AGE HIGH INCOME FUND
PROSPECTUS
MAY 15, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
AGE High Income Fund, Inc. (the "Fund") is a diversified, open-
end management investment company with the principal investment
objective of earning a high level of current income. The Fund
will also seek capital appreciation as a secondary objective. The
assets of the Fund will generally be invested in high yield, high
risk, lower rated, fixed-income debt securities and dividend-
paying common or preferred stocks. The Fund may invest in
domestic and foreign securities as described under "Investment
Objectives and Policies of the Fund."
THE 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 FUND IN LIGHT OF THE
SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK CONSIDERATIONS -
HIGH YIELDING, FIXED-INCOME SECURITIES."
This Prospectus is intended to set forth in a clear and concise
manner information about the 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.
As of May 15, 1995, the Fund offers two classes to its investors:
AGE High Income Fund - Class I ("Class I") and AGE High Income
Fund - Class II ("Class II"). Investors can choose between Class
I shares, which generally bear a higher front-end sales charge
and lower ongoing Rule 12b-1 distribution fees ("Rule 12b-1
fees"), and Class II shares, which generally have a lower front-
end sales charge and higher ongoing Rule 12b-1 fees. Investors
should consider the differences between the two classes,
including the impact of sales charges and distribution fees, in
choosing the more suitable class given their anticipated
investment amount and time horizon. See "How to Buy Shares of the
Fund - Alternative Purchase Arrangements."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE
FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
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.
A Statement of Additional Information (the "SAI"), concerning the
Fund, dated May 15, 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 Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown above.
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 Fund
Investment Objectives and Policies of the Fund
Risk Considerations
Management of the Fund
Distributions to Shareholders
Taxation of the Fund and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund in Connection with Retirement
Plans Involving Tax-Deferred Investments
Other Programs and Privileges Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding Taxpayer IRS Certifications
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 the Fund. The figures for both classes of shares are based on
restated aggregate operating expenses of the Class I shares for
the fiscal year ended May 31, 1994.
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering 4.25% 1.00%^
price)
Deferred Sales Charge NONE+ 1.00%++
Exchange Fee (per transaction) $5.00* $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.46% 0.46%
Rule 12b-1 Fees 0.15%** 0.65%**
Other Expenses:
Shareholder Servicing Costs 0.04% 0.04%
Reports to Shareholders 0.04% 0.04%
Other 0.04% 0.04%
Total Other Expenses 0.12% 0.12%
Total Fund Operating Expenses 0.73% 1.23%
^Although Class II has a lower front-end sales charge than Class
I, over time the higher Rule 12b-1 fee for Class II may cause
shareholders to pay more for Class II shares than for Class I
shares. Given the maximum front-end sales charge and the rate of
Rule 12b-1 fees of each class, it is estimated that this will
take less than six years for shareholders who maintain total
shares valued at less than $100,000 in the Franklin Templeton
Funds. Shareholders with larger investments in the Franklin
Templeton Funds will reach the crossover point more quickly.
+Class I investments of $1 million or more are not subject to a
front-end sales charge; however, a contingent deferred sales
charge of 1%, which has not been reflected in the Example below,
is generally imposed on certain redemptions within a "contingency
period" of 12 months of the calendar month following such
investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
++Class II shares redeemed within a "contingency period" of 18
months of the calendar month following such investments are
subject to a 1% contingent deferred sales charge. See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a
fee.
**Rule 12b-1 fees incurred by the Class I shares represented an
annualized rate of 0.12%. Total Fund operating expenses for the
fiscal year ended May 31, 1994 have been restated to reflect the
maximum Rule 12b-1 fees allowed pursuant to each class' plan of
distribution as though such plan had been in effect for the
entire fiscal year. Class I's plan was effective May 1, 1994, and
Class II's plan is effective May 15, 1995. "Other Expenses" for
Class II shares are estimates based on the actual expenses
incurred by Class I shares for the fiscal year ended May 31,
1994.
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 the 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 maximum front-end sales charge and
applicable contingent deferred sales charges, that apply to a
$1,000 investment in the Fund over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of
each time period.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
CLASS I+ $50 $65 $81 $129
CLASS II++ $33 $49 $77 $157
THIS EXAMPLE IS BASED ON THE RESTATED ANNUAL OPERATING EXPENSES
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 the Fund and only indirectly
by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to
assume an annual return of 5%, but the Fund's actual return may
be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing financial highlights for a
share of Class I of the Fund. The information for each of the
five fiscal years in the period ended May 31, 1994 has been
audited by Coopers & Lybrand L.L.P., independent auditors, whose
audit report appears in the financial statements in the Fund's
SAI. The figures for the six months ended November 30, 1994 are
unaudited. The remaining figures, which are audited, are not
covered by the auditors' current report. Information regarding
Class II shares will be included in this table after they have
been offered to the public for a reasonable period of time. See
the discussion "Reports to Shareholders" under "General
Information."
<TABLE>
<CAPTION> Class I
-------------------------------------------------------------------------------
Six months Year ended May 31,
Ended -------------------------------------------------------------------------------
November 30, 1994 1994 1993 1992 1991 1990
----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year.. $2.70 $ 2.81 $ 2.72 $ 2.37 $ 2.53 $ 3.18
----------- ---------- ---------- ---------- ---------- ----------
Net investment
income............. 0.13 0.27 0.30 0.31 0.34 0.41
Net realized
& unrealized
gains (losses) on
securities......... (0.98) (0.113) 0.054 .340 (0.122) (0.636)
--------- ---------- ---------- ---------- ---------- ----------
Total from
investment
operations......... 0.032 0.157 0.354 .650 0.218 (0.226)
========= ========== ========== ========== ========== ==========
Less distributions:
Dividends from net
investment income.. (0.132) (0.267) (0.264) (.300) (0.359) (0.424)
Distributions from
realized capital
gains -- -- -- -- -- --
Distributions from
paid-in capital ... -- -- -- -- (0.019) --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions. (0.132) (0.267) (0.264) (.300) (0.378) (0.424)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value
at end of year..... $2.60 $ 2.70 $2.81 2.72 $ 2.37 $ 2.53
========== ========== ========== ========== ========== ==========
Total Return**...... 1.19% 5.19% 13.33% 8.48% 10.18% (8.13)
Ratios/Supplemental Data
Net assets at end
of year (in 000's) $1,696,488 $1,817,481 $1,935,919 $1,864,195 $1,587,656 $1,675,212
Ratio of expenses to
average net assets. 0.62%+ .59% .56% .58% .59% .56%
Ratio of net investment
income to average
net assets......... 9.68%+ 9.61% 10.78% 2.18% 14.87% 14.47%
Portfolio turnover rate 19.05% 42.32% 38.33% 3.70% 28.55% 17.59%
</TABLE>
<TABLE>
<CAPTION>
Year ended May 31,
-------------------------------------------------------------------------------
1989 1988 1987 1986 1985
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance*
Net asset value at
beginning of year.. $ 3.37 $ 3.58 $3.83 $ 3.71 $ 3.44
---------- ---------- ---------- ---------- ----------
Net investment
income............. 0.43 0.44 0.44 0.48 0.50
Net realized
& unrealized
gains (losses) on
securities......... (0.188) (0.218) (0.228) 0.133 0.280
---------- ---------- ---------- ---------- ----------
Total from
investment
operations......... 0.242 0.222 0.212 0.613 0.780
========== ========== ========== ========== ==========
Less distributions:
Dividends from net
investment income.. (0.432) (0.432) (0.462) (0.492) (0.510)
Distributions from
realized capital
gains -- -- -- (0.001) --
Distributions from
paid-in capital ... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions. (0.432) (0.432) (0.462) (0.493) (0.510)
---------- ---------- ---------- ---------- ----------
Net asset value
at end of year..... $ 3.18 $ 3.37 $ 3.58 $ 3.83 $ 3.71
========== ========== ========== ========== ==========
Total Return**...... 6.97% 6.32% 5.25% 17.02% 24.21%
Ratios/Supplemental Data
Net assets at end
of year (in 000's). $2,243,494 $1,828,108 $1,639,596 $ 669,782 $ 159,262
Ratio of expenses to
average net assets. .56% .57% .59% .67% .80%
Ratio of net investment
income to average
net assets......... 13.06% 12.72% 11.46% 11.66% 13.33%
Portfolio turnover rate 28.82% 24.11% 22.50% 21.88% 25.94%
</TABLE>
*Selected data for a share of capital stock outstanding
throughout the year.
**Total return measures the change in value of an investment over
the periods indicated. It does not include the maximum front-end
sales charge and assumes reinvestment of dividends at the maximum
offering price and capital gains, if any, at net asset value.
Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan, as discussed in this Prospectus, the sales
charge on reinvested dividends was eliminated.
+ Annualized
ABOUT THE FUND
The Fund is a diversified, open-end management investment company
commonly called a "mutual fund." The Fund was incorporated in
Colorado in January 1968 under the sponsorship of the Assembly of
Governmental Employees and registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act"). The
Fund has two classes of shares of capital stock with a par value
of $.01: AGE High Income Fund - Class I and AGE High Income Fund
- - Class II. All Fund shares outstanding before May 15, 1995, have
been redesignated as Class I shares, and will retain their
previous rights and privileges, except for legally required
modifications to shareholder voting procedures, as discussed in
"General Information - Voting Rights."
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering
price. The current public offering price of the Class I shares is
equal to the net asset value (see "Valuation of Fund Shares"),
plus a variable sales charge not exceeding 4.25% of the offering
price depending upon the amount invested. The current public
offering price of the Class II shares is equal to the net asset
value, plus a sales charge of 1.0% of the amount invested. (See
"How to Buy Shares of the Fund.")
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The Fund's principal investment objective is to earn a high level
of current income. As a secondary objective, the Fund seeks
capital appreciation to the extent it is possible and consistent
with the Fund's principal objective. The investment objectives
are fundamental policies of the Fund and may not be changed
without shareholder approval.
TYPE OF SECURITIES THE FUND MAY PURCHASE
Yield and expected return are the primary criteria used by the
Fund in selecting portfolio securities. The Fund may invest in
both fixed-income debt securities and instruments (sometimes
referred to as "corporate bonds") and dividend-paying common or
preferred stocks, and will seek to invest in whatever type of
security is offering the highest yield and expected total return
without excessive risk at the time of purchase. When purchasing
fixed-income debt securities, the Fund may invest in investment
grade or lower grade securities, depending upon prevailing market
and economic conditions and may, for defensive purposes, invest
its assets in government securities, commercial paper (short-term
debt securities of large corporations), various bank debt
instruments or other money market instruments. The Fund may
invest in both domestic and foreign securities and instruments.
