions, it is possible that these courts may not apply California law, or, if they apply California law, they may nevertheless interpret the law to subject the Funds' limited partners to liability as general partners. Investors in each Fund will be informed of its progress through periodic reports. Financial statements certified by independent auditors will be submitted to shareholders at least annually. PERFORMANCE As noted in the Prospectus, each Fund may from time to time quote various performance figures to illustrate the Fund's past performance. It may occasionally cite statistics to reflect its volatility or risk. Performance quotations by investment companies are subject to rules adopted by the Securities and Exchange Commission ("SEC"). These rules require the use of standardized 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 redeemable value. The calculation assumes the maximum sales charge is deducted from the initial $1,000 purchase order and all income distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each one-, five- and ten-year period, or fractional portion thereof, and the deduction of all applicable charges and fees. If a change is made on the sales charge structure, historical performance information will be restated to reflect the maximum sales charge in effect currently. In considering the quotations of total return by the Funds, investors should remember that the maximum sales charge reflected in each quotation is a one-time fee (charged on all direct purchases) which will have its greatest impact during the early stages of an investor's investment in a Fund. The actual performance of an investment will be affected less by this charge the longer an investor retains the investment in a Fund. The average annual compounded rates of return for each Fund for the indicated periods ended on the date of the financial statements incorporated herein by reference were as follows: ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION Government Fund -8.17% 6.16% 7.70%* High Yield Fund -6.58% 10.03% 8.36%* International Bond Fund -2.12% n/a 7.47%** *Inception May 4, 1987 **From change of investment manager on June 9, 1990 These figures were calculated according to the SEC formula: n P(1+T) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year periods at the end of the one-, five-, or ten-year periods (or fractional portion thereof) As discussed in the Prospectus, each Fund may quote total rates of return in addition to its average annual total return. Such quotations are computed in the same manner as each Fund's average annual compounded rate, except that such quotations will be based on each Fund's actual return for a specified period rather than to its average return over one-, five-, and ten-year periods, or fractional portion thereof. The total rates of return for each Fund for the indicated periods ended on the date of the financial statements incorporated herein by reference were follows: ONE-YEAR FIVE-YEAR FROM PERIOD PERIOD INCEPTION Government Fund -8.17% 34.86% 76.60%* High Yield Fund -6.58% 61.27% 85.09%* International Bond Fund -2.12% n/a 38.98%** *Inception May 4, 1987 **From change of investment manager on June 9, 1990 YIELD Current yield reflects the income per share earned by each Fund's portfolio investments. Current yield is determined by dividing the net investment income per share earned during a 30-day base period by the maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders during the base period. The yield for each Fund for the 30-day period ended on the date of the financial statements incorporated herein by reference were as follows: Government Fund 7.05% High Yield Fund 10.15% International Bond Fund 8.54% These figures were obtained using the following SEC formula: 6 Yield = 2 [( a-b + 1 ) - 1] ---- cd where: a =dividends earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive income distributions d = the maximum offering price per share on the last day of the period CURRENT DISTRIBUTION RATE Yield which is calculated according to a formula prescribed by the SEC is not indicative of the amounts which were or will be paid to a Fund's shareholders. Amounts paid to shareholders are reflected in the quoted "current distribution rate." The current distribution rate is computed by dividing the total amount of distributions per share paid by a Fund during the past 12 months by a current maximum offering price. Under certain circumstances, such as when there has been a change in the amount of income distribution payout, or a fundamental change in investment policies, it might be appropriate to annualize the distributions paid over the period such policies were in effect, rather than using the distributions during the past 12 months. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than interest, such as short-term capital gain, and is calculated over a different period of time. VOLATILITY Occasionally statistics may be used to specify Fund volatility or risk. Measures of volatility or risk are generally used to compare fund net asset value or performance relative to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market as represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility greater than the market, and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average, over a specified period of time. The premise is that greater volatility connotes greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS With respect to those categories of investors who are permitted to purchase shares of each Fund at net asset value, sales literature pertaining to the Funds may quote a "Current Distribution for Net Asset Value Investments." This rate is computed by adding the income distributions paid by each Fund during the last 12 months and dividing that sum by the Fund's current net asset value. Figures for yield, total return, and other measures of performance for Net Asset Value Investments may also be quoted. These will be derived as described elsewhere in this Statement of Additional Information with the substitution of net asset value for the public offering price. Regardless of the method used, past performance is not necessarily indicative of future results, but is an indication of the return to shareholders only for the limited historical period used. The Funds may include in their advertising or sales material information relating to investment objectives and performance results of funds belonging to the Templeton Group of Funds. Resources is the parent company of the advisers and underwriter of both the Franklin Group of Funds and Templeton Group of Funds. COMPARISONS To help investors better evaluate how an investment in a Fund may satisfy their investment objective, advertisements and other materials regarding the Funds may discuss various measures of a Fund's performance as reported by various financial publications. Materials may also compare performance (as calculated above) to performance as reported by other investments, indices, and averages. Such comparisons may include, but are not limited to, the following examples: a) Dow Jones Composite Average or its component averages - an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20 transportation company stocks. Comparisons of performance assume reinvestment of distributions. b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of performance assume reinvestment of distributions. c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund Performance Analysis - measure total return and average current yield for the mutual fund industry. Rank individual mutual fund performance over specified time periods, assuming reinvestment of all distributions, exclusive of any applicable sales charges. d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. - analyzes price, current yield, risk, total return, and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. e) Financial publications: The Wall Street Journal and Business Week, Changing Times, Financial World, Forbes, Fortune, and Money magazines - provide performance statistics over specified time periods. f) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of Labor Statistics - a statistical measure of change, over time, in the price of goods and services in major expenditure groups. g) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates - historical measure of yield, price, and total return for common and small company stock, long-term government bonds, Treasury bills, and inflation. h) Savings and Loan Historical Interest Rates - as published in the U.S. Savings & Loan League Fact Book. i) Salomon Brothers Broad Bond Index or its component indices - The Broad Index measures yield, price, and total return for Treasury, Agency, Corporate, and Mortgage bonds. j) Lehman Brothers Aggregate Bond Index or its component indices - - The Aggregate Bond Index measures yield, price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee bonds. k) International Business Communications Money Fund Report(Registered Trademark) - Industry averages for seven-day annualized and compounded yields of taxable, tax-free, and government money funds. l) Bond Buyers 20-Bond Index - an index of municipal bond yields based upon yields of 20 general obligation bonds maturing in 20 years. m) Bond Buyers 30-Bond Index - an index of municipal bond yields based upon yields of 20 revenue bonds maturing in 30 years. n) Historical data supplied by the research departments of First Boston Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce Fenner & Smith, Lehman Brothers and Bloomberg L.P. From time to time, advertisements or information for each Fund may include a discussion of certain attributes or benefits to be derived by an investment in the Fund. Such advertisements or information may include symbols, headlines, or other material which highlight or summarize the information discussed in more detail in the communication. Advertisements or information may also compare a Fund's performance to the return on certificates of deposit or other investments. Investors should be aware, however, that an investment in a Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a certificate of deposit issued by a bank. For example, as the general level of interest rates rise, the value of the Fund's fixed-income investments, as well as the value of its shares which are based upon the value of such portfolio investments, can be expected to decrease. Conversely, when interest rates decrease, the value of the Fund's shares can be expected to increase. Certificates of deposit are frequently insured by an agency of the U.S. government. An investment in any of the Funds is not insured by any federal, state or private entity. In assessing such comparisons of performance, an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, that the indices and averages are generally unmanaged, and that the items included in the calculations of such averages may not be identical to the formula used by the Fund to calculate its figures. In addition there can be no assurance that the Funds will continue this performance as compared to such other averages. OTHER FEATURES AND BENEFITS Each Fund may help investors achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college 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 2.5 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 $114 billion in assets under management for more than 3.8 million shareholder accounts and offers 110 U.S.-based mutual funds. Each Fund may identify itself by its NASDAQ or CUSIP number. The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in service quality for five of the past seven years. As of February 10, 1995, the persons known to the Funds to own beneficially or of record more than 5% of the Funds' outstanding shares were as follows: NAME AND ADDRESS NUMBER OF PERCENT OF OF BENEFICIAL OWNER SHARES OWNED SHARES HIGH YIELD FUND Paul W. C. Watt 575,542.59 5.6% 3385 Stagecoach Drive Lafayette CA 94549-1824 Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j) under the 40 Act, who are employees of Franklin Resources, Inc. or their subsidiearies, are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (1) The trade must receive advance clearance from a Compliance Officer and must be completed within 24 hours after this clearance; (2) Copies of all brokerage confirmations must be sent to the Compliance Officer and within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the Compliance Officer; (3) In addition to items (1) and (2), access persons involved in preparing and making investment deceisions must file annual reports of their securities holdings each January alnd also inform the Compliance Officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client. OWNERSHIP AND AUTHORITY DISPUTES In the event of disputes involving multiple claims of ownership or authority to control a shareholder's account, each Fund has the right (but has no obligation) to: (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the Internal Revenue Service in response to a Notice of Levy. FINANCIAL STATEMENTS The financial statements contained in the Annual Report to Shareholders of Franklin Partners Funds dated December 31, 1994 are incorporated herein by reference. APPENDIX A The Franklin Tax-Advantaged U.S. Government Securities Fund Amended and Restated Agreement of Limited Partnership dated May 1, 1987 as amended April 28, 1988 and May 1, 1991 is incorporated by reference to Part B of Post Effective Amendment No. 8 to the Registration Form N-1A of the Franklin Tax-Advantaged High Yield Securities Fund as filed on February 28, 1995. APPENDIX B The Franklin Tax-Advantaged High Yield Securities Fund Amended and Restated Agreement of Limited Partnership dated May 1, 1987 as amended April 28, 1988 and May 1, 1991 is incorporated by reference to Part B of Post Effective Amendment No. 8 to the Registration Form N-1A of the Franklin Tax-Advantaged High Yield Securities Fund as filed on February 28, 1995. APPENDIX C The Franklin Tax-Advantaged International Bond Fund Amended and Restated Agreement of Limited Partnership dated December 19, 1986, July 13, 1987, June 19, 1990, May 1, 1991 and January 18, 1994 is incorporated by reference to Part B of Post Effective Amendment No. 8 to the Registration Form N-1A of the Franklin Tax- Advantaged High Yield Securities Fund as filed on February 28, 1995. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A CALIFORNIA LIMITED PARTNERSHIP) File Nos. 33-11963 811-5007 FORM N-1A PART C Other Information Item 24 Financial Statements and Exhibits a) Financial Statements incorporated herein by reference to the Registrant's Annual Report to Shareholders dated December 31, 1994 as filed on February 27, 1995 (i) Report of Independent Auditors - February 1, 1995 (ii) Statement of Investments in Securities and Net Assets - December 31, 1994 (iii)Statements of Assets and Liabilities - December 31, 1994 (iv) Statements of Operations - for the year ended December 31, 1994 (v) Statements of Changes in Net Assets - for the years ended December 31, 1994 and 1993 (vi) Notes to Financial Statements b) Exhibits: (1) copies of the charter as now in effect; (i) Amended and Restated Agreement of Limited Partnership dated May 1, 1987, as amended April 28, 1988 and May 1, 1991 is incorporated by reference to: Registrant: Franklin Tax-Advantaged High Yield Securities Fund Filing: Post-Effective Amendment No. 8 to Registration on Form N-1A File No. 33-11962 Filing Date: February 28, 1995 (2) copies of the existing By-Laws or instruments corresponding thereto; (i) Operating Procedures (ii) Amendment to By-Laws dated April 26, 1988 (3) copies of any voting trust agreement with respect to more than five percent of any class of equity securities of the Registrant; N/A (4) specimens or copies of each security issued by the Registrant, including copies of all constituent instruments, defining the rights of the holders of such securities, and copies of each security being registered; N/A (5) copies of all investment advisory contracts relating to the management of the assets of the Registrant; (i) Management Agreement between Registrant and Franklin Advisers, Inc. dated May 4, 1987 (6) copies of each underwriting or distribution contract between the Registrant and a principal underwriter, and specimens or copies of all agreements between principal underwriters and dealers; (i) Distribution Agreement between Registrant and Franklin Distributors, Inc. dated May 4, 1987 (ii) Amendment to Distribution Agreement between Registrant and Franklin/Templeton Distributors, Inc. dated July 1, 1993 (iii)Forms of Dealer Agreements between Franklin/Templeton Distributors, Inc. and dealers are Incorporated by reference to: Registrant: Franklin Premier Return Fund Filing: Post-Effective Amendment No. 54 to Registration on Form N-1A File No. 2-12647 Filing Date: February 27, 1995 (7) copies of all bonus, profit sharing, pension or other similar contracts or arrangements wholly or partly for the benefit of directors or officers of the Registrant in their capacity as such; any such plan that is not set forth in a formal document, furnish a reasonably detailed description thereof; N/A (8) copies of all custodian agreements and depository contracts under Section 17(f) of the 1940 Act, with respect to securities and similar investments of the Registrant, including the schedule of remuneration; (i) Custodian Agreement between Registrant and Bank of America NT & SA dated April 10, 1987 (ii) Amendment to Custodian Agreement between Registrant and Bank of America NT & SA dated December 1, 1994 is Incorporated by reference to: Registrant: Franklin Premier Return Fund Filing: Post-Effective Amendment No. 54 to Registration on Form N-1A File No. 2-12647 Filing Date: February 27, 1995 (iii)Copy of Custodian Agreements between Registrant and Citibank Delaware: 1. Citicash Management ACH Customer Agreement 2. Citibank Cash Management Services Master Agreement 3. Short Form Bank Agreement - Deposits and Disbursements of Funds Incorporated by reference to: Registrant: Franklin Premier Return Fund Filing: Post-Effective Amendment No. 54 to Registration on Form N-1A File No. 2-12647 Filing Date: February 27, 1995 (9) copies of all other material contracts not made in the ordinary course of business which are to be performed in whole or in part at or after the date of filing the Registration Statement; N/A (10) an opinion and consent of counsel as to the legality of the securities being registered, indicating whether they will, when sold, be legally issued, fully paid and nonassessable; (i) Opinion and Consent of Counsel dated February 21, 1995 (11) copies of any other opinions, appraisals or rulings and consents to the use thereof relied on in the preparation of this registration statement and required by Section 7 of the 1933 Act; (i) Tax Opinion and Consent dated July 7, 1994 is Incorporated by reference to: Registrant: Franklin Tax-Advantaged High Yield Securities Fund Filing: Post-Effective Amendment No. 8 to Registration on Form N-1A File No. 33-11962 Filing Date: February 28, 1995 (ii) Consent of Independent Auditors dated February 27, 1995 (12) all financial statements omitted from Item 23; N/A (13) copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the underwriter, adviser, promoter or initial stockholders and written assurances from promoters or initial stockholders that their purchases were made for investment purposes without any present intention of redeeming or reselling; N/A (14) copies of the model plan used in the establishment of any retirement plan in conjunction with which Registrant offers its securities, any instructions thereto and any other documents making up the model plan. Such form(s) should disclose the costs and fees charged in connection therewith; (i) Copy of model retirement plan is Incorporated by reference to: Registrant: AGE High Income Fund, Inc. Filing: Post-Effective Amendment No. 26 to Registration on Form N-1A File No. 2-30203 Filing Date: August 1, 1989 (15) copies of any plan entered into by Registrant pursuant to Rule 12b-1 under the 1940 Act, which describes all material aspects of the financing of distribution of Registrant's shares, and any agreements with any person relating to implementation of such plan. (i) Distribution Plan dated July 1, 1994 (16) schedule for computation of each performance quotation provided in the registration statement in response to Item 22 (which need not be audited). (i) Schedule for Computation of Performance Quotation (17) Power of Attorney (i) Power of Attorney dated February 16, 1995 (ii) Certificate of Secretary dated February 16, 1995 (27) Financial Data Schedule for the Registrant (i) Financial Data Schedule Item 25 Persons Controlled by or under Common Control with Registrant None Item 26 Number of Holders of Securities As of December 31, 1994 the number of record holders of the only class of securities of the Registrant was as follows: Title of Class Number of Record Holders Shares of Partnership 5,154 Interest Item 27 Indemnification Please see Section 14 of Agreement of Limited Partnership (Exhibit 1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to general partners, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities other than the payment by the Registrant of expenses incurred or paid by a general partner, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion if its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 28 Business and Other Connections of Investment Adviser Certain of the officers and directors of the Registrant's investment adviser also serve as officers and/or directors or trustees for (1) the adviser's corporate parent, Franklin Resources, Inc., (2) the Registrant's corporate Non-Managing General Partner, Franklin Partners, Inc., and/or (3) other investment companies in the Franklin Group of Funds and the Templeton Group of Funds. In addition, Mr. Charles B. Johnson is director of General Host Corporation. For additional information, please see Part B. Item 29 Principal Underwriters a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as principal underwriter of shares of AGE High Income Fund, Inc., Franklin Premier Return Fund, Franklin Custodian Funds, Inc., Franklin Gold Fund, Franklin Equity Fund, Franklin California Tax-Free Income Fund, Inc., Franklin New York Tax- Free Income Fund, Inc., Franklin Municipal Securities Trust, Franklin Federal Tax-Free Income Fund, Franklin Investors Securities Trust, Franklin Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged High Yield Securities Fund, Franklin California Tax-Free Trust, Franklin Tax-Free Trust, Franklin New York Tax-Free Trust, Franklin Strategic Series, Franklin International Trust, Franklin Managed Trust, Franklin Balance Sheet Investment Fund, Franklin Strategic Mortgage Portfolio, Institutional Fiduciary Trust, Franklin Money Fund, Franklin Federal Money Fund, Franklin Tax Exempt Money Fund, Franklin Real Estate Securities Trust, Franklin Templeton Global Trust, Templeton Variable Products Series Fund, Templeton Real Estate Securities Fund, Templeton Growth Fund, Inc., Templeton Funds, Inc., Templeton Smaller Companies Growth Fund, Inc., Templeton Income Trust, Templeton Global Opportunities Trust, Templeton Institutional Funds, Inc., Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton Developing Markets Trust, Templeton Global Investment Trust, Templeton Variable Annuity Fund, Franklin Templeton Japan Fund. (b) The information required by this Item 29 with respect to each director and officer of Distributors is incorporated by reference to Part B of this N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889) Item 30 Location of Accounts and Records The accounts, books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 are kept by the Registrant or its shareholder services agent, Franklin/Templeton Investor Services, Inc., both of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404. Item 31 Management Services There are no management-related service contracts not discussed in Part A or Part B. Item 32 Undertakings The Registrant hereby undertakes to comply with the information requirement in Item 5A of the Form N-1A by including the required information in the Fund's annual report and to furnish each person to whom a prospectus is delivered a copy of the annual report upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 28th day of February 1995. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A California Limited Partnership) By: Rupert H. Johnson, Jr. * Rupert H. Johnson, Jr. President Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Amendment has been signed below by the following persons in the capacities and on the dates indicated: Rupert H. Johnson, Jr.* Managing General Partner and Rupert H. Johnson, Jr. Principal Executive Officer Dated: February 28, 1995 Frank H. Abbott, III* Managing General Partner Frank H. Abbott, III Dated: February 28, 1995 Harris J. Ashton* Managing General Partner Harris J. Ashton Dated: February 28, 1995 Kenneth V. Domingues* Managing General Partner, Kenneth V. Domingues Tax-Matters Partner Dated: February 28, 1995 Martin L. Flanagan* Principal Financial Officer Martin L. Flanagan Dated: February 28, 1995 S. Joseph Fortunato* Managing General Partner S. Joseph Fortunato Dated: February 28, 1995 David W. Garbellano* Managing General Partner David W. Garbellano Dated: February 28, 1995 Charles B. Johnson* Managing General Partner Charles B. Johnson Dated: February 28, 1995 Charles E. Johnson* Managing General Partner Charles E. Johnson Dated: February 28, 1995 Diomedes Loo-Tam* Principal Accounting Officer Diomedes Loo-Tam Dated: February 28, 1995 Gordon S. Macklin* Managing General Partner Gordon S. Macklin Dated: February 28, 1995 *By Larry L. Greene, Attorney-in-Fact (Pursuant to Power of Attorney filed herewith) EX-99 2 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND REGISTRATION STATEMENT EXHIBITS INDEX EXHIBIT NO. DESCRIPTION LOCATION EX-99.B1(i) Amended and Restated Agreement *** of Limited Partnership dated May 1, 1987, as amended April 28, 1988 and May 1, 1991 EX-99.B2(i) Operating Procedures Attached EX-99.B2(ii) Amendment to By-Laws dated Attached April 26, 1988 EX-99.B5(i) Management Agreement dated Attached May 4, 1987 EX-99.B6(i) Distribution Agreement dated Attached May 4, 1987 EX-99.B6(ii) Amendment to Distribution Attached Agreement dated July 1, 1993 EX-99.B6(iii) Forms of Dealer Agreements * EX-99.B8(i) Custodian Agreement dated Attached April 10, 1987 EX-99.B8(ii) Amendment to Custodian * Agreement dated December 1, 1994 EX-99.B8(iii) Copy of Custodian Agreements * between Registrant and Citibank Delaware EX-99.B10(i) Opinion and Consent of Counsel Attached dated February 21, 1995 EX-99.B11(i) Tax Opinion and Consent dated *** July 7, 1994 EX-99.B11(ii) Consent of Independent Attached Auditors dated February 27, 1995 EX-99.B14(i) Copy of Model Retirement Plan ** EX-99.B15(i) Distribution Plan dated July Attached 1, 1994 EX-99.B16(i) Schedule for Computation of Attached Performance Quotation EX-99.B17(i) Power of Attorney dated Attached February 16, 1995 EX-99.B17(ii) Certificate of Secretary dated Attached February 16, 1995 EX-99.B27(i) Financial Data Schedule Attached *Incorporated by Reference to: Franklin Premier Return Fund ** Incorporated by Reference to: Age High Income Fund, Inc. ***Incorporated by Reference to: Franklin Tax-Advantaged High Yield Securities Fund EX-99 3 OPERATING PROCEDURES for the regulation and management, except as otherwise provided by statute or the Agreement of Limited Partnership. of the FRANKLIN TAX-ADVANTAGED U S. GOVERNMENT SECURITIES FUND (a California limited partnership) TABLE OF CONTENTS ARTICLE I Committees 1. Committees of Managing General Partners 2. Meetings and Action of Committees ARTICLE II Officers 1. Officers 2. Election of Officers 3. Subordinate Officers 4. Removal and Resignation of Officers 5. Vacancies in Offices 6. Chairman 7. President 8. Vice Presidents 9. Secretary 10. Principal Financial Officer 11. Principal Accounting Officer ARTICLE III Indemnification of Employees and Other Agents; Insurance 1. Agents, Proceedings and Expenses 2. Actions Other than by Trust 3. Actions by the Trust 4. Exclusion of Indemnification 5. Successful Defense by Agent 6. Required Approval 7. Authorization of Indemnification 8. Advance of Expenses 9. Other Contractual Rights 10. Limitations 11. Insurance 12. Fiduciaries of Employee Benefit Plan ARTICLE IV Records and Reports 1. Maintenance and Inspection of By-Laws 2. Maintenance and Inspection of Other Records 3. Inspection by Managing General Partners ARTICLE V General Matters 1. Checks, Drafts, Evidence of Indebtedness 2. Contracts and Instruments; How Executed 3. Representation of Shares of Other Entities 4. Amendment of Operating Procedures OPERATING PROCEDURES OF THE FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (a California limited partnership) ARTICLE I COMMITTEES Section 1. COMMITTEES OF MANAGING GENERAL PARTNERS. The Managing General Partners may by resolution adopted by a majority of the authorized number of Managing General Partners designate one (1) or more committees, each consisting of two (2) or more Managing General Partners, to serve at the pleasure of the Managing General Partners. The Managing General Partners may designate one or more Managing General Partners as alternate members of any committee who may replace any absent member at any meeting of the committee. Any committee to the extent provided in the resolution of the Managing General Partners, shall have the authority of the Managing General Partners, except with respect to: (a) the approval of any action which under applicable law or under the Agreement of Limited Partnership also requires approval of the partners as a whole or approval of the outstanding shares, or requires approval by a majority of all the Managing General Partners or certain members of the Managing General Partners; (b) the filling of vacancies on any committee; (c) the fixing of compensation of the Managing General Partners for serving as Managing General Partners or on any committee; (d) the amendment or repeal of the Agreement of Limited Partnership or of the Operating Procedures or the adoption of new Operating Procedures; (e) the amendment or repeal of any resolution of the Managing General Partners which by its express terms is not so amendable or repealable; or (f) the appointment of any other committees of the Managing General Partners or the members of these committees. Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, held and taken in accordance with the provisions of the Agreement of Limited Partnership as if such meetings were meetings of the Managing General Partners, with such changes in the context thereof as are necessary to substitute the committee and its members for the Managing General Partners, except that the time of regular meetings of committees may be determined either by resolution of the Managing General Partners or by resolution of the committee. Special meetings of committees may also be called by resolution of the Managing General Partners. Alternate members shall be given notice of meetings of committees and shall have the right to attend all meetings of committees. The Managing General Partners may adopt rules for the government of any committee not inconsistent with the provisions of these Operating Procedures or the Agreement of Limited Partnership. ARTICLE II OFFICERS Section 1. OFFICERS. The officers of the Partnership shall be a president, a secretary, a principal financial officer and a principal accounting officer. The Partnership may also have, at the discretion of the Managing General Partners, a chairman, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any number of offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the Partnership, except such officers as may appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by the Managing General Partners, and each shall serve at the pleasure of the Managing General Partners, subject to the rights, if any, of an officer under any contract of employment. Section 3. SUBORDINATE OFFICERS. The Managing General Partners may appoint and may empower the president to appoint such other officers as the business of the Partnership may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Operating Procedures or as the Managing General Partners may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Managing General Partners at any regular or special meeting of the Managing General Partners or by the president or by such other officer upon whom such power of removal may be conferred by the Managing General Partners. Any officer may resign at any time by giving written notice to the Partnership. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Partnership under any contract to which the officer is a party. Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or other cause shall be filled in the manner prescribed in these Operating Procedures for regular appointment to that office. The president may make temporary appointments to a vacant office pending action by the Managing General Partners. Section 6. CHAIRMAN. The chairman, if such an officer is elected, shall be elected from among the Managing General Partners and shall, if present, preside at meetings of the Managing General Partners and exercise and perform such other powers and duties as may be from time to time assigned to her by the Managing General Partners or prescribed by the Operating Procedures. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Managing General Partners to the chairman, if there be such an officer, the president shall be the president of the Partnership and shall, subject to the control of the Managing General Partners, have general supervision, direction and control of the business and the officers of the Partnership. He shall preside at all meetings of the shareholders and in the absence of the chairman or if there be none, at all meetings of the Managing General Partners. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Managing General Partners or these Operating Procedures. Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Managing General Partners or if not ranked, any vice president shall perform all the duties of the president and when so acting shall have all powers of and be subject to all the restrictions upon the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Managing General Partners or the president or the chairman or by these Operating Procedures. Section 9. SECRETARY. The secretary shall keep or cause to be kept at the principal executive office of the Partnership or such other place as the Managing General Partners may direct a book of minutes of all meetings and actions of Managing General Partners, committees of Managing General Partners and shareholders with the time and place of holding, whether regular or special, and if special, how authorized, the notice given, the names of those present at Managing General Partners' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep or cause to be kept at the principal executive office of the Partnership in California a Partnership List, which may be in the form of a share register or a duplicate share register, showing in alphabetical order the names of all shareholders and their last known addresses, their capital contribution and share in the profits and losses of the Partnership and the number and classes of shares held by each. The General Partners shall be identified as such on such Partnership List. A similar or duplicate record may also be kept at the office of the Partnership's transfer agent or registrar. The Secretary shall also keep or cause to be kept at the principal executive office of the Partnership in California such other books and records as are required to be kept there by the Agreement of Limited Partnership. The secretary shall give or cause to be given notice of all meetings of the shareholders and of the Managing General Partners and of committees of the Managing General Partners required to be given by the Agreement of Limited Partnership, these Operating Procedures or by applicable law and shall have such other powers and perform such other duties as may be prescribed by the Managing General Partners or by these Operating Procedures. Section 10. PRINCIPAL FINANCIAL OFFICER. The principal financial officer or treasurer shall be the chief financial officer of the Partnership and shall deposit all monies and other valuables in the name and to the credit of the Partnership with such depositaries as may be designated by the Managing General Partners. He shall disburse the funds of the Partnership as may be ordered by the Managing General Partners, shall render to the president and Managing General Partners, whenever they request it, an account of all of his transactions as principal financial officer and of the financial condition of the Partnership and shall have other powers and perform such other duties as may be prescribed by the Managing General Partners or these Operating Procedures. Section 11. PRINCIPAL ACCOUNTING OFFICER. The principal accounting officer shall keep and maintain or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the Partnership, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, shares, and records of the book and tax capital accounts of all partners. The books of account shall at all reasonable times be open to inspection by any Managing General Partner and, to the extent provided in the Agreement of Limited Partnership, by any partner. He shall render to the president and the Managing General Partners, whenever they request it, an accounting of the Partnership and shall have other powers and perform such other duties as may be prescribed by the Managing General Partners or these Operating Procedures. ARTICLE III INDEMNIFICATION OF EMPLOYEES AND OTHER AGENTS; INSURANCE Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this Article, "agent" means any person who is or was an employee or other agent of this Partnership; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes without limitation attorney's fees and any expenses of establishing a right to indemnification under this Article. Section 2. ACTIONS OTHER THAN BY TRUST. This Partnership shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Partnership) by reason of the fact that such person is or was an agent of this Partnership, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed: (a) in the case of conduct in his official capacity as a Partnership of the Partnership, that his conduct was in the Partnership's best interests and (b) in all other cases, that his conduct was at least not opposed to the Partnership's best interests and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Partnership or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. ACTIONS BY THE TRUST. This Partnership shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of this Partnership to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Partnership, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Partnership and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the agent's office with this Partnership. No indemnification shall be made under Sections 2 or 3 of this Article: (a) In respect of any claim, issue, or matter as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or (b) In respect of any claim, issue or matter as to which that person shall have been adjudged to be liable in the performance of that person's duty to this Partnership, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the circumstances of the case, that person was not liable by reason of the disabling conduct set forth in the preceding paragraph and is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; or (c) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained. Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this Partnership has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 of this Article or in defense of any claim. issue or matter therein, before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Managing General Partners, including a majority who are disinterested, non-party Managing General Partners, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article. Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Partnership only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by: (a) A majority vote of a quorum consisting of Managing General Partners who are not parties to the proceeding and are not interested persons of the Partnership (as defined in the Investment Company Act of 1940); or (b) A written opinion by an independent legal counsel. Section 7. AUTHORIZATION OF INDEMNIFICATION AND DETERMINATION OF REASONABLENESS. An authorization of indemnification and determination as to reasonableness of expenses must be made in the same manner as set forth in Section 6 of this Article for the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by independent legal counsel, authorization of indemnification and determination as to reasonableness of expenses must be made by a majority vote of a quorum consisting of Managing General Partners who, at the time of the vote, are not named defendants or respondents in the proceeding; or if such a quorum cannot be obtained, by a majority vote of a committee of the Managing General Partners, designated to act in the matter by a majority vote of all Managing General Partners, consisting solely of two or more Managing General Partners who, at the time of the vote, are not named defendants or respondents in the proceeding. Section 8. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Partnership before the final disposition of the proceeding (a) receipt of a written affirmation by the Managing General Partner of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article and a written undertaking by or on behalf of the agent, such undertaking being an unlimited general obligation to repay the amount of the advance if it is ultimately determined that he has not met those requirements, and (b) a determination that the facts then known to those making the determination would not preclude indemnification under this Article. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible. Section 9. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than Managing General Partners and officers of this Partnership may be entitled by contract or otherwise. Section 10. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears: (a) That it would be inconsistent with a provision of the Agreement of Limited Partnership, a resolution of the shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 11. INSURANCE. Upon and in the event of a determination by the Managing General Partners of this Partnership to purchase such insurance, this Partnership shall purchase and maintain insurance on behalf of any Managing General Partner, officer or agent of this Partnership against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, but only to the extent that this Partnership would have the power to indemnify such person against that liability under the provisions of the Agreement of Limited Partnership or this Article. Section 12. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any Managing General Partner, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Partnership as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a Managing General Partner, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article. ARTICLE IV RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF BY-LAWS. The Partnership shall keep at its principal executive office in California the original or a copy of these Operating Procedures as amended to date, which shall be open to inspection by the partners at all reasonable times during office hours. Section 2. MAINTENANCE AND INSPECTION OF OTHER RECORDS. Except the books and records required to be maintained by the Agreement of Limited Partnership and applicable law at the Partnership's principal executive offices in California, the books and records and minutes of proceedings of the shareholders and the Managing General Partners and any committees of the Managing General Partners shall be kept at such place or places designated by the Managing General Partners or in the absence of such designation, at the principal executive office of the Partnership in California. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The books and records shall be open to inspection by partners as set forth in the Agreement of Limited Partnership. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Section 3. INSPECTION BY MANAGING GENERAL PARTNERS. Every Managing General Partner shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the Partnership. This inspection by a Managing General Partner may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. ARTICLE V GENERAL MATTERS Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Partnership shall be signed or endorsed in such manner and by such person or persons as shall be designated from time to time in accordance with the resolution of the Managing General Partners. Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Managing General Partners, except as otherwise provided in these Operating Procedures, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Partnership and this authority may be general or confined to specific instances; and unless so authorized or ratified by the Managing General Partners or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the Partnership by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 3. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The chairman, the president or any vice president or any other person authorized by resolution of the Managing General Partners or by any of the foregoing designated officers, is authorized to vote or represent on behalf of the Partnership any and all shares of any corporation, partnership, trusts, or other entities, foreign or domestic, standing in the name of the Partnership. The authority granted may be exercised in person or by a proxy duly executed by such designated person. Section 4. AMENDMENT OF OPERATING PROCEDURES. These Operating Procedures may be amended or repealed by the affirmative vote or written consent of a majority of the Managing General Partners, except as otherwise provided by applicable law or by the Agreement of Limited Partnership. The attached Agreement of Limited Partnership reflects the amendments thereto duly adopted by the Managing General Partners on April 23, 1991. May 1, 1991 /s/ Charles B. Johnson Charles B. Johnson, Managing General Partner on behalf of all Partners pursuant to Power of Attorney EX-99 4 CERTIFICATE OF SECRETARY I, Deborah R. Gatzek, Secretary of Franklin Tax-Advantaged U.S. Government Securities Fund (the "Fund"), a limited partnership organized under the laws of the State of California, do hereby certify that the following resolution was adopted by a majority of the managing general partners present at a meeting held at the offices of the Fund at 777 Mariners Island Boulevard, San Mateo, California, on April 26, 1988. RESOLVED, that Article III, Section 6 of the By-Laws of the Fund be amended to read: Section 6. ANNUAL MEETING. The Board of Directors shall hold a regular meeting on the month following the fiscal year end of the Fund, for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required. I declare under penalty of perjury that the matters set forth in this certificate are true and correct of my own knowledge. /s/ Deborah R. Gatzek Dated: 08/02/88 Deborah R. Gatzek Secretary EX-99 5 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT made between FRANKLIN TAX- ADVANTAGED U.S. GOVERNMENT SECURITIES FUND, a California limited partnership, hereinafter called the "Fund", and FRANKLIN ADVISERS, INC., a California corporation, hereinafter called the "Manager." WHEREAS, the Fund has been organized and intends to operate as an investment company registered under the Investment Company Act of 1940 (the "Act") for the purpose of investing and reinvesting its assets in securities as set forth in its Agreement of Limited Partnership, its Operating Procedures, and its Registration Statement under the Act and the Securities Act of 1933, all as may be amended and supplemented; and the Fund desires to avail itself of the services, information, advice, assistance and facilities of an investment manager and to have an investment manager perform various management, statistical, research, investment advisory and other services for the Fund; and, WHEREAS, the Manager is registered as an investment adviser under the Investment Advisers Act of 1940, is engaged in the business of rendering management investment advisory, counselling and supervisory services to investment companies and other investment counselling clients and desires to provide these services to the Fund. NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is mutually agreed as follows: 1. Employment of the Manager. The Fund hereby employs the Manager to manage the investment and reinvestment of the Fund's assets and to administer its affairs, subject to the direction and control of the Managing General Partners of the Fund, for the period and on the terms hereinafter set forth. The Manager hereby accepts such employment and agrees during such period to render the services and to assume the obligations herein set forth for the compensation herein provided. The Manager shall for all purposes herein be deemed to be an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. 2. Obligations of and Services to be Provided by the Manager. The Manager undertakes to provide the services hereinafter set forth and to assume the following obligations: A. Administrative Services. The Manager shall furnish to the Fund adequate (i) office space, which may be space within the offices of the Manager or in such other place as may be agreed upon from time to time, (ii) office furnishings, facilities and equipment as may be reasonably required for managing the affairs and conducting the business of the Fund, including conducting correspondence and other communications with the shareholders of the Fund, maintaining all internal bookkeeping, accounting and auditing services and records in connection with the Fund's investment and business activities. The Manager shall employ or provide and compensate the executive, secretarial and clerical personnel necessary to provide such services. The Manager shall also compensate all officers and employees of the Fund who are officers or employees of the Manager or its affiliates. B. Investment Management Services. (a) The Manager shall manage the Fund's assets subject to and in accordance with the respective investment objectives and policies of the Fund and any directions which the Fund's Managing General Partners may issue from time to time. In respect of the foregoing, the Manager shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised. The Manager shall render regular reports to the Fund, at regular meetings of its Managing General Partners and at such other times as may be reasonably requested by the Fund's Managing General Partners, of (i) the decisions which it has made with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions and (iii) the extent to which those decisions have been implemented. (b) The Manager, subject to and in accordance with any directions which the Fund's Managing General Partners may issue from time to time, shall place, in the name of the Fund, orders for the execution of the Fund's securities transactions. When placing such orders the Manager shall seek to obtain the best net price and execution for the Fund, but this requirement shall not be deemed to obligate the Manager to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Fund and the Manager in accord with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Managing General Partners determine that the Fund will benefit, directly or indirectly, by doing so, the Manager may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by that broker. Accordingly, the Fund and the Manager agree that the Manager shall select brokers for the execution of the Fund's transactions from among: (i) Those brokers and dealers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services; (ii) Those brokers and dealers who supply research, statistical and other data to the Manager or its affiliates which the Manager or its affiliates may lawfully and appropriately use in their investment advisory capacities, which relate directly to securities, actual or potential, of the Fund, or which place the Manager in a better position to make decisions in connection with the management of the Fund's assets and securities, whether or not such data may also be useful to the Manager and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required. (c) When the Manager has determined that the Fund should tender securities pursuant to a "tender offer solicitation," the Manager shall designate Franklin Distributors, Inc. ("Distributors") as the "tendering dealer" so long as it is legally permissible for the Manager to do so, and act in such capacity under the Federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Distributors shall not be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Manager or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Fund shall enter into an agreement with the Manager and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees. (d) The Manager shall render regular reports to the Fund, not more frequently than quarterly, of how much total brokerage business has been placed by the Manager with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished. (e) The Manager agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Manager's paramount duty to obtain the best net price and execution for the Fund C. Provision of Information Necessary for Preparation of Securities Registration Statements, Amendments and Other Materials. The Manager, its officers and employees will make available and provide accounting and statistical information required by the Fund in the preparation of registration statements, reports and other documents required by Federal, state and foreign securities laws and tax laws and with such information as the Fund may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the offering of the Fund's shares. D. Other Obligations and Services. The Manager shall make its officers and employees available to the Managing General Partners and officers of the Fund for consultation and discussions regarding the administration and management of the Fund and its investment activities. 3. Expenses of the Funds. It is understood that the Fund will pay all of its own expenses other than those expressly assumed by the Manager herein, which expenses payable by the Fund shall include: A. Fees to the Manager as provided herein; B. Expenses of all audits by independent public accountants; C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder recordkeeping services, including the expenses of issue, repurchase or redemption of shares; D. Expenses of obtaining quotations for calculating the value of the Fund's net assets; E. Salaries and other compensations of officers of the Fund who are not officers, directors, stockholders or employees of the Manager or its affiliates; F. Taxes levied against the Fund (to the extent such obligations are not the obligations of the Fund's shareholders); G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Fund; H. Costs, including the interest expense, of borrowing money; I. Costs incident to meetings of Managing General Partners and shareholders of the Fund, reports to the Fund's shareholders, the filing of reports with regulatory bodies and the maintenance of the Fund's legal existence; J. Legal fees, including the legal fees related to the registration and continued qualification of the Fund's shares for sale: K. Fees and expenses of the Managing General Partners who are not directors, officers, employees or stockholders of the Manager or any of its affiliates; L. Costs and expense of registering and maintaining the registration of the Fund and its shares under the applicable Federal, state and foreign securities laws; including the printing and mailing of prospectuses to its shareholders; M. Trade association dues; and N. The Fund's pro rata portion of fidelity bond insurance premiums. 