The 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 Fund in light of the
securities in which the Fund invests.
Various investment services publish ratings of some of the types
of securities in which the Fund may invest. Higher yields are
ordinarily available from securities in the lower rated
categories of the recognized rating services (that is, securities
rated Ba or lower by Moody's Investors Service ["Moody's"] or BB
or lower by Standard & Poor's Corporation ["S&P"]) or from
unrated securities of comparable quality. A list of these ratings
is shown in the Appendix to this Prospectus. These ratings, which
represent the opinions of the rating services with respect to the
issuer's ability to pay interest and repay principal, although
they do not purport to reflect the risk of fluctuations in market
value and are not absolute standards of quality, will be
considered in connection with the investment of the Fund's
assets, but will not be a determining or limiting factor. The
Fund may invest in securities regardless of their rating
(including securities in the lowest rating categories) or in
securities which are not rated. It is the Fund's intent not to
purchase securities rated below CCC. With respect to unrated
securities, it is the Fund's intent not to purchase securities
which, in the view of the Fund's investment manager, would be
comparable to securities rated below B by Moody's or S&P.
Securities rated B and CCC are regarded by S&P, on balance, as
predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the
obligation. As of May 31, 1994, approximately 84.1% of the Fund's
net assets were invested in lower rated bonds (those having a
rating below the four highest grades assigned by the rating
services) or in unrated bonds with comparable credit
characteristics. (A breakdown of the bonds' ratings is included
under "Risk Considerations - Asset Composition Table.") As noted
above, the 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 Fund's portfolio is changed by the ratings
service or the security goes into default, such event will be
considered by the Fund in its evaluation of the overall
investment merits of that security but will not generally 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 Fund's portfolio may also include, among other things,
consideration of relative values, based on such factors as
anticipated cash flow, interest or dividend 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. Since a substantial
portion of the Fund's portfolio at any particular time may
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 the
Fund may invest may be purchased at a discount to par value. Such
securities, when held to maturity or retired, may include an
element of capital gain. The Fund does not generally intend to
hold securities solely for the purpose of achieving such capital
gain, but will generally hold them as long as expected returns on
such securities remain attractive. A capital loss may be realized
when a security is purchased at a premium, that is, in excess of
its stated or par value, is held to maturity or is called or
redeemed at a price lower than its purchase price. A capital gain
or loss also may be realized upon the sale of securities, whether
purchased at par, a discount or a premium.
The Fund's total return, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods
ended on May 31, 1994, was 1.23%, 8.76% and 10.52%, respectively.
See "Performance."
FOREIGN SECURITIES. The Fund may purchase foreign securities
which are traded in the United States or purchase American
Depository Receipts ("ADRs") which are certificates issued by
U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent bank.
The Fund may also purchase the securities of foreign issuers
directly in foreign markets and may purchase securities of U.S.
issuers which are denominated in foreign currency. See "Risk
Considerations - Foreign Securities."
Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries, but investments
will not be made in any equity securities issued without stock
certificates or in debt securities which are not issued and
transferable in fully registered form. Securities which are
acquired by the Fund outside the United States and which are
publicly traded in the United States, on a foreign securities
exchange or in a foreign securities market are not considered by
the Fund to be an illiquid asset so long as the Fund acquires and
holds the security with the intention of reselling the security
in the foreign trading market, the Fund reasonably believes it
can readily dispose of the security for cash in the U.S. or
foreign market and current market quotations are readily
available. The Fund presently has no intention of investing more
than 10% of its net assets in foreign securities not publicly
traded in the United States.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may enter into
forward currency exchange contracts ("Forward Contracts") to
attempt to minimize the risk to the Fund from adverse changes in
the relationship between currencies or to enhance income. A
Forward Contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders
and their customers.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write
put and call options on foreign currencies (traded on U.S. and
foreign exchanges or over-the-counter) for hedging purposes to
protect against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar
cost of foreign securities or other assets to be acquired. As in
the case of other kinds of options, however, the writing of an
option on foreign currency will constitute only a partial hedge,
up to the amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction costs.
OPTIONS ON SECURITIES. Although the Fund's policies permit it to
write covered call options, it does not currently anticipate that
it will use such authority. If, in the future, the Fund should
engage in covered call options writing, it is not limited in the
extent to which it may write such options. Prior to engaging in
options writing the Fund will amend the Prospectus to discuss its
transactions in options.
INTEREST RATE SWAPS. The Fund may also participate in interest
rate swaps. An interest rate swap is the transfer between two
counterparties of interest rate obligations, one of which has an
interest rate fixed to maturity while the other has an interest
rate that changes in accordance with changes in a designated
benchmark (e.g., London Interbank Offered Rate (LIBOR), prime,
commercial paper, or other benchmarks). The obligations to make
repayment of principal on the underlying securities are not
exchanged. Such transactions generally require the participation
of an intermediary, frequently a bank. The entity holding the
fixed rate obligation will transfer the obligation to the
intermediary, and such entity will then be obligated to pay to
the intermediary a floating rate of interest, generally including
a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity which
has a floating-rate obligation which substantially mirrors the
obligation desired by the first party. In return for assuming a
fixed obligation, the second entity will pay the intermediary all
sums that the intermediary pays on behalf of the first entity,
plus an arrangement fee and other agreed upon fees.
The Fund intends to participate in interest rate swaps with
regard to obligations held in the Fund's portfolio. To the
extent, however, the Fund does not own the underlying obligation,
the Fund will maintain, in a segregated account with the Fund's
custodian, cash or liquid debt securities having an aggregate
value equal to the amount of the Fund's outstanding swap
obligation.
Interest rate swaps are generally entered into to permit the
party seeking a floating rate obligation the opportunity to
acquire such obligation at a lower rate than is directly
available in the credit market, while permitting the party
desiring a fixed rate obligation the opportunity to acquire such
a fixed rate obligation, also frequently at a price lower than is
available in the capital markets. The success of such a
transaction depends in large part on the availability of fixed
rate obligations at a low enough coupon rate to cover the cost
involved.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed-upon
price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an
initial market value, including accrued interest, equal to at
least 102% of the dollar amount invested by the Fund in each
agreement, with the value of the underlying security marked-to-
market daily to maintain coverage of at least 100%. A default by
the seller might cause the Fund to experience a loss or delay in
the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to enter
into repurchase agreements only with financial institutions such
as broker-dealers and banks which are deemed creditworthy by the
Fund's investment manager. A repurchase agreement is deemed to be
a loan by the Fund under the 1940 Act. The U.S. government
security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Fund's Board of
Directors and will be held pursuant to a written agreement.
SHORT-TERM INVESTMENTS. The Fund may invest its uninvested daily
cash balances in shares of Franklin Money Fund and other money
market funds in the Franklin Group of Funds provided i) its
purchases and redemptions of such money market fund shares may
not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees,
nor to any charge related to the expense of distributing the
Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets
or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money market fund.
TRADE CLAIMS. The Fund may invest a portion of its assets in
trade claims. Trade claims are purchased from creditors of
companies in financial difficulty. For purchasers such as the
Fund, trade claims offer the potential for profits since they are
often purchased at a significantly discounted value and,
consequently, may generate capital appreciation in the event that
the value of the claim increases as the debtor's financial
position improves. In the event that the debtor is able to pay
the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial
condition, trade claims offer the potential for higher income due
to the difference in the face value of the claim as compared to
the discounted purchase price.
An investment in trade claims is speculative and carries a high
degree of risk. There can be no guarantee that the debtor will
ever be able to satisfy the obligation on the trade claim.
Trading in claims is not regulated by federal securities laws or
the SEC. Currently, trading in claims is regulated primarily by
bankruptcy laws. Because trade claims are unsecured, holders of
trade claims may have a lower priority in terms of payment than
most other creditors in a bankruptcy proceeding. In light of the
nature and risk of trade claims, the Fund's investment in these
instruments will not exceed 5% of its net assets at time of
acquisition.
DEFAULTED DEBT SECURITIES. The Fund may purchase defaulted debt
securities if, in the opinion of the investment manager, it
appears likely that the issuer may resume interest payments or
other advantageous developments appear likely in the near term.
Such securities may be illiquid. The Fund will not invest more
than 10% of its total assets (at the time of purchase) in
defaulted debt securities, although this is not a fundamental
policy and may be changed by the Board of Directors without
shareholder approval.
LOAN PARTICIPATIONS. The Fund is authorized to acquire loan
participations and other related direct or indirect bank debt
obligations ("Loan Participations"), in which the Fund will
purchase from a lender a portion of a larger loan which it has
made to a borrower. Generally, such Loan Participations are sold
without guarantee or recourse to the lending institution and are
subject to the credit risks of both the borrower and the lending
institution. Such Loan Participations, however, may enable the
Fund to acquire an interest in a loan from a financially strong
borrower which it could not do directly. While Loan
Participations generally trade at par value, the Fund will be
permitted to purchase such securities which sell at a discount
because of the borrower's credit problems. To the extent the
borrower's credit problems are resolved, such Loan Participations
may appreciate in value.
Investment in Loan Participations is permitted to the extent that
such securities, all of which may have speculative
characteristics and some of which may be in default, and other
defaulted securities represent no more than 15% of the Fund's net
assets (at the time of investment).
INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase debt obligations on a "when-issued" or
"delayed delivery" basis. Such securities are subject to market
fluctuation prior to delivery to the Fund and generally do not
earn interest until their scheduled delivery date. When the Fund
is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian, cash or high-grade
marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the
extent the Fund engages in when-issued and delayed delivery
transactions, it will do so only for the purpose of acquiring
portfolio securities consistent with the Fund's investment
objectives and policies, and not for the purpose of investment
leverage. (The Fund's SAI contains a more complete discussion
regarding when-issued and delayed delivery transactions.)
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures
approved by the Board of Directors and subject to the following
conditions, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan. The
borrower must deposit with the Fund's custodian collateral with
an initial market value at least 102% of the initial market value
of the securities loaned, including any accrued interest, with
the value of the collateral and loaned securities marked-to-
market daily to maintain collateral coverage of at least 100%.
Such collateral shall consist of cash, securities issued by the
U.S. Government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a
common practice in the securities industry. The Fund engages in
security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash
collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities
loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and
loss of rights in the collateral should the borrower of the
security fail financially.
CONCENTRATION. The Fund will not invest more than 25% of the
value of its total assets in any one particular industry.
BORROWING. The Fund does not borrow money or mortgage or pledge
any of its assets, except that it may borrow for temporary or
emergency purposes in an amount not to exceed 5% of the Fund's
total assets.
ILLIQUID INVESTMENTS. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount
at which the Fund has valued the securities) may not constitute,
at the time of purchase, more than 10% of the value of the total
net assets of the Fund. Subject to this limitation, the Board of
Directors has authorized the Fund to invest in restricted
securities where such investments are consistent with the Fund's
investment objectives and has authorized such securities to be
considered liquid to the extent the investment manager determines
on a daily basis that there is a liquid institutional or other
market for such securities. Notwithstanding the determinations in
this regard, the Board of Directors remains responsible for such
determinations and will consider appropriate action to maximize
the Fund's liquidity and its ability to meet redemption demands
if a security should become illiquid subsequent to its purchase.
To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the Fund may
be increased if qualified institutional buyers become
uninterested in purchasing these securities or the market for
these securities contracts. See "Additional Information Regarding
the Fund's Investment Objectives and Policies" in the SAI.
GENERAL
It is the present policy of the Fund (which may be changed
without the approval of shareholders) not to invest more than 5%
of its total assets in companies which have a record of less than
three years continuous operations, including predecessors; nor to
invest in puts, calls, straddles or spreads, or any combination
thereof, except in connection with option writing activities; nor
to engage in joint or joint and several trading accounts in
securities, except that an order to purchase or sell may be
combined with orders from other persons to obtain lower brokerage
commissions.
So long as these percentage restrictions are observed by the Fund
at the time of purchase of any such security, changes in values
of particular Fund assets or the assets of the Fund as a whole
will not cause a violation of any of the foregoing restrictions.
The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the approval
of shareholders, which limit its activities to some extent. For a
list of these restrictions and more information concerning the
policies discussed herein, please see the SAI.
The Fund's investment in options, forward contracts, options on
foreign currencies and foreign securities may be limited by the
requirements of the Internal Revenue Code of 1986, as amended
(the "Code") for qualification as a regulated investment company
and are subject to special tax rules that may affect the amount,
timing and character of distributions to shareholders. These
securities require the application of complex and special tax
rules and elections, more information about which is included in
the SAI.
The Fund's investment in zero coupon and delayed interest bonds,
or bonds that provide for payment of interest in kind may cause
the Fund to recognize income and make distributions to
shareholders prior to the receipt of cash payments. Payment-in-
kind obligations are subject to special tax rules concerning the
amount, character and timing of income required to be accrued by
the Fund.
The Fund may also be required under the Code and U.S. Treasury
regulations to accrue income for income tax purposes on defaulted
obligations and to distribute such income to the Fund's
shareholders even though the Fund is not currently receiving
interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution
requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to
use cash flows from other sources such as the sale of Fund
shares.
RISK CONSIDERATIONS
HIGH YIELDING, FIXED-INCOME SECURITIES
Because of the Fund's policy of investing in higher yielding,
higher risk securities, an investment in the 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 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 Fund invests.
The market values of lower rated, fixed-income securities and
unrated securities of comparable quality (commonly known as "junk
bonds") tend to reflect individual corporate developments to a
greater extent than do 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. Bonds rated BB
or below by S&P or Ba or below by Moody's are considered, on
balance, to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating
categories. Even bonds 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. As of May 31,
1994, four issues (from four separate issuers) out of 170 issues
(excluding short-term securities and cash equivalents) in the
Fund's portfolio were in default. In the fiscal year ended May
31, 1994, two issues defaulted, and a total of 20 issues
defaulted over the prior three years of which the Fund still
holds the four issues mentioned above. Defaulted issues
represented 1.20% of the net assets of the Fund at May 31, 1994.
Current prices for defaulted bonds, however, are generally
significantly lower than their purchase price, and the Fund may
have unrealized losses on such defaulted securities which are
reflected in the price of the Fund's shares. In general,
securities which default lose much of their value in the time
period prior to the actual default so that the Fund's net assets
are impacted prior to the default. The Fund may retain an issue
which has defaulted because such issue may present an opportunity
for subsequent price recovery. The high yield securities 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 securities and adversely affected the value
of outstanding securities and the ability of issuers of such
securities to meet their obligations. Those adverse effects may
continue even as the economy recovers.
High yielding, fixed-income securities frequently have call or
buy-back features which permit an issuer to call or repurchase
the securities from the Fund. Although such securities are
typically not callable for a period from three to five years
after their issuance, if a call were exercised by the issuer
during periods of declining interest rates, the Fund would likely
have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund
and dividends 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 the Fund to manage the timing of
its receipt of income, which may have tax implications. Further
information is included under "Taxation of the Fund and Its
Shareholders."
The Fund 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 the 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 Fund to obtain market quotations
based on actual trades for purposes of valuing the 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 Fund is authorized to acquire high yielding, fixed-income
securities that are sold without registration under the federal
securities laws and therefore carry restrictions on resale. While
many recent high yielding securities have been sold with
registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted
securities before the securities have been registered, it may be
deemed an underwriter of such securities as defined in the
Securities Act of 1933, which entails special responsibilities
and liabilities. The Fund may incur special costs in disposing of
such securities; however, the Fund will generally incur no costs
when the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities
during an initial underwriting. Such securities involve special
risks because they are new issues. The Fund has no arrangement
with its 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 Fund's net asset value. 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, the 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 Fund 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
Fund will realize no cash until the cash payment date and, if the
issuer defaults, the Fund may obtain no return at all on its
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 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. Current federal income tax law
requires that a holder of a zero coupon security report as income
each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives
no cash payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the
issuance of additional bonds. The Fund will be deemed to receive
interest over the life of such bonds and be taxed as if interest
were paid on a current basis, although no cash interest payments
are received by the Fund until the cash payment date or until the
bonds mature. Current federal income tax law requires that
companies such as the Fund, which seek to qualify for pass-
through federal income tax treatment as regulated investment
companies, distribute at least 90% of their investment company
taxable income each year, including tax-exempt and non-cash
income. The Fund is not limited in the amount of its assets that
may be invested in such securities. The Fund, however, intends to
continue to qualify as a regulated investment company under the
Code. Accordingly, during periods when the Fund receives no cash
interest payments on its zero coupon securities or deferred
interest or pay-in-kind bonds, it will be required, in order to
maintain its desired tax treatment, to distribute cash
approximating the income attributable to such securities. Such
distribution may require the sale of portfolio securities to meet
the distribution requirements and such sales may be subject to
the risk factors discussed above. Further information is included
under "Taxation of the Fund and Its Shareholders."
ASSET COMPOSITION TABLE
As stated earlier, ratings published by rating services, such as
S&P, will be considered in connection with the Fund's investments
in bonds, although such ratings will not be determinative. The
following table shows the percentage invested in each of the
specific S&P rating categories and those that are not rated but
deemed by the investment manager to be of the same credit
quality. 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 May 31,
1994. The Appendix to this Prospectus includes a description of
each rating category.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 5.64%
AA 0.36%
BBB+ 0.06%
BBB 0.80%
BBB- 3.19%
BB+ 7.01%
BB 3.18%
BB- 9.28%
B+ 18.93%
B* 27.25%
B- 13.05%
CCC+ 4.93%
CCC 0.99%
CCC- 1.09%
CC 0.37%
C 0.06%
D 1.17%
N/R* 6.32%
*6.32% of these securities, which are unrated by an NRSRO, have
been included in the B rating category.
FOREIGN SECURITIES
Investments in foreign securities where delivery takes place
outside the United States may involve risks that are different
from investments in U.S. securities. These risks may include
future unfavorable political and economic developments, possible
withholding taxes, seizure of foreign deposits, currency exchange
controls, including currency blockage, higher transactional costs
due to a lack of negotiated commissions, or other governmental
restrictions which might affect the amount and types of foreign
investments made or the payment of principal or interest on
securities the Fund holds. In addition, there may be less
information available about these securities and it may be more
difficult to obtain or enforce a court judgment in the event of a
lawsuit. Fluctuations in currency convertibility or exchange
rates could result in investment losses for the Fund. Investment
in foreign securities may also subject the Fund to losses due to
nationalization, expropriation or differing accounting practices
and treatments.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S
ACTIVITIES
The assets of the Fund are invested in portfolio securities. If
the securities owned by the Fund increase in value, the value of
the shares of the Fund which the shareholder owns will increase.
If the securities owned by the 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 Fund shares will fluctuate with
movements in the broader equity and bond markets, as well. To the
extent the Fund's investments consist of debt securities, changes
in interest rates will affect the value of the Fund's portfolio
and thus the share price of Fund shares. Increased rates of
interest which frequently accompany higher inflation and/or a
growing economy are likely to have a negative effect on the value
of Fund shares. To the extent the Fund's investments consist of
common stocks, a decline in the market, expressed for example by
a drop in the Dow Jones Industrials or the Standard & Poor's 500
average or any other equity based index, may also be reflected in
declines in the Fund's share price. History reflects both
increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably
in the future.
MANAGEMENT OF THE FUND
The Board of Directors has the primary responsibility for the
overall management of the Fund and for electing the officers of
the Fund who are responsible for administering its day-to-day
operations.
The Board has carefully reviewed the multiclass structure to
ensure that no material conflict exists between the two classes
of shares. Although the Board does not expect to encounter
material conflicts in the future, the Board will continue to
monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Fund has retained the
authority to establish additional classes of shares. It is the
Fund's present intention to offer only two classes of shares, but
new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the
Fund's investment manager. Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company, the principal shareholders of which are Charles
B. Johnson and Rupert H. Johnson, Jr., who own approximately 20%
and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services
industry through its various subsidiaries (the "Franklin
Templeton Group"). Advisers acts as investment manager or
administrator to 33 U.S. registered investment companies (111
separate series) with aggregate assets of over $74 billion.
Pursuant to the management agreement, the Manager supervises and
implements the Fund's investment activities and provides certain
administrative services and facilities which are necessary to
conduct the Fund's business.