4. Compensation of the Manager. The Fund shall pay a management fee in cash to the Manager based upon a percentage of the value of the Fund's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Manager, payable at the request of the Manager. A. For purposes of calculating such fee, the value of the net assets of the Fund shall be determined in the same manner as the Fund uses the compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Fund's current prospectus and statement of additional information. B. The rate of the management fee payable by the Fund shall be as follows, based on the value of the Fund's net assets as of the close of business on the last business day of each month: 5/96 of 1% of the value of the Fund's net assets up to and including $100,000,000; 1/24 of 1% of the value of the Fund's net assets over $100,000,000 up to and including $250,000,000; and 9/240 of 1% of the value of the Fund's net assets in excess of $250,000,000. C. The management fee payable by the Fund shall be reduced or eliminated (i) to the extent that Distributors have actually received cash payments of tender offer solicitation fees less certain costs and expenses incurred in connection therewith as set forth in paragraph 2(B)(c) of this Agreement, or (ii) to the extent required by applicable state law or regulation in any state where shares of the Fund are qualified for sale. 5. Activities of the Manager. The services of the Manager to the Fund hereunder are not to be deemed exclusive, and the Manager and any of its affiliates shall be free to render similar services to others. Subject to and in accordance with the Agreement of Limited Partnership and Operating Procedures of the Fund and Section 10(a) of the Act, it is understood that Managing General Partners, officers, agents and shareholders of the Fund are or may be interested in the Manager or its affiliates as directors, officers, agents or stockholders; that directors, officers, agents or stockholders of the Manager or its affiliates are or may be interested in the Fund as Managing General Partners, officers, agents, shareholders or otherwise; that the Manager or its affiliates may be interested in the Fund as Non- Managing General Partners, shareholders, or otherwise; and that the effect of any such interests shall be governed by said Agreement of Limited Partnership, Operating Procedures and the Act. 6. Liabilities of the Manager A. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of Manager, the Manager shall not be subject to liability to the Fund or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Fund. B. Notwithstanding the foregoing, the Manager agrees to reimburse the Fund for any and all costs, expenses, and counsel fees reasonably incurred by the Fund in the preparation, printing and distribution of proxy statements, amendments to its Registration Statement, holdings of meetings of its shareholders or Managing General Partners, the conduct of factual investigations, any legal or administrative proceedings (including any applications for rulings, exemptions or determinations by the Internal Revenue Service or the Securities and Exchange Commission) which the Fund incurs as the result of action or inaction of the Manager or any of its affiliates or any of their officers, directors, employees or stockholders where the action or inaction necessitating such expenditures (i) is directly or indirectly related to any transactions or proposed transaction in the stock or control of the Manager or its affiliates (or litigation related to any pending or proposed or future transaction in such shares or control) which shall have been undertaken without the prior, express approval of the Fund's Managing General Partners; or, (ii) is within the control of the Manager or any of its affiliates or any of their officers, directors, employees or stockholders. The Manager shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to reimburse the Fund for any expenditures related to the institution of an administrative proceeding or civil litigation by the Fund or a shareholder of the Fund seeking to recover all or a portion of the proceeds derived by any stockholder of the Manager or any of its affiliates from the sale of his shares of the Manager, or similar matters. So long as this Agreement is in effect, the Manager shall pay to the Fund the amount due for expenses subject to this Subparagraph 6(B) within 30 days after a bill or statement has been received by the Manager therefor. This provision shall not be deemed to be waiver of any claim the Fund may have or may assert against the Manager or others for costs, expenses or damages heretofore incurred by the Fund or for costs, expenses or damages the Fund may hereafter incur which are not reimbursable to it hereunder C. No provision of this Agreement shall be construed to protect any Managing General Partner or officer of the Fund, or director or officer of the Manager, from liability in violation of Sections 17(h) and (i) of the Act. 7. Renewal and Termination. A. This Agreement shall become effective on the date written below and shall continue in effect for a period of two (2) years unless sooner terminated as provided below. The Agreement is renewable annually thereafter for successive periods not to exceed one (1) year (i) by a vote of a majority of the outstanding voting securities of the Fund or by a vote of the Managing General partners of the Fund, and (ii) by a vote of a majority of the Managing General Partners of the Fund who are not parties to the Agreement (other than as Managing General Partners of the Fund), cast in person at a meeting called for the purpose of voting on the Agreement. B. This Agreement: (i) may at any time be terminated without the payment of any penalty either by vote of the Managing General Partners of the Fund or by vote of a majority of the outstanding voting securities of the Fund, on 60 days' written notice to the Manager; (ii) shall immediately terminate in the event of its assignment; and (iii) may be terminated by the Manager on 60 days' written notice to the Fund. C. As used in this Paragraph and other Paragraphs of this Agreement the terms "assignment." "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for any such terms in the Act. D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party. 8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 10. Limitation of Liability. The Fund's obligations hereunder shall be limited to the Fund and the assets of the Fund and no party shall seek satisfaction of any such obligation from any limited partner, officer, employee or agent of the Fund. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the 4th day of May, 1987. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND /s/ Charles B. Johnson Charles B. Johnson FRANKLIN ADVISERS, INC. /s/ Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. EX-99 6 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A California Limited Partnership) 777 Mariners Island Blvd. San Mateo, California 94402 Franklin Distributors, Inc. 777 Mariners Island Blvd. San Mateo, California 94402 Re: Distribution Agreement Gentlemen: We are a California limited partnership operating as an open-end management investment company. As such, our partnership (referred to herein as the "Fund") is registered under the Investment Company Act of 1940, (the "1940 Act"), and its shares of partnership interest (the "Shares") are registered under the Securities Act of 1933 (the "1933 Act"). We desire to begin issuing our authorized but unissued Shares to authorized persons in accordance with applicable Federal and State securities laws. You have informed us that your company is registered as a broker- dealer under the provisions of the Securities Exchange Act of 1934 and that your company is a member of the National Association of Securities Dealers, Inc. ("NASD"). You have indicated your desire to act as the exclusive selling agent and distributor for the Shares. We have been authorized to execute and deliver this Agreement to you by a resolution of our Managing General Partners passed at a meeting at which a majority of our Managing General Partners, including a majority who are not otherwise interested persons of the Fund and who are not interested persons of our investment adviser, its related organizations or with you or your related organizations, were present and voted in favor of the said resolution approving this Agreement. 1. Appointment of Underwriter. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive sales agent for our Shares (except for sales made directly by the Fund without sales charge) and agree that we will deliver such Shares as you may sell. You agree to use your best efforts to promote the sale of Shares, but are not obligated to sell any specific number of Shares. 2. Independent Contractor. You will undertake and discharge your obligations hereunder as an independent contractor and shall have no authority or power to obligate or bind us by your actions, conduct or contracts except that you are authorized to accept orders for the purchase or repurchase of Shares as our agent. You may appoint sub-agents or distribute through dealers or otherwise as you may determine from time to time, but this Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale or repurchase on our behalf or otherwise act as our agent for any purpose. You may allow such sub-agents or dealers such commissions or discounts not exceeding the total sales commission as you shall deem advisable so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws. 3. Offering Price. The Shares of the Fund shall be offered for sale at a price equivalent to their respective net asset value plus a variable percentage of the public offering price as sales commission. On each business day on which the New York Stock Exchange is open for business, we will furnish you with the net asset value of the Shares which shall be determined in accordance with our then effective prospectus. All Shares will be sold in the manner set forth in our then effective prospectus. 4. Sales Commission. You shall be entitled to charge a sales commission on the sale of our Shares in the amount set forth in our then effective prospectus. Such commission (subject to any quantity or other discounts or eliminations of commission as set forth in our then current effective prospectus) shall be an amount mutually agreed upon between us and equal to the difference between the net asset value and the public offering price of such Shares. 5. Terms and Conditions of Sales. Shares of the Fund shall be offered for sale only in those jurisdictions where they have been properly registered or are exempt from registration, and only to those groups of people which the Managing General Partners may from time to time determine to be eligible to purchase such Shares, and subject to the terms and requirements as set forth in our current prospectus. 6. Payment of Shares. At or prior to the time of delivery of any of our Shares you will pay or cause to be paid to our Custodian or its successor, for our account, an amount in cash equal to the net asset value of such Shares. In the event that you pay for Shares sold by you prior to your receipt of payment from purchasers you are authorized to reimburse yourself for the net asset value of such Shares from the offering price of such Shares when received by you. 7. Purchases for Your Own Account. You shall not purchase our Shares for your own account for purposes of resale to the public, but you may purchase Shares for your own investment account upon your written assurance that the purchase is for investment purposes and that the Shares will not be resold except through redemption by us. 8. Sale of Shares to Affiliates. You may sell our Shares at net asset value to certain of your and our affiliated persons pursuant to the applicable provisions of the Federal Securities Statutes and Rules or Regulations thereunder (the "Rules and Regulations"), as amended from time to time. 9. Allocation of Expenses. We will pay the expenses: (a) Of the preparation of the audited and certified financial statements of the Fund to be included in any Post- Effective Amendments ("Amendments") to our Registration Statement under the 1933 Act or 1940 Act, including the prospectus and statement of additional information included therein; (b) Of the preparation, including legal fees, and of printing all Amendments or supplements filed with the Securities and Exchange Commission including the copies of the prospectuses and statements of additional information included in the Amendments and the first 10 copies of the definitive prospectuses and statements of additional information or supplements thereto, other than those necessitated by your (including your "Parent's") activities or Rules and Regulations related to your activities where such Amendments or supplements result in expenses which we would not otherwise have incurred; (c) Of the preparation, printing and distribution of any reports or communications which we send to our existing shareholders; and (d) Of filing and other fees to Federal and State securities regulatory authorities necessary to continue offering the Shares of the Fund. You will pay the expenses: (a) Of printing the copies of the prospectuses and any supplements thereto and statements of additional information (which are necessary to continue to offer our Shares); (b) Of the preparation, excluding legal fees, and printing of all Amendments and supplements to our prospectuses and statements of additional information if the Amendment or supplement arises from your (including your "Parent's") activities or Rules and Regulations related to your activities and those expenses which would not otherwise have been incurred by us; (c) Of printing additional copies, for use by you as sales literature, of reports or other communications which we have prepared for distribution to our existing shareholders; and (d) Incurred by you in advertising, promoting and selling our Shares. 10. Furnishing of Information. We will furnish to you such information with respect to the Fund and its Shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained when so signed will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our Shares for sale to the public under the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will furnish you with annual audited financial statements of our books and accounts certified by independent public accountants, with semi-annual financial statements prepared by us, and, from time to time, with such additional information regarding our financial condition as you may reasonably request. 11. Conduct of Business. Other than our currently effective prospectus and statement of additional information, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of Federal and State securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such materials prior to their use and no such material shall be published if we shall reasonably and promptly object. You shall comply with the applicable Federal and State laws and regulations where our Shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Rules of Fair Practice of the NASD. 12. Redemption or Repurchase Within Seven Days. If Shares are tendered to us for redemption or repurchase by us within seven business days after your acceptance of the original purchase order for such Shares, you will immediately refund to us the full sales commission (net of allowances to dealers or brokers) allowed to you on the original sale, and will promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of the balance of sales commissions reallowed by you. We shall notify you of such tender for redemption within 10 days of the day on which notice of such tender for redemption is received by us. 13. Other Activities. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares. 14. Term of Agreement. This Agreement shall become effective on the date of its execution, and shall remain in effect for a period of one (1) year. The Agreement is renewable annually thereafter for successive periods not to exceed one year (i) by a vote of a majority of the outstanding voting securities of the Fund or by a vote of the Managing General Partners of the Fund, and (ii) by a vote of a majority of the Managing General Partners of the Fund who are not parties to the Agreement or interested persons of any parties to the Agreement (other than as Managing General Partners of the Fund), cast in person at a meeting called for the purpose of voting on the Agreement. This Agreement may at any time be terminated by the Fund without the payment of any penalty, (i) either by vote of the Managing General Partners of the Fund or by vote of a majority of the outstanding voting securities of the Fund, on ninety (90) days' written notice to you; or (ii) by you on ninety days' written notice to the Fund; and shall immediately terminate in the event of its assignment. 15. Suspension of Sales. We reserve the right at all times to suspend or limit the public offering of the Shares of the Fund upon two (2) days' written notice to you. 16. Distribution Plan. A. The provisions set forth in this paragraph 16 (hereinafter referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the 1940 Act by the Fund, having been approved by a majority of the Managing General Partners who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plan (the "non-interested Managing General Partners"), cast in person at a meeting called for the purpose of voting on such Plan. The Managing General Partners concluded that the compensation to be paid to the Manager of the Fund was fair and not excessive, and that due solely to the uncertainty that may exist-from time to time with respect to whether payments to be made by the Fund or the Manager to other firms may be deemed to constitute distribution expenses, it was determined that adoption of the Plan would be prudent and in the best interests of the Fund and its shareholders. The Managing General Partners' approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. The Plan has also been approved by a vote of at least a majority of the Fund's outstanding voting securities. B. No additional payments are to be made by the Fund as a result of the Plan other than the compensation the Fund is otherwise obligated to make (i) to the Manager pursuant to paragraph 4 of the Management Agreement between the Fund and Franklin Advisers, Inc. and (ii) to its Shareholder Servicing Agent pursuant to their respective Agreements as in effect at any time, including any reimbursement for costs the Fund is obligated to make under said agreements. Notwithstanding subparagraphs (i) and (ii) above, the Plan recognizes that the Fund may also make payments in the ordinary course of its business and to the extent any such payments by the Fund or to or by the Manager, the Fund's Shareholder Servicing Agent or other parties on behalf of the Fund, the Manager or the Shareholder Servicing Agent are deemed (e.g. by a court of law) to be payments for the financing of any activity primarily intended to result in the sale of Shares issued by the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to be made pursuant to the Plan as set forth herein. Such costs, the payment of which are intended to be within the scope of the Plan, but only to the extent they are deemed to be payments for an activity primarily intended to result in the sale of Shares issued by the Fund, may include, but not necessarily be limited to, the following: (a) the costs of the preparation, printing and mailing of all required reports and notices to shareholders; (b) the costs of the preparation, printing and mailing or other dissemination of all prospectuses (including statements of additional information); (c) the costs of the preparation, printing and mailing of any proxy statements and proxies; (d) all legal and accounting fees relating to the preparation of any such reports, prospectuses, statements of additional information, proxies and proxy statements; (e) all fees and expenses relating to the qualification of the Fund and/or its Shares under the securities or "Blue Sky" laws of any jurisdiction; (f) all fees under the 1933 Act and the 1940 Act, including fees in connection with any application for exemption relating to or directed toward the sale of the Shares of the Fund; (g) all fees and assessments of the Investment Company Institute or other trade or any successor organization, irrespective of whether some of its activities are designed to provide sales assistance; (h) all costs of the preparation and mailing of confirmations of Shares sold or redeemed, and reports of Share balances; (i) all costs of responding to telephone or mail inquiries of investors or prospective investors; and (j) payments to dealers, financial institutions, advisers, or other firms, any one of whom may receive monies in respect of the Shares of the Fund 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 the Fund; (ii) assisting clients in changing distribution options, account designations and addresses; (iii) performing sub-accounting; (iv) establishing and maintaining shareholder accounts and records; (v) processing purchases and redemption transactions; (vi) automatic investment in Fund Shares of client cash account balances; (vii) 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; (viii) arranging for bank transfers; and (ix) such other services as the Fund may request, to the extent such firms are permitted by applicable statute, rule or redemption to render such services. C. Notwithstanding any of the foregoing, while the Plan is in effect, the following terms and provisions will apply: (a) You shall report in writing to the Managing General Partners of the Fund at least quarterly on the amounts and purpose of payments for any of the activities in subparagraph B of this paragraph 16 and shall furnish the Managing General Partners with such other information as the Managing General Partners may reasonably request in connection with such payments in order to enable the Managing General Partners to make an informed determination of whether the Plan should be continued. (b) The Plan shall continue in effect for a period of more than one year from the date written below only so long as such continuance is specifically approved at least annually by the Fund's Managing General Partners, including the non-interested Managing General Partners, cast in person at a meeting called for the purpose of voting on the Plan. (c) The Plan may be terminated at any time by vote of a majority of the non-interested Managing General Partners or by vote of a majority of the Fund's outstanding voting securities on not more than sixty (60) days' written notice to any other party to the Plan, and shall terminate automatically in the event of any act that constitutes an assignment of this Distribution Agreement or the Management Agreement. (d) The Plan may not be amended to increase materially the amount deemed to be spent for distribution without approval by the Fund's shareholders, and all material amendments to the Plan shall be approved by the non-interested Managing General Partners cast in person at a meeting called for the purpose of voting on such amendment. (e) So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Managing General Partners shall be committed to the discretion of such non-interested Managing General Partners. 17. Miscellaneous. This Agreement shall be subject to the laws of the State of California and shall be interpreted and construed to further promote the operation of the Fund as an open-end investment company. As used herein the terms "Net Asset Value", "Offering Price", "Investment Company", "Open-End Investment Company", "Assignment", "Principal Underwriter", "Interested Person", "Parents", "Affiliated Person", and "Majority of the Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder. Nothing herein shall be deemed to protect you against any liability to us or to our securities holders to which you would otherwise be subject by reason of wilful misfeasance, bad faith or gross negligence in the performance of your duties hereunder, or by reason of your reckless disregard of your obligations and duties hereunder. If the foregoing meets with your approval, please acknowledge your acceptance by signing each of the enclosed copies, whereupon this will become a binding agreement as of the date set forth below. Very truly yours, FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND (A California Limited Partnership) /s/ Charles B. Johnson Managing General Partner Accepted: FRANKLIN DISTRIBUTORS , INC. /s/ Rupert H. Johnson, Jr. Senior Vice President DATED: May 4, 1987 EX-99 7 Franklin Tax-Advantaged U.S. Government Securities Fund Amendment to Distribution Agreement WHEREAS, a majority of the Managing General Partners of Franklin Tax-Advantaged U.S. Government Securities Fund (the "Fund"), including a majority of those Managing General Partners who are not interested persons of the Fund and who are not interested persons of the Fund's investment adviser or its related organizations, have approved certain amendments to the Distribution Agreement between the Fund and Franklin Distributors, Inc. (now known as Franklin/Templeton Distributors, Inc.") ("Distributors"); NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: 1) Section 16B of the Distribution Agreement is hereby amended to read as follows: In addition to the payments which the Fund is otherwise obligated to make (i) to the Manager pursuant to paragraph 4 of the Management Agreement between the Fund and Franklin Advisers, Inc. and (ii) to its Shareholder Servicing Agent pursuant to their respective Agreements as in effect at any time, including any reimbursement for costs the Fund is obligated to make under said agreements, to the extent that you, the fund, the Manager, or other parties on your behalf or on behalf of the Fund, or the Manager make payments that are deemed to be payments for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. The costs and activities, the payment of which are intended to be within the scope of the plan, but only to the extent they are deemed to be payments for activities primarily intended to result in the sale of shares issued by the Fund, shall include, but not necessarily be 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 Fund; (b) the costs of preparing 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 Fund shares; (e) all costs of preparing and mailing 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; (g) payments to dealers, financial institutions, advisers, or other firms, any one of whom may receive monies in respect to the 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 the 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 Fund may require, to the extent such firms are permitted by applicable statute, rule or regulation to render such services; and (h) a prorated portion of your overhead expenses attributable to the distribution of the Fund's shares, including leases, communications, salaries, training, supplies, photocopying, and any other category of your 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 Plan, plus any other payments made pursuant to the 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) 2) Section 16c. (c) is hereby amended to read as follows: (c) The Plan may be terminated at any time without penalty by vote of a majority of the non-interested General Partners or by a vote of A majority of the Fund's outstanding voting securities on not more than sixty (60) days' written notice to any other party to the Plan, and shall terminate automatically in the event of any act that constitutes an assignment of this Distribution Agreement or the Management Agreement. 3) Section 16C. (d) is hereby amended to read as follows: (d) All material amendments to the Plan shall be approved by vote of the non-interested Managing General Partners cast in person at a meeting called for the purpose of voting on such amendment. 