During the fiscal year ended May 31, 1994, management fees
totaling 0.46% of the average monthly net assets of the Fund were
paid to Advisers.
Among the responsibilities of the Manager under the management
agreement is the selection of brokers and dealers through whom
transactions in the 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 the Fund, as factors in selecting a
broker. Further information is included under "The Fund's
Policies Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions for the
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.
During the fiscal year ended May 31, 1994, expenses borne by
Class I shares of the Fund, including fees paid to Advisers and
to Investor Services, totaled 0.59% of the average monthly net
assets of such class.
PLANS OF DISTRIBUTION
A separate Plan of Distribution has been approved and adopted for
each class ("Class I Plan" and "Class II Plan," respectively, or
"Plans") pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-
1 fees charged to each class will be based solely on the
distribution and servicing fees attributable to that particular
class. Any portion of fees remaining from either Plan after
distribution to securities dealers of up to the maximum amount
permitted under each Plan may be used by the class to reimburse
Distributors for routine ongoing promotion and distribution
expenses incurred with respect to such class. 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 the
Fund, Distributors or its affiliates.
The maximum amount which the Fund may pay to Distributors or
others under the Class I Plan for such distribution expenses is
0.15% per annum of Class I's average daily net assets 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.
Under the Class II Plan, the maximum amount which the Fund is
permitted to pay to Distributors or others for distribution
expenses and related expenses is 0.50% per annum of Class II's
daily net assets, payable quarterly. All expenses of
distribution, marketing and related services over that amount
will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan
provides for an additional payment by the Fund of up to 0.15% per
annum of Class II's average daily net assets as a servicing fee,
payable quarterly. This fee will be used to pay securities
dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and
answering correspondence; monitoring dividend payments from the
Fund on behalf of customers, or similar activities related to
furnishing personal services and/or maintaining shareholder
accounts.
During the first year after the purchase of Class II shares,
Distributors will keep a portion of the Plan fees assessed on
Class II shares to partially recoup fees Distributors pays to
securities dealers. Distributors, or its affiliates, may pay,
from its own resources, a commission of up to 1% of the amount
invested to securities dealers who initiate and are responsible
for purchases of Class II shares.
Both Plans also cover 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 class of the Fund.
For more information, including a discussion of the Board's
policies with regard to the amount of each Plan's fees, please
see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to
its shareholders:
1. INCOME DIVIDENDS. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income
dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains
or losses in connection with sales or other dispositions of its
portfolio securities. Distributions by the Fund derived from net
short-term and net long-term capital gains (after taking into
account any net capital loss carryovers) may generally be made
once a year in December to reflect any net short-term and net
long-term capital gains realized by the Fund as of October 31 of
the current fiscal year and any undistributed net capital gains
from the prior fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund
may make more than one distribution derived from net short-term
and net long-term capital gains in any year or adjust the timing
of these distributions for operational or other reasons.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Code, dividends and capital
gains will be calculated and distributed in the same manner for
Class I and Class II shares. The per share amount of any income
dividends will generally differ only to the extent that each
class is subject to different Rule 12b-1 fees.
DISTRIBUTION DATE
Although subject to change by the Board of Directors, without
prior notice to or approval by shareholders, the Fund's current
policy is to declare income dividends monthly for shareholders of
record on the last business day of the month, payable on or about
the 15th day of the following month. The amount of income
dividend payments by the Fund is dependent upon the amount of net
income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board of
Directors. Fund shares are quoted ex-dividend on the first
business day following the record date. THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT
IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the record
date. An investor considering purchasing Fund shares shortly
before the record date of a distribution should be aware that
because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply
and demand, any distribution of income or capital gain will
result in a decrease in the value of the Fund's shares equal to
the amount of the distribution. While a dividend or capital gain
distribution received shortly after purchasing shares represents,
in effect, a return of a portion of the shareholder's investment,
it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless otherwise requested, income dividends and capital gain
distributions, if any, will be automatically reinvested in the
shareholder's account in the form of additional shares, valued at
the closing net asset value (without a sales charge) on the
dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset
value in the same class of shares of the Fund or the same class
of another of the Franklin Templeton Funds. 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. See
the SAI for more information.
Many of the Fund's 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 income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected distributions
to the same class of 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. Dividends 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. Dividend and capital gain
distributions are eligible for investment in the same class of
another fund in the Franklin Templeton Funds at net asset value.
See "Purchases at Net Asset Value" under "How to Buy Shares of
the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations
that affect mutual funds and their shareholders. Additional
information on tax matters relating to the Fund and its
shareholders is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.
The Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, qualified as such and
intends to continue to so qualify. By distributing all of its
income and meeting certain other requirements relating to the
sources of its income and diversification of its assets, the Fund
will not be liable for federal income or excise taxes.
Foreign securities, which meet the definition in the Code of a
Passive Foreign Investment Company ("PFIC"), may subject the Fund
to an income tax and interest charge with respect to such
investment. To the extent possible, the Fund will avoid such
treatment by not investing in PFIC securities or by adopting
other tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends which the
shareholder receives from the Fund, as well as any distributions
derived from the excess of net short-term capital gain over net
long-term capital loss, are treated as ordinary income whether
the shareholder has elected to receive them in cash or in
additional shares.
Distributions derived from the excess of net long-term capital
gain over net short-term capital loss are treated as long-term
capital gain regardless of the length of time the shareholder has
owned Fund shares and regardless of whether such distributions
are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operational reasons,
may not be paid to the shareholder until the following January,
will be treated for tax purposes as if received by the
shareholder on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on
which a shareholder may realize a gain or loss. Any loss incurred
on the sale or exchange of Fund shares, held for six months or
less, will be treated as a long-term capital loss to the extent
of capital gain dividends received with respect to such shares.
All or a portion of the sales charge incurred in purchasing
shares of the Fund will not be included in the federal tax basis
of such shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund
or in another fund in the Franklin Group of Funds or the
Templeton Group and a sales charge which would otherwise apply to
the reinvestment is reduced or eliminated. Any portion of such
sales charge excluded from the tax basis of the shares sold will
be added to the tax basis of the shares acquired in the
reinvestment. Shareholders should consult with their tax advisor
concerning the tax rules applicable to the redemption or exchange
of Fund shares.
For corporate shareholders, it is anticipated that only a small
portion of the Fund's dividends during the current fiscal year
will qualify for the corporate dividends-received deduction
because of the Fund's principal investment in non-equity domestic
investments. To the extent that the Fund pays dividends which
qualify for this deduction, the availability of the deduction is
subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and will,
promptly after the close of each calendar year, advise them of
the tax status for federal income tax purposes of such dividends
and distributions.
Shareholders who are not U.S. persons for purposes of federal
income taxation should consult with their financial or tax
advisors regarding the applicability of U.S. withholding or other
taxes to distributions received by them from the Fund and the
application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect
to the applicability of any state and local intangible property
or income taxes on their shares of the Fund and distributions and
redemption proceeds received from the Fund.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities
dealers which execute an agreement with Distributors, the
principal underwriter of the Fund's shares. 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 the
Fund. Such reference, however, is for convenience only and does
not indicate a legal conclusion of capacity. The minimum initial
investment is $100 and subsequent investments must be $25 or
more. These minimums may be waived when the shares are purchased
through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for
the purchase of shares.
ALTERNATIVE PURCHASE ARRANGEMENTS. The difference between Class I
and Class II shares lies primarily in their front-end and
contingent deferred sales charges and Rule 12b-1 fees as
described below.
CLASS I. All Fund shares outstanding before the implementation of
the multiclass structure have been redesignated as Class I
shares, and will retain their previous rights, and privileges.
Class I shares are generally subject to a variable sales charge
upon purchase and not subject to any sales charge upon
redemption. Class I shares are subject to Rule 12b-1 fees of up
to an annual maximum of 0.15% of average daily net assets of such
shares. With this multiclass structure, Class I shares have
higher front-end sales charges than Class II shares and
comparatively lower Rule 12b-1 fees. Class I shares may be
purchased at a reduced front-end sales charges or at net asset
value if certain conditions are met. In most circumstances,
contingent deferred sales charges will not be assessed against
redemptions of Class I shares. See "Management of the Fund," and
"How to Sell Shares of the Fund" for more information.
CLASS II. The current public offering price of Class II shares is
equal to the net asset value, plus a front-end sales charge of 1%
of the amount invested. Class II shares are also subject to a
contingent deferred sales charge of 1.0% if shares are redeemed
within 18 months of the calendar month following purchase. In
addition, Class II shares are subject to Rule 12b-1 fees of up to
a maximum of .65% of average daily net assets of such shares.
Class II shares have lower front-end sales charges than Class I
shares and comparatively higher Rule 12b-1 fees. See "Contingent
Deferred Sales Charge" under "How to Sell Shares of the Fund".
Purchases of Class II shares are limited to purchases below $1
million. Any purchases of $1 million or more will automatically
be invested in Class I shares, since that is more beneficial to
investors. Such purchases, however, may be subject to a
contingent deferred sales charge. Investors may exceed $1 million
in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million,
however, should consider purchasing Class I shares through a
Letter of Intent instead of purchasing Class II shares.
DECIDING WHICH CLASS TO PURCHASE. Investors should carefully
evaluate their anticipated investment amount and time horizon
prior to determining which class of shares to purchase.
Generally, an investor who expects to invest less than $100,000
in the Franklin Templeton Funds and who expects to make
substantial redemptions within approximately six years or less of
investment should consider purchasing Class II shares. However,
the higher annual Rule 12b-1 fees on the Class II shares will
result in slightly higher operating expenses and lower income
dividends for Class II shares, which will accumulate over time to
outweigh the difference in initial sales charges. For this
reason, Class I shares may be more attractive to long-term
investors even if no sales charge reductions are available to
them.
Investors who qualify to purchase Class I shares at reduced sales
charges definitely should consider purchasing Class I shares,
especially if they intend to hold their shares approximately six
years or more. Investors who qualify to purchase Class I shares
at reduced sales charges but who intend to hold their shares less
than approximately six years should evaluate whether it is more
economical to purchase Class I shares through a Letter of Intent
or under Rights of Accumulation or other means, rather than
purchasing Class II shares. INVESTORS INVESTING $1 MILLION OR
MORE IN A SINGLE PAYMENT AND OTHER INVESTORS WHO QUALIFY TO
PURCHASE CLASS I SHARES AT NET ASSET VALUE WILL BE PRECLUDED FROM
PURCHASING CLASS II SHARES.
Each class represents the same interest in the investment
portfolio of the Fund and has the same rights, except that each
class has a different sales charge, bears the separate expenses
of its Rule 12b-1 distribution plan, and has exclusive voting
rights with respect to such plan. The two classes also have
separate exchange privileges.
PURCHASE PRICE OF FUND SHARES
Shares of both classes of the Fund are offered at their
respective public offering prices, which are determined by adding
the net asset value per share plus a front-end 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 Shareholder
Application accompanied by a negotiable check).
CLASS I. The sales charge for Class I shares is a variable
percentage of the offering price depending upon the amount of the
sale. 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 front-end sales charges or
underwriting commissions and dealer concessions for Class I
shares.
TOTAL SALES CHARGE
SIZE OF AS A PERCENTAGE AS A PERCENTAGE DEALER
TRANSACTION AT OF OFFERING OF NET AMOUNT CONCESSION AS A
OFFERING PRICE PRICE INVESTED PERCENTAGE OF
OFFERING
PRICE*,***
Less than 4.25% 4.44% 4.00
$100,000
$100,000 but 3.50% 3.63% 3.25%
less than
$250,000
$250,000 but 2.75% 2.83% 2.50%
less than
$500,000
$500,000 but 2.15% 2.20% 2.00%
less than
$1,000,000
$1,000,000 NONE NONE (see
or more below)**
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of
its own resources, to securities dealers who initiate and are
responsible for purchases of $1 million or more: 0.75% on sales
of $1 million but less than $2 million, plus 0.60% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12
months for purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at
times be allowed to the securities dealer. If 90% or more of the
sales commission is allowed, such securities dealer may be deemed
to be an underwriter as that term is defined in the Securities
Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or
more, but a contingent deferred sales charge of 1% is imposed on
certain redemptions of all or a portion of investments of $1
million within the contingency period. See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales
charge on the purchase of Class I 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(Registered Trademark) and the Templeton Group of Funds.
Included for these aggregation purposes are (a) the mutual funds
in the Franklin Group of Funds except Franklin Valuemark Funds
and Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors or its
affiliates (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
and (c) the U.S. registered mutual funds in the Templeton Group
of Funds except 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.
Other Payments to Securities Dealers. Distributors, or one of its
affiliates, may make payments, out of its own resources, of up to
0.75% of the amount purchased to securities dealers who initiate
and are responsible for purchases made at net asset value by non-
designated retirement plans, and up to 1% of the amount purchased
to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated
retirement plans (excluding IRA and IRA rollovers), certain trust
companies and trust departments of banks and certain retirement
plans of organizations with collective retirement plan assets of
$10 million or more. See definitions under "Description of
Special Net Asset Value Purchases" and as set forth in the SAI.
CLASS II. Unlike Class I shares, the front-end sales charges and
dealer concessions for Class II shares do not vary depending on
the amount of purchase. See table below:
TOTAL SALES CHARGE
SIZE OF AS A AS A DEALER
TRANSACTION PERCENTAGE OF PERCENTAGE OF CONCESSION AS
AT OFFERING OFFERING NET AMOUNT A PERCENTAGE
PRICE PRICE INVESTED OF OFFERING
PRICE*
any amount 1.00% 1.01% 1.00%
(less than $1
million)
* Distributors, or one of its affiliates, may make additional
payments to securities dealers, from its own resources, of up to
1% of the amount invested. During the first year following a
purchase of Class II shares, Distributors will keep a portion of
the Rule 12b-1 fees assessed to those shares to partially recoup
fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will
be assessed a contingent deferred sales charge of 1.0% on the
lesser of the then-current net asset value or the net asset value
of such shares at the time of purchase, unless such charge is
waived as described under "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
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 the 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. Securities dealers may
not use sales of the Fund's 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 Fund or
its shareholders.
Additional terms concerning the offering of the Fund's shares are
included in the SAI.
Certain officers and directors of the Fund are also affiliated
with Distributors. A detailed description is included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES - CLASS I SHARES ONLY
Class I 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 securities
dealer should notify Distributors at the time of each purchase of
shares which qualifies for the reduction. In determining whether
a purchase qualifies for a discount, an investment 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. The value of Class II shares owned by the investor
may also be included for this purpose.
In addition, an investment in Class I shares 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 Class I shares by
completing the Letter of Intent section of the Shareholder
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 Class I shares 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.
Although the sales charges on Class II shares cannot be reduced
through these programs, the value of Class II shares owned by the
investor may be included in determining a reduced sales charge to
be paid on Class I shares pursuant to the Letter of Intent and
Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
An individual who is a member of a qualified group, such as the
Assembly of Governmental Employees ("AGE"), may also purchase
Class I shares of the Fund 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 members of 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 Fund shares and now were
investing $25,000, the sales charge would be 3.50%. Members of
AGE who participate in the payroll deduction plan described below
or the group accumulation plan discussed above are eligible for a
reduced sales charge of 1% on investments of $500 or more. In
addition, as stated above, no front-end sales charge applies on
investments of $1 million or more by individuals or groups, but a
contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month of the
purchase. 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
Fund shares 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 Fund or Distributors and the
members, agree to include sales and other materials related to
the Fund 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 Fund.
AGE members who select a payroll deduction plan should complete
the payroll deduction plan section of the supplement to the
Shareholder Application and submit it to their employer.
Investments may be in any amount, with a minimum of $12.50.
Payroll deduction plans will normally be identified by a member's
social security number, therefore, such plans must be limited to
one payroll deduction account per member. Subsequent investments
will be automatic and will continue until such time as the
investor notifies the Fund 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 Fund, there may be a delay between the time of
the payroll deduction and the time the money reaches the Fund.
The investment in the Fund 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 Fund.
PURCHASES AT NET ASSET VALUE
Class I shares may be purchased without the imposition of a front-
end sales charge ("net asset value") or a contingent deferred
sales charge by (1) officers, trustees, directors, and full-time
employees of the Fund, any of the Franklin Templeton Funds, or of
the Franklin Templeton Group, and by their spouses and family
members, including any subsequent payments made by such parties
after cessation of employment; (2) companies exchanging shares
with or selling assets pursuant to a merger, acquisition or
exchange offer; (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 Code,
in shares of the Fund; (6) certain unit investment trusts and
unit holders of such 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.
For either Class I or Class II, the same class of shares of the
Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund
or another of the Franklin Templeton Funds which were purchased
with a front-end sales charge or assessed a contingent deferred
sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the
time of purchase of the new shares. 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 and subsequently repurchased, a new contingency
period will begin. Shares of the Fund 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 the 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.
For either Class I or Class II, the same class of shares of the
Fund or of another of the Franklin Templeton Funds may be
purchased at net asset value and without a contingent deferred
sales charge by persons who have received dividends and capital
gains distributions in cash from investments in that class of
shares of the Fund 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 to Shareholders."
Class I shares 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 a
mutual fund which is not part of the Franklin Templeton Funds and
which charged the investor a contingent deferred sales charge
upon redemption and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by broker
dealers who have entered into a supplemental agreement with
Distributors, or by registered investment advisors affiliated
with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Class I shares may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by anyone
who has taken a distribution from an existing retirement plan
already invested in the Franklin Templeton Funds (including
former participants of the Franklin Templeton Profit Sharing
401(k) plan, to the extent of such distribution. In order to
exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust
Company (the "Trust Company"), the Fund or Investor Services,
within 120 days after the plan distribution.
Class I shares may also be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
any state, county, or city, or any instrumentality, department,
authority or agency thereof which has determined that the Fund is
a legally permissible investment and which is prohibited by
applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any
registered management investment company ("an eligible
governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN
LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal
investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net asset
value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to
such securities dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may also be purchased at net asset value and
without the imposition of a contingent deferred sales charge by
certain designated retirement plans, including profit sharing,
pension, 401(k) and simplified employee pension plans
("designated plans"), subject to minimum requirements with
respect to number of employees or amount of purchase, which may
be established by Distributors. Currently those criteria require
that the employer establishing the plan have 200 or more
employees or that the amount invested or to be invested during
the subsequent 13-month period in the Fund or in any of the
Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under
Section 401 of the Code ("non-designated plans") may be afforded
the same privilege if they meet the above requirements as well as
the uniform criteria for qualified groups previously described
under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related
expenses.
Class I shares 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. 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 this Fund 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.
Class I shares may be purchased at net asset value and without
the imposition of a contingent deferred sales charge by trustees
or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of
$10 million or more, without regard to where such assets are
currently invested.
Refer to the SAI for further information regarding net asset
value purchases of Class I shares.
PURCHASING CLASS I AND CLASS II SHARES
When placing purchase orders, investors should clearly indicate
which class of shares they intend to purchase. A purchase order
that fails to specify a class will automatically be invested in
Class I shares. Purchases of $1 million or more in a single
payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset
value should purchase Class I rather than Class II shares. See
the section "Purchases at Net Asset Value" and "Description of
Special Net Asset Value Purchases" above for a discussion of when
shares may be purchased at net asset value.
GENERAL
Securities laws of states in which the Fund's 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.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer-
sponsored retirement plans involving tax-deferred investments.
The Fund may be used as an investment vehicle for an existing
retirement plan, or Franklin Templeton Trust Company ( the "Trust
Company") may provide the plan documents and serve as custodian
or trustee. A plan document must be adopted for a retirement plan
to be in existence.
The Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for retirement plans. Brochures for the
Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution
requirements. Please note that an application other than the one
contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a
retirement plan brochure or application, call 1-800/DIAL BEN (1-
800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan accounts.
Specific forms are required to be completed for distributions
from Franklin Templeton Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or
benefits and pension plan consultants before choosing a
retirement plan. In addition, retirement plan investors should
consider consulting their investment representatives or advisers
concerning investment decisions within their plans.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION
MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE
SHARES ARE HELD, OF RECORD, BY A FINANCIAL INSTITUTION OR IN A
"STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH THE NATIONAL
SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE SECTION
CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and capital
gain distributions, are generally credited to an account in the
name of an investor on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the
risk of loss or theft of a share certificate. A lost, stolen or
destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is
generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate
will be issued if requested in writing by the shareholder or by
the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that period
and after each other transaction which affects the shareholder's
account. This statement will also show the total number of shares
owned by the shareholder, including the number of shares in "plan
balance" for the account of 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 Automatic Investment Plan
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 dealers or from Distributors.