4) All references to Franklin Distributors, Inc. are hereby changed to "Franklin/Templeton Distributors, Inc." IN WITNESS WHEREOF, the parties hereto have set their hands as of the 1st day of July, 1993. FRANKLIN TAX-ADVANTAGED U S. GOVERNMENT SECURITIES FUND (a California Limited Partnership) /s/ Rupert H. Johnson, Jr. Managing General Partner FRANKLIN/TEMPLETON DISTRIBUTORS, INC. /s/ Harmon E. Burns Executive Vice President EX-99 8 CUSTODIAN AGREEMENT AGREEMENT, made as of April 10, 1987, between Franklin Tax- Advantaged U. S. Government Securities Fund, a California Limited Partnership (hereinafter called the "Fund"), and Bank of America NT & SA, a national banking association (hereinafter called the "Custodian"). WITNESSETH: WHEREAS, the Fund is registered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management company which will make shares of partnership interest (the "Shares") available for purchase and desires that its securities and cash shall be held and administered by the Custodian pursuant to the terms of this Agreement; and WHEREAS, the Custodian has an aggregate capital, surplus, and undivided profits in excess of Two Million Dollars ($2,000,000) and has its functions and physical facilities supervised by federal authority and is ready and willing to serve pursuant to and subject to the terms of this Agreement: NOW, THEREFORE, in consideration of the mutual agreements herein made, the Fund and Custodian agree as follows: Sec. 1. Definitions: The word "securities" as used herein includes stocks, shares, bonds, debentures, notes, mortgages and other obligations and any certificates, receipts, warrants or other instruments representing rights to receive, purchase, or subscribe for the same, or evidencing or representing any other rights or interests therein, or in any property or assets. The term "proper instructions" shall mean a request or direction by telephone or any other communication device from an authorized Fund designee to be followed by a certification in writing signed in the name of the Fund by any two of the following persons: the President, a Vice-President, the Secretary and Treasurer of the Fund, or any other persons duly authorized to sign by the Managing General Partners of the Fund and for whom authorization has been communicated in writing to the Custodian. The term "proper officers" shall mean the officers authorized above to give proper instructions. Sec. 2. Names, Titles and Signatures of Authorized Signers: An officer or Managing General Partner of the Fund will certify to Custodian the names and signatures of those persons authorized to sign in accordance with Sec. 1 hereof, and on a timely basis, of any changes which thereafter may occur. Sec. 3. Receipt and Disbursement of Money: Custodian shall open and maintain a separate account or accounts in the name of the Fund, subject only to draft or order by Custodian acting pursuant to the terms of this Agreement, ("Direct Demand Deposit Account"). Custodian shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the accounts of the Fund. This shall include, without limitation, the proceeds from the sale of Shares of the Fund which shall be received along with proper instructions from the Fund. All such payments received by Custodian shall be converted to Federal Funds no later than the day after receipt and deposited to such Direct Demand Deposit Account. Custodian shall make payments of cash to, or for the account of, the Fund from such cash or Direct Demand Deposit Account only (a) for the purchase of securities for the portfolio of the Fund upon the delivery of such securities to Custodian registered in the name of the Custodian or of the nominee or nominees thereof, in the proper form for transfer, (b) for the redemption of Shares of the Fund, (c) for the payment of interest, dividends, taxes, management or supervisory fees or any operating expenses (including, without limitations thereto, insurance premiums, fees for legal, accounting and auditing services), (d) for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund held by or to be delivered to Custodian; or (e) for other proper Fund purposes. Before making any such payment Custodian shall receive and may rely upon, proper instructions requesting such payment and setting forth the purposes of such payment. Custodian is hereby authorized to endorse and collect for the account of the Fund all checks, drafts or other orders for the payment of money received by Custodian for the account of the Fund. Sec. 4. Holding of Securities: Custodian shall hold all securities received by it for the account of the Fund, pursuant to the provisions hereof, in accordance with the provisions of Section 17(f) of the Investment Company Act of 1940 and the regulations thereunder. All such securities are to be held or disposed of by the Custodian for, and subject at all times to the proper instructions of, the Fund, pursuant to the terms of this Agreement. The Custodian shall have no power of authority to assign, hypothecate, pledge or otherwise dispose of any such securities and investments, except pursuant to the proper instructions of the Fund and only for the account of the Fund as set forth in Sec. 5 of this Agreement. Sec. 5. Transfer, Exchange or Delivery, of Securities: Custodian shall have sole power to release or to deliver any securities of the Fund held by it pursuant to this Agreement. Custodian agrees to transfer, exchange, or deliver securities held by it hereunder only (a) for the sales of such securities for the account of the Fund upon receipt by Custodian of payment therefor, (b) when such securities are called, redeemed or retired or otherwise become payable, (c) for examination by any broker selling any such securities in accordance with "street delivery" custom, (d) in exchange for or upon conversion into other securities alone or other securities and cash whether pursuant to any plan or merger, consolidation, reorganization, recapitalization or readjustment, or otherwise, (e) on conversion of such securities pursuant to their terms into other securities, (f) upon exercise of subscription, purchase or other similar rights represented by such securities, (g) for the purpose of exchanging interim receipts or temporary securities for definitive securities, (h) for the purpose of redeeming in kind Shares of the Fund upon delivery thereof to Custodian, or (i) for other proper Fund purposes. Any securities or cash receivable in exchange for such deliveries made by Custodian, shall be deliverable to Custodian. Before making any such transfer, exchange or delivery, the Custodian shall receive, and may rely upon, proper instructions authorizing such transfer, exchange or delivery and setting forth the purpose thereof. Sec. 6. Other Actions of Custodians: (a) The Custodian shall collect, receive and deposit income dividends, interest and other payments or distribution of cash or property of whatever kind with respect to the securities held hereunder; receive and collect securities received as a distribution upon portfolio securities as a result of a stock dividend, share split-up, reorganization, recapitalization, consolidation, merger, readjustment, distribution of rights and other items of like nature, or otherwise, and execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with the collection of coupons upon corporate securities, setting forth in any such certificate or affidavit the name of the Fund as owner of such securities; and do all other things necessary or proper in connection with the collection, receipt and deposit of such income and securities, including without limiting the generality of the foregoing, presenting for payment all coupons and other income items requiring presentation and presenting for payment all securities which may be called, redeemed, retired or otherwise become payable. Amounts to be collected hereunder shall be credited to the account of the Fund according to the following formula: (1) Periodic interest payments and final payments on maturities of Federal instruments such as U.S. Treasury bills, bonds and notes; interest payments and final payments on maturities of other money market instruments including tax-exempt money market instruments payable in federal or depository funds; and payments on final maturities of GNMA instruments, shall be credited to the account of the Fund on payable or maturity date. (2) Dividends on equity securities and interest payments, and payments on final maturities of municipal bonds (except called bonds) shall be credited to the account of the Fund on payable or maturity date plus one. (3) Payments for the redemption of called bonds, including called municipal bonds shall be credited to the account of the Fund on the payable date except that called municipal bonds paid in other than Federal or depository funds shall be credited on payable date plus one. (4) Periodic payments of interest and/or of partial principal on GNMA instruments (other than payments on final maturity) shall be credited to the account of the Fund on payable date plus three. (5) Proceeds of insurance in lieu of any payments on municipal securities in default shall be credited to the account of the Fund on date of receipt. (6) Should the Custodian fail to credit the account of the Fund on the date specified in paragraphs (1) - (5) above, the Fund may at its option, require compensation from the Custodian of foregone interest (at the rate of prime plus one) and for damages, if any. (b) Payments to be received or to be paid in connection with purchase and sale transactions shall be debited or credited to the account of the Fund on the contract settlement date with the exception of "when-issued" municipal bonds. Payments to be made for purchase by the Fund of when-issued municipal bonds shall be debited to the account of the Fund on actual settlement date. (1) In the event a payment is wrongfully debited to the account of the Fund due to an error by the Custodian, the Custodian will promptly credit such amount to the Fund, plus interest (prime plus one) and damages, if any. (2) In the event a payment is credited to the account of the Fund and the Custodian is unable to deliver securities being sold due to an error on the part of the Fund, such payment shall be debited to the account of the Fund, and an appropriate charge for costs of the transaction may be sent by the Custodian to the Fund. Sec. 7. Reports by Custodian: Custodian shall each business day furnish the Fund with a statement summarizing all transactions and entries for the account of the Fund for the preceding day. At the end of every month Custodian shall furnish the Fund with a list of the portfolio securities showing the quantity of each issue owned, the cost of each issue and the market value of each issue at the end of each month. Such monthly report shall also contain separate listings of (a) unsettled trades and (b) when-issued securities. Custodian shall furnish such other reports as may be mutually agreed upon from time to time. Sec. 8. Compensation: Custodian shall be paid as compensation for its services pursuant to this Agreement such compensation as may from time to time be agreed upon in writing between the two parties. Sec. 9. Liabilities and Indemnifications: (a) Custodian shall not be liable for any action taken in good faith upon any proper instructions herein described or pursuant to a certified copy of any resolution of the Managing General Partners of the Fund, and may rely on the genuineness of any such document which it may in good faith believe to have been validly executed. (b) The Fund agrees to indemnify and hold harmless the Custodian and its nominee from all taxes, charges, expenses, assessments, claims and liabilities (including counsel fees) incurred or assigned against it or its nominee in connection with the performance of this Agreement, except such as may arise from negligent action, negligent failure to act or willful misconduct of Custodian or its nominee. Sec. 10. Records: The Custodian hereby acknowledges that all of the records it shall prepare and maintain pursuant to this Agreement shall be the property of the Fund and, if and to the extent applicable, of the principal underwriter of the Shares of the Fund, and that upon proper instructions of the Fund or such principal underwriter, if any, or both, it shall: (a) Deliver said records to the Fund, principal underwriter or a successor custodian, as appropriate: (b) Provide the auditors of the Fund or principal underwriter or any securities regulatory agency with a copy of such records without charge; and provide the Fund and successor custodian with a reasonable number of reports and copies of such records at a mutually agreed upon charge appropriate to the circumstances. (c) Permit any securities regulatory agency to inspect or copy during normal business hours of the Custodian any such records. Sec. 11. Appointment of Agents: (a) The Custodian shall have the authority, in its discretion, to appoint an agent or agents to do and perform any acts or things for and on behalf of the Custodian, pursuant at all times to its instructions, as the Custodian is permitted to do under this Agreement. (b) Any agent or agents appointed to have physical custody of securities held under this Agreement or any part thereof must be: (1) a bank or banks, as that term is defined in Section 2(a)(5) of the 1940 Act, having an aggregate, surplus and individual profits of not less than $2,000,000 (or such greater sum as may then be required by applicable laws), or (2) a securities depository, (the "Depository") as that term is defined in Rule 17f-4 under the 1940 Act, upon proper instructions from the Fund and subject to any applicable regulations, or (3) the book-entry system of the U.S. Treasury Department and Federal Reserve Board, (the "System") upon proper instructions and subject to any applicable regulations. (c) With respect to portfolio securities deposited or held in the System or the Depository Custodian shall: 1) hold such securities in a nonproprietary account which shall not include securities owned by Custodian; 2) on each day on which there is a transfer to or from the Fund in such portfolio securities, send a written confirmation to the Fund; 3) upon receipt by Custodian, send promptly to the Fund (i) a copy of any reports Custodian receives from the System or the Depository concerning internal accounting controls, and (ii) a copy of such reports on Custodian's systems of internal accounting controls as the Fund may reasonably request. (d) The delegation of any responsibilities or activities by the Custodian to any agent or agents shall not relieve the Custodian from any liability which would exist if there were no such delegation. Sec. 12. Assignment and Termination: (a) This Agreement may not be assigned by the Fund or the Custodian without written consent of the other party. (b) Either the Custodian or the Fund may terminate this Agreement without payment of any penalty, at any time upon one hundred twenty (120) days written notice thereof delivered by the one to the other, and upon the expiration of said one hundred twenty (120) days, this Agreement shall terminate; provided, however, that this Agreement shall continue thereafter for such period as may be necessary for the complete divestiture of all assets held hereinunder, as next herein provided. In the event of such termination, the Custodian will immediately upon the receipt or transmittal of such notice, as the case may be, commence and prosecute diligently to completion the transfer of a11 cash and the delivery of all portfolio securities, duly endorsed, to the successor of the Custodian when appointed by the Fund. The Fund shall select such successor custodian within sixty (60) days after the giving of such notice of termination, and the obligation of the Custodian named herein to deliver and transfer over said assets directly to such successor custodian shall commence as soon as such successor is appointed and shall continue until completed, as aforesaid. At any time after termination hereof the Fund may have access to the records of the administration of this custodianship whenever the same may be necessary. (c) If, after termination of the services of the Custodian, no successor custodian has been appointed within the period above provided, the Custodian may deliver the cash and securities owned by the Fund to a bank or trust company of its own selection having an aggregate capital, surplus and undivided profits of not less than Two Million Dollars ($2000,000) (or such greater sum as may then be required by the laws and regulations governing the conduct by the Fund of its business as an investment company) and having its functions and physical facilities supervised by federal or state authority, to be held as the property of the Fund under the terms similar to those on which they were held by the retiring Custodian, whereupon such bank or trust company so selected by the Custodian shall become the successor custodian with the same effect as though selected by the Managing General Partners of the Fund. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. Franklin Tax-Advantaged U.S. Government Securities Fund (A California Limited Partnership) /s/ Charles B. Johnson By Charles B. Johnson Managing General Partner Bank of America, NT & SA /s/ illegible EX-99 9 Franklin Tax-Advantaged U.S. Government Securities Fund February 21, 1995 Page 2 STRADLEY RONON STEVENS & YOUNG Attorneys At Law 2600 One Commerce Square Philadelphia, Pennsylvania 19103-7098 (215) 564-8000 Fax: (215) 564-8120 Direct Dial: (215) 564-8024 February 21, 1995 Franklin Tax-Advantaged U.S. Government Securities Fund 777 Mariners Island Blvd. San Mateo, California 94404 Re: FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND Gentlemen: We have examined the Partnership Agreement of Franklin Tax-Advantaged U.S. Government Securities Fund ("Fund"), a California limited partnership, and the various pertinent records, documents and proceedings we deem material. We have also examined the Notification of Registration and the Registration Statements filed under the Investment Company Act of 1940 ("Investment Company Act") and the Securities Act of 1933 ("Securities Act"), all as amended to date, as well as other items we deem material to this opinion. You have indicated that, pursuant to Section 24(e)(l) of the Investment Company Act, the Fund intends to file Post- Effective Amendment No. 8 to its registration statement under the Securities Act to register 7,369,357 additional shares of partnership interest for sale pursuant to its currently effective registration statement under the Securities Act. Based upon the foregoing information and examination, it is our opinion that the Fund is a valid and subsisting limited partnership organized under the laws of the State of California and that the proposed registration of the 7,369,357 shares of partnership interest is proper and such shares of partnership interest, when issued will be legally outstanding, fully-paid and non-assessable shares of partnership interest, and the holders of such shares of partnership interest will have all the rights provided for with respect to such holding by the Partnership Agreement and the laws of the State of California. We hereby consent to the use of this opinion as an exhibit to Post-Effective Amendment No. 8 to be filed by the Fund, covering the registration of the said shares under the Securities Act and the applications and registration statements, and amendments thereto, filed in accordance with the securities laws of the several states in which shares of the Fund are offered, and we further consent to reference in the Prospectus and Statement of Additional Information of the Fund to the fact that this opinion concerning the legality of the issue has been rendered by us. Very truly yours, STRADLEY, RONON, STEVENS & YOUNG BY:/s/ Mark H. Plafker Mark H. Plafker MHP/nlk EX-99 10 CONSENT OF INDEPENDENT AUDITORS To the Managing General Partners of Franklin Tax-Advantaged U.S. Government Securities Fund: We consent to the incorporation by reference in Post-Effective Amendment No. 8 to the Registration Statement of Franklin Tax- Advantaged U.S. Government Securities Fund on Form N-1A (File No. 33-11963) of our report dated February 1, 1995 on our audit of the financial statements and financial highlights of the Franklin Tax-Advantaged U.S. Government Securities Fund, which report is included in the Annual Report to Shareholders for the year ended December 31, 1994, which is incorporated by reference in the Registration Statement. /s/ Coopers & Lybrand L.L.P. San Francisco, California February 27, 1995 EX-99 11 FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND Preamble to Distribution Plan The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Franklin Tax-Advantaged U.S. Government Securities Fund (the "Fund"), which Plan shall take effect on the 1st day of July, 1994 (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Managing General Partners of the Fund (the "Board of Managing General Partners"), including a majority of the managing general partners who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plan (the "non-interested managing general partners"), cast in person at a meeting called for the purpose of voting on such Plan. In reviewing the Plan, the Board of Managing General Partners considered the schedule and nature of payments and terms of the Management Agreement between the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement between the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board of Managing General Partners concluded that the compensation of Advisers, under the Management Agreement, and of Distributors, under the Underwriting Agreement, was fair and not excessive; however, the Board of Managing General Partners also recognized that uncertainty may exist from time to time with respect to whether payments to be made by the Fund to Advisers, Distributors, or others or by Advisers or Distributors to others may be deemed to constitute distribution expenses of the Fund. Accordingly, the Board of Managing General Partners determined that the Plan should provide for such payments and that adoption of the Plan would be prudent and in the best interest of the Fund and its shareholders. Such approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. DISTRIBUTION PLAN 1. The Fund shall reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the Shares of the Fund, including but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution- related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund Shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Fund, Distributors or its affiliates, which form of agreement has been approved from time to time by the managing general partners, including the non- interested managing general partners. 2. The maximum amount which may be reimbursed by the Fund to Distributors or others pursuant to Paragraph 1 herein shall be 0.15% per annum of the average daily net assets of the Fund. Said reimbursement shall be made quarterly by the Fund to Distributors or others. 3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors or other parties on behalf of the Fund, Advisers or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, 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. Distributors shall furnish to the Board of Managing General Partners, for their review, on a quarterly basis, a written report of the monies reimbursed to it and to others under the Plan, and shall furnish the Board of Managing General Partners with such other information as the Board of Managing General Partners may reasonably request in connection with the payments made under the Plan in order to enable the Board of Managing General Partners to make an informed determination of whether the Plan should be continued. 5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of the Board of Managing General Partners, including the non-interested managing general partners, cast in person at a meeting called for the purpose of voting on the Plan. 6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding Shares of the Fund or by vote of a majority of the non-interested managing general partners, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Management Agreement between the Fund and Advisers. 7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 2 hereof without approval by a majority of the Fund's outstanding Shares. 8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, 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. 9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested managing general partners shall be committed to the discretion of such non-interested managing general partners. This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Fund and Distributors as evidenced by their execution hereof. FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND /s/ Deborah R. Gatzek FRANKLIN/TEMPLETON DISTRIBUTORS, INC. /s/ Harmon E. Burns EX-99 12 Fund Name: Franklin Tax-Advantaged U.S. Gov't. Secs. Fund Period Ending: 12/31/94 12/31/94 MAX OFF NAV 1 Yr T.Return: -8.17% -4.13% 5 Yr T.Return: 34.86% 40.83% 10 Yr T.Return: NA NA From Inception: 76.60% 84.37% Inception Date: 05/04/87 05/04/87 SEC STANDARD TOTAL RETURN Franklin Tax-Advantaged U.S. Gov't. AS OF: 12/31/94 Secs. Fund MAX OFFER NAV ONE YEAR -8.17% -4.13% P= 1000.00 1000.00 T= -0.0817 -0.0413 n= 1 1 ERV= 918.30 958.70 FIVE YEAR 6.16% 7.09% P= 1000.00 1000.00 T= 0.0616 0.0709 n= 5 5 ERV= 1348.36 1408.46 TEN YEAR 0.00% 0.00% P= 1000.00 1000.00 T= 0.0000 0.0000 n= 10 10 ERV= 1000.00 1000.00 FROM INCEPTION 05/04/87 7.70% 8.30% P= 1000.00 1000.00 T= 0.0770 0.0830 n= 7.6685 7.6685 ERV= 1766.23 1843.10 AGGREGATE TOTAL RETURN 1 YEAR -8.17% -4.13% 5 YEAR 34.86% 40.83% 10 YEAR NA NA FROM INCEPTION 76.60% 84.37% 30-DAY SEC YIELD 7.05% 30-DAY SEC YIELD W/O NA WAIVER FISCAL YEAR-END 6.83% DISTRIBUTION RATE (ON MAX OFFERING) FISCAL YEAR-END 7.13% DISTRIBUTION RATE (ON NAV) FPF - FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND #355 For the period ended 12/31/94 SEC - YIELD CALCULATION a = interest/dividends earned 3,054,559 b = expenses accrued 261,053 c = avg # of shares o/s 47,352,286 d = maximum offering price 10.190 a - b SEC Yield= 2[(------------------------- + 1) -1] cd 3,054,559 - 261,053 6 = 2[(----------------------------------- + 1) -1] 47,352,286 * 10.190 2,793,506 6 = 2[(------------------------- + 1) -1] 482,519,794 6 = 2[( 1.00578941223297 ) -1] CALIFORNIA TAX FREE INCOME FUND 15-Feb-95 = 2( 1.03524313060668 - 1) = 0.0704862612 = 7.05% EX-99 13 POWER OF ATTORNEY The undersigned officers and managing general partners of Franklin Tax-Advantaged U.S. Government Securities Fund (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of them to act alone) his attorney-in-fact and agent, in all capacities, to execute, and to file any of the documents referred to below relating to Post-Effective Amendments to the Registrant's registration statement on Form N-1A under the Investment Company Act of 1940, as amended, and under the Securities Act of 1933 covering the sale of shares by the Registrant under prospectuses becoming effective after this date, including any amendment or amendments increasing or decreasing the amount of securities for which registration is being sought, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority. Each of the undersigned grants to each of said attorneys, full authority to do every act necessary to be done in order to effectuate the same as fully, to all intents and purposes as he could do if personally present, thereby ratifying all that said attorneys-in- fact and agents, may lawfully do or cause to be done by virtue hereof. The undersigned officers and managing general partners hereby execute this Power of Attorney as of this 16th day of February 1995. /s/ Rupert H. Johnson, Jr. /s/ Charles B. Johnson Rupert H. Johnson, Jr., Charles B. Johnson, Principal Executive Officer Managing General Partner and Managing General Partner /s/ Frank H. Abbott, III /s/Harris J. Ashton Frank H. Abbott, III, Harris J. Ashton, Managing General Partner Managing General Partner /s/ Kenneth V. Domingues /s/ S. Joseph Fortunato Kenneth V. Domingues, S. Joseph Fortunato, Managing General Partner Managing General Partner /s/ David W. Garbellano /s/ Charles E. Johnson David W. Garbellano, Charles E. Johnson, Managing General Partner Managing General Partner /s/ Gordon S. Macklin /s/ Diomedes Loo-Tam Gordon S. Macklin, Diomedes Loo-Tam, Managing General Partner Principal Accounting Officer /s/ Martin L. Flanagan Martin L. Flanagan, Principal Financial Officer EX-99 14 CERTIFICATE OF SECRETARY I, Deborah R. Gatzek, certify that I am Secretary of Franklin Tax- Advantaged U.S. Government Securities Fund (the "Fund"). As Secretary of the Fund, I further certify that the following resolution was adopted by a majority of the Managing General Partners of the Fund present at a meeting held at 777 Mariners Island Boulevard, San Mateo, California, on February 16, 1995. RESOLVED, that a Power of Attorney, substantially in the form of the Power of Attorney presented to this Board, appointing Harmon E. Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene and Mark H. Plafker as attorneys-in-fact for the purpose of filing documents with the Securities and Exchange Commission, be executed by each Managing General Partner and designated officer. I declare under penalty of perjury that the matters set forth in this certificate are true and correct of my own knowledge. /s/ Deborah R. Gatzek Dated: February 16, 1995 Deborah R. Gatzek Secretary EX-27 15
6 THE SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN PARTNERS FUNDS FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND DECEMBER 31, 1994 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1994 DEC-31-1994 468,651,739 425,436,848 34,205,613 0 0 459,642,461 0 0 3,221,355 3,221,355 0 507,640,765 46,759,786 52,626,766 0 0 (8,004,768) 0 (43,214,891) 456,421,106 0 39,713,088 0 (3,225,724) 36,487,364 (6,576,310) (54,248,227) (24,337,173) 0 (36,487,364) 0 0 9,919,069 (18,014,014) 2,227,965 (117,585,696) 0 (1,428,458) 0 0 (2,608,074) 0 (3,225,724) 527,424,376 10.910 .704 (1.150) (.704) 0 0 9.760 (.610) 0 0
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