The market value of each class of the 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. Retirement plans subject to mandatory distribution
requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis.
If the shareholder establishes a plan, any capital gain
distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account 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 Shareholder 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. Payments 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 dividends and 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, 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 yield or
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 Fund would be
disadvantageous because of the sales charge on the additional
purchases. Also, redemptions of Class I shares and Class II
shares may be subject to a contingent deferred sales charge if
the shares are redeemed within 12 months (Class I shares) or 18
months (Class II shares) of the calendar month of the original
purchase date. 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.
With respect to Class I shares, the contingent deferred sales
charge is waived for redemptions through a Systematic Withdrawal
Plan set up prior to February 1, 1995. With respect to
Systematic Withdrawal Plans set up on or after February 1, 1995,
however, the applicable contingent deferred sales charge is
waived for Class I and Class II share redemptions of up to 1%
monthly of an account's net asset value (12% annually, 6% semi-
annually, 3% quarterly). For example, if a Class I account
maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan
free of charge; any amount over that $120,000 would be assessed a
1% (or applicable) contingent deferred sales charge. Likewise, if
a Class II account maintained an annual balance of $10,000, only
$1,200 could be withdrawn through a once-yearly Systematic
Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice
by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's 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.
Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
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 a shareholder's investment objective or outlook for
the securities markets changes, the Fund shares may be exchanged
for the same class of shares of other Franklin Templeton Funds
which are eligible for sale in the shareholder's state of
residence and in conformity with such fund's stated eligibility
requirements and investment minimums. Some funds, however, may
not offer Class II shares. Class I shares may be exchanged for
Class I shares of any Franklin Templeton Funds. Class II shares
may be exchanged for Class II shares of any Franklin Templeton
Funds. No exchanges between different classes of shares will be
allowed. 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 12 months (Class I
shares) or 18 months (Class II shares) of the calendar month
following the original purchase date, a contingent deferred sales
charge will be imposed. Investors should review the prospectus 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 may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of the
written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF
ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING
INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED FRANKLIN
TELEFACTS(REGISTERED TRADEMARK) SYSTEM (DAY OR NIGHT) AT 1-
800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE
EXTENDED TO A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES
SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect
exchanges from the Fund into an identically registered account of
the same class of shares in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is available
only for uncertificated shares or those which have previously
been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. Please
refer to "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be difficult
to implement and the TeleFACTS option may not be available. In
this event, shareholders should follow the other exchange
procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's
shares, Investor Services will accept exchange orders from
securities dealers who execute a dealer or similar agreement with
Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which
certificates have previously been deposited. A securities dealer
may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges of the same class of shares are made on the basis of
the net asset values of the class involved, except as set forth
below. Exchanges of shares of a class which were originally
purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and
the class of shares being purchased, unless the original
investment on which no sales charge was paid was transferred in
from a fund on which the investor paid a sales charge. Exchanges
of Class I shares of the Fund which were purchased with a lower
sales charge into a fund which has a higher sales charge will be
charged the difference in sales charges, 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 the
Fund account, declared but unpaid income dividends and capital
gain distributions will be transferred to the account in the fund
being exchanged into and will be invested at net asset value.
Because the exchange is considered a redemption and purchase of
shares, the shareholder may realize a gain or loss for federal
income tax purposes. Backup withholding and information reporting
may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section
in this Prospectus and in the SAI.
There are differences among the many Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and review
a current prospectus of the fund into which the shareholder
wishes to transfer.
If a substantial portion of the 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 Fund to initially invest this money in
short-term, interest-bearing money market instruments, unless it
is felt that attractive investment opportunities consistent with
the Fund's investment objectives 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.
The Exchange Privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
EXCHANGES OF CLASS I SHARES
The contingency period of Class I shares will be tolled (or
stopped) for the period such shares are exchanged into and held
in a Franklin or Templeton money market fund. If a Class I
account has shares subject to a contingent deferred sales charge,
Class I shares will be exchanged into the new account on a "first-
in, first-out" basis. See also "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the
contingent deferred sales charge and Class II shares that are
not, the shares will be transferred proportionately into the new
fund. Shares received from reinvestment of dividends and capital
gains are referred to as "free shares," shares which were
originally subject to a contingent deferred sales charge but to
which the contingent deferred sales charge no longer applies are
called "matured shares," and shares still subject to the
contingent deferred sales charge are referred to as "CDSC liable
shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For
instance, if a shareholder has $1,000 in free shares, $2,000 in
matured shares, and $3,000 in CDSC liable shares, and the
shareholder exchanges $3,000 into a new fund, $500 will be
exchanged from free shares, $1,000 from matured shares, and
$1,500 from CDSC liable shares. Similarly, if CDSC liable shares
have been purchased at different periods, a proportionate amount
will be taken from shares held for each period. If, for example,
a shareholder holds $1,000 in shares bought 3 months ago, $1,000
bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of
these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II
shareholders is the Franklin Templeton Money Fund II ("Money Fund
II"), a series of the Franklin Templeton Money Fund Trust. No
drafts (checks) may be written on Money Fund II accounts, nor may
shareholders purchase shares of Money Fund II directly. Class II
shares exchanged for shares of Money Fund II will continue to age
and a contingent deferred sales charge will be assessed if CDSC
liable shares are redeemed. No other money market funds are
available for Class II shareholders for exchange purposes. Class
I shares may be exchanged for shares of any of the money market
funds in the Franklin Templeton Funds except Money Fund II.
Draft writing privileges and direct purchases are allowed on
these other money market funds as described in their respective
prospectuses.
To the extent shares are exchanged proportionately, as opposed to
another method, such as first-in first-out, or free-shares
followed by CDSC liable shares, the exchanged shares may, in some
instances, be CDSC liable even though a redemption of such
shares, as discussed elsewhere herein, may no longer be subject
to a CDSC. The proportional method is believed by management to
more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the
contingency period. For federal income tax purposes, the cost
basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen
by the Fund.
TRANSFERS
Transfers between identically registered accounts in the same
fund and class are treated as non-monetary and non-taxable
events, and are not subject to a contingent deferred sales
charge. The transferred shares will continue to age from the date
of original purchase. Like exchanges, Class II shares will be
moved proportionately from each type of shares in the original
account.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be
convertible to Class I shares. A shareholder may, however, sell
his Class II shares and use the proceeds to purchase Class I
shares, subject to all applicable sales charges.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may
accomplish exchanges directly. Certain restrictions may apply,
however, to other types of retirement plans. See "Restricted
Accounts" under "Telephone Transactions."
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.
The 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, or more than 1/4 of 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.
The Fund also reserves the right to refuse the purchase side of
an exchange request 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.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive
from the Fund the value of the shares. Shares may be redeemed in
any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of this
Prospectus, and any share certificates which have been issued for
the shares being redeemed, properly endorsed and in order for
transfer. The shareholder will then receive from the Fund the
value of the class of shares redeemed based upon the net asset
value per share (less a contingent deferred sales charge, if
applicable) 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 the close of the New York Stock Exchange
["Exchange"], which is generally 1:00 p.m. Pacific time) each day
that the Exchange is open for business will receive the price
calculated on the following business day. Shareholders are
requested 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) share certificates, if the redemption proceeds are in excess
of $50,000; or
(5) 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.
Share Certificates - Where shares to be redeemed are represented
by share certificates, the request for redemption must be
accompanied by the share certificate and a share assignment form
signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above.
Shareholders are advised, for their own protection, to send the
share certificate and assignment form in separate envelopes if
they are being mailed in for redemption.
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 state law since these accounts have varying
requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"), included
with this Prospectus, may redeem shares of the Fund by telephone,
subject to the Restricted Account exception noted under
"Telephone Transactions - Restricted Accounts." 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
FUND 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 the completed Agreement on file,
redemptions of uncertificated shares or shares which have
previously been deposited with the Fund or Investor Services may
be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the close of the Exchange
(generally 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, government entities, and
qualified retirement plans which qualify to purchase shares at
net asset value pursuant to the terms of this Prospectus) which
wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available
from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers
who have entered into an 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. The 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
and the class, 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
dividends 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 dealer may charge a fee for
handling the order. The SAI contains more information on the
redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
CLASS I. In order to recover commissions paid to securities
dealers on 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 net asset value of the shares redeemed (exclusive
of reinvested dividends and capital gain distributions) or the
total cost of such shares at the time of purchase, and is
retained by Distributors. The contingent deferred sales charge is
waived in certain instances. See "Purchases at Net Asset Value"
under "How to Buy Shares of the Fund."
CLASS II. Class II shares redeemed within the contingency period
of 18 months of the calendar month following their purchase will
be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net
asset value at the time of purchase of such shares, and is
retained by Distributors. The contingent deferred sales charge is
waived in certain instances. See below.
CLASS I AND CLASS II. In determining if a contingent deferred
sales 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 the contingency
period (12 months in the case of Class I shares and 18 months in
the case of Class II shares); (ii) shares purchased with
reinvested dividends and capital gain distributions; and (iii)
other shares held longer than the contingency period; and
followed by any shares held less than the contingency period, on
a "first in, first out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in
redemption proceeds or an adjustment to the cost basis of the
shares redeemed.
The contingent deferred sales charge on each class of shares is
waived, as applicable, for: exchanges; any account fees;
distributions to participants or their beneficiaries in Trust
Company individual retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of
excess contributions from employee benefit plans; distributions
from employee benefit plans, including those due to termination
or plan transfer; redemptions through a Systematic Withdrawal
Plan set up for shares 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); redemptions initiated by the Fund
due to a shareholder's account falling below the minimum
specified account size; and redemptions following the death of
the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when
during the month the investment occurred, will age one month on
the last day of that month and each subsequent month.
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.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the 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 Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement plan account, a
shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such
plans to a participant under age 59 1/2, unless the distribution
meets one of the exceptions set forth in the Code.
OTHER
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.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of
record, if any, may 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 dividend option (see "Restricted Accounts" below),
(iii) transfer Fund shares in one account to another identically
registered account in the Fund, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described
under "How to Sell Shares of the Fund - Redemptions by Telephone"
will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The 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
by sending a confirmation statement on redemptions to the address
of record each time account activity is initiated by telephone.
So long as the Fund 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. The Fund and Investor Services
may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any
instance where the 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 losses which
may occur because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To assure
compliance with all applicable regulations, special forms are
required for any distribution, redemption, or dividend payment.
While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement plans.
Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or transfer
procedures, including any required forms, retirement account
shareholders may call to speak to a Retirement Plan Specialist at
1-800/527-2020 for Franklin accounts, or 1-800/354-9191 (press
"2" when prompted to do so) for Templeton accounts.
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 to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any
losses resulting from the inability of a shareholder to execute a
telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written notice
to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of each class of the Fund is
determined as of the close of the Exchange (generally 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 each class of shares of the
Fund).
The net asset value per share for each class of the Fund is
determined in the following manner: The aggregate of all
liabilities, is deducted from the aggregate gross value of all
assets, and the difference is divided by the number of shares of
the respective class of the Fund outstanding at the time. For the
purpose of determining the aggregate net assets of each class of
the Fund, cash and receivables are valued at their realizable
amounts. Interest is recorded as accrued and dividends are
recorded on the ex-dividend date. 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. Trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally
completed well before the close of business of the Exchange on
each day on which the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or
countries, may not take place on every Exchange business day.
Furthermore, trading takes place in various foreign markets on
days which are not business days for the Exchange and on which
the Fund's net asset value is not calculated. The Fund calculates
net asset value per share, and therefore effects sales and
redemptions of its shares, as of the close of the Exchange each
day on which the Exchange is open. Such calculation does not take
place contemporaneously with the determination of the prices of
many of the portfolio securities used in such calculation and, if
events occur which materially affect the value of these foreign
securities, they will be valued at fair market value as
determined by the management and approved in good faith by the
Board of Directors.
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 Board of Directors. With the approval of directors, the
Fund may utilize a pricing service, bank or securities dealer to
perform any of the above described functions.
Each of the Fund's classes will bear, pro-rata, all of the common
expenses of the Fund. The net asset value of all outstanding
shares of each class of the Fund will be computed on a pro-rata
basis for each outstanding share based on the proportionate
participation in the Fund represented by the value of shares of
such classes, except that the Class I and Class II shares will
bear the Rule 12b-1 expenses payable under their respective
plans. Due to the specific distribution expenses and other costs
that will be allocable to each class, the dividends paid to each
class of the Fund may vary.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
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, Franklin and Templeton shareholders may
access an automated system (day or night) which offers the
following features:
By calling the Franklin TeleFACTS system, Class I shareholders
may obtain current price, yield or other performance information
specific to a Franklin fund; process an exchange into an
identically registered Franklin account; obtain account
information and request duplicate confirmation or year-end
statements, money fund checks, if applicable, and deposit slips.
By calling the Templeton Star Service, shareholders may obtain
current price and yield information specific to a Templeton fund,
regardless of class, or Franklin Class II shares; obtain account
information, request duplicate confirmation or year-end
statements and money fund checks, if applicable.
Share prices and account information specific to Templeton Class
I or II shares and Franklin Class II shares may also be accessed
on TeleFACTS by Franklin Class I and Class II shareholders.
The TeleFACTS system is accessible by calling 1-800/247-1753. The
Star Service is accessible by calling 1-800/654-0123. Franklin
Class I and Class II share codes for the Fund, which will be
needed to access system information are 105 and 205,
respectively. The system's automated operator will prompt the
caller with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
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:
DEPARTMENT NAME TELEPHONE NO. HOURS OF OPERATION (PACIFIC TIME)
(MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
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 a class'
performance, including current yield, various expressions of
total return and current distribution rate. They may occasionally
cite statistics to reflect its 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 Fund may also furnish total return quotations
for each class 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 income and capital
gain 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 for each class reflects the income per share earned
by the Fund's portfolio investments; it is calculated for each
class by dividing that class' net investment income per share
during a recent 30-day period by the maximum public offering
price for that class of shares on the last day of that period and
annualizing the result.
Yield for each class, which is calculated according to a formula
prescribed by the SEC (see the SAI), is not indicative of the
dividends or distributions which were or will be paid to the
Fund's shareholders. Dividends or distributions paid to
shareholders of a class 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
dividends per share paid by a class during the past 12 months by
a current maximum offering price for that class of shares. Under
certain circumstances, such as when there has been a change in
the amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect,
rather than using the dividends 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 dividends and interest, such as premium
income from option writing and short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against a class'
income and will assume the payment of the maximum sales charge on
the purchase of that class 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 each class, 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 a class' yield, distribution rate or total return may be
in any future period.
Because Class II shares were not offered prior to May 15, 1995,
no performance data is available for these shares. After a
sufficient period of time has passed, Class II performance data
will be available.
GENERAL INFORMATION
As of May 15, 1995, the full name of each class is as follows:
AGE High Income Fund, Inc., AGE High Income Fund Series, AGE High
Income Fund - Class I, and AGE High Income Fund, Inc., AGE High
Income Fund Series, AGE High Income Fund - Class II.
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends May 31. Annual Reports containing
audited financial statements of the Fund, including the auditors'
report, and Semi-Annual Reports containing unaudited financial
statements are automatically sent to shareholders. Copies may be
obtained, without charge, upon request to the Fund at the
telephone number or address set forth on the cover page of this
Prospectus.
Additional information on Fund performance is included in the
Fund's Annual Report to Shareholders and the SAI.
ORGANIZATION AND VOTING RIGHTS
The Fund's authorized capital stock consists of 5,000,000,000
shares of common stock of $.01 par value divided into two
classes. Two billion, five hundred million (2,500,000,000) shares
of capital stock have been allocated to Class I and Two billion,
five hundred million (2,500,000,000) shares of stock have been
allocated to Class II. All shares have one vote and, when issued,
are fully paid and nonassessable. All shares have equal voting,
participation and liquidation rights, but have no subscription,
preemptive or conversion rights.
To the extent required by applicable law, the Fund holds regular
annual meetings of its security holders. Shares of the Fund have
noncumulative voting rights which means that in all elections of
directors, the holders of more than 50% of the shares voting can
elect 100% of the directors if they choose to do so, and in such
event, the holders of the remaining shares voting will not be
able to elect any person or persons to the Board of Directors.
Shares of each class represent proportionate interests in the
assets of the Fund and have the same voting and other rights and
preferences as the other class of the Fund for matters that
affect the Fund as a whole. For matters that only affect a
certain class of the Fund's shares, however, only shareholders of
that class will be entitled to vote. Therefore each class of
shares will vote separately on matters (1) affecting only that
class, (2) expressly required to be voted on separately by state
corporation law, or (3) required to be voted on separately by the
1940 Act, or the rules adopted thereunder. For instance, if a
change to the Rule 12b-1 plan relating to Class I shares requires
shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class.
Similarly, if a change to the Rule 12b-1 plan relating to Class
II shares requires approval, only shareholders of Class II may
vote on changes to such plan. On the other hand, if there is a
proposed change to the investment objective of the Fund, this
affects all shareholders, regardless of which class of shares
they hold and, therefore, each share has the same voting rights.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares
of any shareholder whose account has a value of less than $50,
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.
OTHER INFORMATION
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 Fund nor its 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 the Fund may be made by check, draft
or wire. The Fund has 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 the
Fund carried in "street" or "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 Fund 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.
IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may
be required to report to the IRS any taxable dividend, capital
gain distribution, or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made
to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and
made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to
backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for
previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for
any person failing to provide a TIN along with the required
certifications and (2) close an account by redeeming its shares
in full at the then-current net asset value upon receipt of
notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a
shareholder who has completed an "awaiting TIN" certification to
provide the Fund with a certified TIN within 60 days after
opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-
day management of the Fund's portfolio: R. Martin Wiskemann since
1972 and Chris Molumphy since 1991.
R. Martin Wiskemann
Senior Vice President of Advisers
Mr. Wiskemann holds a degree in business administration from the
Handelsschule of the State of Zurich, Switzerland. He has been
with Advisers since 1972 and 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.
Chris Molumphy
Portfolio Manager of Advisers
Mr. Molumphy holds a bachelor of arts degree in economics from
Stanford University and a master's degree in finance from the
University of Chicago. He has been with Advisers since 1988. He
is a Chartered Financial Analyst (CFA) and a member of several
securities industry associations.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
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 the 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; 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.
C - Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA - This is the highest rating assigned by S&P to a debt
obligation and 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.
D - Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears
AGE High Income Fund
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
CUSTODIAN
Bank of America
555 California Street, 4th Floor
San Francisco, California 94104
For an enlarged version of this prospectus please call 1-
800/DIAL BEN
Your Representative Is:
05 P 10/94
FRANKLIN'S
AGE HIGH INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
May 15, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
Additional Information Regarding the Fund's Investment Objectives
and Policies (See also the Prospectus "Investment Objectives and
Policies of the Fund")
Officers and Directors
Investment Advisory and Other Services (See also the Prospectus
"Management of the Fund")
The Fund's Policies Regarding Brokers Used on Portfolio
Transactions
Additional Information Regarding Fund Shares (See also the
Prospectus "How to Buy Shares of the Fund"; "How to Sell Shares
of the Fund"; "Valuation of Fund Shares")
Additional Information Regarding Taxation (See also the
Prospectus "Taxation of the Fund and Its Shareholders")
The Fund's Underwriter
General Information
Financial Statements
AGE High Income Fund, Inc. (the "Fund") is a diversified, open-
end management investment company with the principal investment
objective of earning a high level of current income. The Fund
also seeks capital appreciation as a secondary objective. The
Fund's assets will generally be invested in both fixed-income
debt securities and dividend-paying common or preferred stocks.
A Prospectus for the Fund, dated May 15, 1995, as may be amended
from time to time, provides the basic information an investor
should know before investing in the Fund and may be obtained
without charge from the Fund or from its principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors") at the
address listed above.
As explained in the Prospectus, this Fund offers two classes of
shares to its investors: AGE High Income Fund - Class I ("Class
I") and AGE High Income Fund - Class II ("Class II"). This new
multiclass structure allows investors to consider, among other
features, the impact of sales charges and distribution fees
("Rule 12b-1 fees") on their investments in this Fund.
This Statement of Additional Information (the "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 Fund, and should be read in
conjunction with the Fund's Prospectus.
Additional Information Regarding the Fund's Investment
Objectives and Policies
Investment Objectives and Policies
Loans of Portfolio Securities. As stated in the Prospectus, the
Fund may make loans of its portfolio securities, up to 10% of its
total assets, in accordance with guidelines adopted by the Fund's
Board of Directors. The lending of securities is a common
practice in the securities industry. The Fund will engage in
security loan arrangements with the primary objective of
increasing the Fund's income either through investing the
collateral in short-term, interest bearing obligations or by
receiving loan premiums from the borrower. The Fund will continue
to be entitled to all dividends or interest on any loaned
securities. As with any extension of credit, there are risks of
delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially. The Fund will not lend
its portfolio securities if such loans are not permitted by the
laws or regulations of any state in which its shares are
qualified for sale. Loans will be subject to termination by the
Fund in the normal settlement time, currently five business days
after notice, or by the borrower on one day's notice. Borrowed
securities must be returned when the loan is terminated. Any gain
or loss in the market price of the borrowed securities which
occurs during the term of the loan inures to the Fund and its
shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of
its securities.
Restricted Securities. A restricted security is a security which
has been purchased through a private offering and cannot be sold
without prior registration under the Securities Act of 1933,
unless such sale is pursuant to an exemption therefrom. In recent
years, the Fund's portfolio has included several issues of such
securities.
Notwithstanding the restriction on the sale of such securities, a
secondary market exists for many of these securities. As with
other securities in the Fund's portfolio, if there are readily
available market quotations for a restricted security, it will be
valued, for purposes of determining the Fund's net asset value,
within the range of the bid and ask prices. To the extent that no
such quotations are available, the securities will be valued at
fair value in accordance with procedures adopted by the Board of
Directors. The Fund's purchases of restricted securities can
result in the receipt of commitment fees. For example, the
transaction may involve an individually negotiated purchase of
short-term increasing rate notes. Maturities for this type of
security typically range from one to five years. Such notes are
usually issued as temporary or "bridge" financing to be replaced
ultimately with permanent financing for the project or
transaction which the issuer seeks to finance. Typically, at the
time of commitment, the Fund receives the security and sometimes
a cash commitment fee. Because the transaction could possibly
involve a delay between the time the Fund commits to purchase the
security and the Fund's payment for and receipt of that security,
the Fund will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments
until payment is made. The Fund will not purchase restricted
securities in order to generate commitment fees, although the
receipt of such fees will assist the Fund in achieving its
principal objective of earning a high level of current income.
The Fund may also receive consent fees based on a variety of
situations. For example, the Fund may receive consent fees in
situations where an issuer seeks to "call" a bond it has issued
which does not contain a provision permitting the issuer to call
the bond. The Fund may also receive a consent fee in situations
where its consent is required to facilitate a merger or other
business combination transaction. Such fees are received only
occasionally, are privately negotiated and may be in any amount.
As is the case with commitment fees, the Fund will not purchase
securities with a view to generating consent fees, although the
receipt of such fees is consistent with the Fund's principal
investment objective.
Illiquid Securities. As noted in the Prospectus, it is the policy
of the Fund that illiquid securities (including illiquid equity
securities, securities with legal or contractual restrictions on
resale, repurchase agreements of more than seven days duration
and other securities which are not readily marketable) may not
constitute, at the time of purchase, more than 10% of the value
of the total net assets of the Fund. 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 instrument. Subject to this
limitation, the Board of Directors has authorized the Fund to
invest in restricted securities where such investment is
consistent with the Fund's investment objectives and has
authorized such securities to be considered liquid to the extent
the Fund's investment manager determines that there is a liquid
institutional or other market for such securities, such as
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. The Board of Directors will
review on a monthly basis any determination by the Fund's
investment advisor to treat a restricted security as liquid,
including the investment advisor'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 Fund's investment advisor and the Board of
Directors 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 the Fund
invests in restricted securities that are deemed liquid, the
general level of illiquidity may be increased if qualified
institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
Forward Currency Exchange Contracts. As stated in the Prospectus,
the Fund may enter into forward currency exchange contracts
("Forward Contracts") to attempt to minimize the risk to the Fund
from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date
which is individually negotiated and is privately traded by
currency traders and their customers. When the Fund is the buyer
or a seller in such a transaction, it will either cover its
position or maintain, in a segregated account with its custodian,
cash or high-grade marketable securities having an aggregated
value equal to the amount of such commitment until payment is
made.
When-Issued and Delayed Delivery Transactions. The Fund may
purchase debt securities on a "when-issued" or "delayed delivery"
basis. These transactions are arrangements under which the Fund
purchases securities with payment and delivery scheduled for a
future time. Purchases of debt securities on a when-issued or
delayed delivery basis are subject to market fluctuation and are
subject to the risk that the value or yields at delivery may be
more or less than the purchase price or the yields available when
the transaction was entered into. Although the Fund will
generally purchase debt securities on a when-issued basis with
the intention of acquiring such securities, it may sell them
before the settlement date if it is deemed advisable. In when-
issued and delayed delivery transactions, the Fund relies on the
seller to complete the transaction. The other party's failure may
cause the Fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued or delayed delivery basis
do not generally earn interest until their scheduled delivery
date. The Fund is not subject to any percentage limit on the
amount of its assets which may be invested in when-issued debt
securities.
Options on Securities. The Fund may write covered call options
which are listed for trading on a national securities exchange.
This means that the Fund will only write options on securities
which the Fund actually owns. A call option gives the buyer the
right to buy the security on which the option is written for a
specified period of time for a price agreed to at the time the
option is sold, even though that price may be less than the value
of the security at the time the option is exercised. When the
Fund sells covered call options, the Fund receives a cash premium
which can be used in whatever way is felt to be most beneficial
to the Fund. The risks associated with covered call writing are
such that in the event of a price rise on the underlying security
which would likely trigger the exercise of the call option, the
Fund will not participate in the increase in price beyond the
exercise price. If the Fund determines that it does not wish to
deliver the underlying securities from its portfolio, it would
have to enter into a "closing purchase transaction," the premium
on which may be higher or lower than that received by the Fund
for writing the option. There is no assurance that a closing
purchase transaction will be available in every instance.
Foreign Securities. As noted in the Prospectus, the Fund may
purchase foreign securities which are traded in the United States
or purchase American Depository Receipts ("ADRs") which are
certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank
or a correspondent bank. The Fund will only purchase ADRs which
are "sponsored," that is, an ADR in which 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 depository and the ADR holder. Under the terms of
most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions, thereby
ensuring that ADR holders will be able to exercise voting rights
through the depository with respect to the deposited securities.
Securities Transactions of the Fund
Normally, the Fund will purchase securities with the intention of
holding them for the long-term; however, it may on occasion
purchase securities with the expectation of selling within a
short period of time. Changes in particular portfolio holdings
may be made whenever it is considered that a security no longer
is suitable for the Fund's portfolio or that another security
appears to offer a relatively greater opportunity, and will be
made without regard to the length of time a security has been
held. The portfolio turnover for the fiscal years ended May 31,
1993 and 1994 was 38.33% and 42.32%, respectively.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental
policies, which means that they may not be changed without the
approval of a majority of the outstanding voting securities of
the Fund. Under the Investment Company Act of 1940 (the "1940
Act"), a "vote of a majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser
of (1) more than 50% of the outstanding shares of the Fund, or
(2) 67% or more of the shares of the Fund present at a
shareholders' meeting if more than 50% of the outstanding shares
of the Fund are represented at the meeting in person or by proxy.
The Fund may not:
1. Invest more than 25% of the value of the Fund's total assets
in one particular industry.
2. Purchase securities, if the purchase would cause the Fund at
that time to have more than 5% of the value of its total assets
invested in the securities of any one company or to own more than
10% of the voting securities of any one company (except
obligations issued or guaranteed by the U.S. government).
3. Underwrite or engage in the agency distributions of
securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter in connection with the
disposition of securities in its portfolio.
4. Make loans to other persons except on a temporary basis in
connection with the delivery or receipt of portfolio securities
which have been bought or sold, or by the purchase of bonds,
debentures or similar obligations which have been publicly
distributed or of a character usually acquired by institutional
investors or through loans of the Fund's portfolio securities, or
to the extent the entry into a repurchase agreement may be deemed
a loan.
5. Borrow money in excess of 5% of the value of the Fund's total
assets, and then only as a temporary measure for extraordinary or
emergency purposes.
6. Sell securities short or buy on margin nor pledge or
hypothecate any of the Fund's assets.
7. Buy or sell real estate (other than interests in real estate
investment trusts), commodities or commodity contracts.
8. Invest in the securities of another investment company,
except securities acquired in connection with a merger,
consolidation or reorganization; except to the extent the Fund
invests its uninvested daily cash balances in shares of the
Franklin Money Fund and other money market funds in the Franklin
Group of Funds provided i) its purchases and redemptions of such
money market fund' shares may not be subject to any purchase or
redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the
expense of distributing the Fund's shares (as determined under
Rule 12b-1, as amended under the federal securities laws), and
iii) provided aggregate investments by the Fund in any such money
market fund do not exceed (A) the greater of i) 5% of the Fund's
total net assets or (ii) $2.5 million, or (B) more than 3% of the
outstanding shares of any such money market fund.
9. Invest in any company for the purpose of exercising control
or management.
10. Purchase the securities of any company in which any officer
or director of the Fund or its investment manager owns more than
1/2 of 1% of the outstanding securities and in which all of the
officers and directors of the Fund and its investment manager as
a group, own more than 5% of such securities.
In response to state requirements:
(1) the Fund may not invest in warrants (valued at the lower of
cost or market) in excess of 5.0% of the value of the Fund's net
assets. No more than 2.0% of the value of the Fund's net assets
may be invested in warrants (valued at the lower of cost or
market) which are not listed on the New York or American Stock
Exchanges. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value;
(2) the Fund may not invest in rights (valued at the lower of
cost or market) in excess of 5.0% of the value of the Fund's net
assets. No more than 2.0% of the value of the Fund's net assets
may be invested in rights (valued at the lower of cost or market)
which are not listed on the New York or American Stock Exchanges.
Rights acquired by the Fund in units or attached to securities
may be deemed to be without value.
(3) the Fund will not invest in real estate limited partnerships
or in interests (other than publicly traded equity securities) in
oil, gas, or other mineral programs or leases, exploration or
development.
(4) the Fund will limit its investments to a total of 15% of its
total assets in any mix of restricted securities for which there
is not a liquid market, securities of issuers which are not
readily marketable, and securities of issuers which have been in
operation for less than three years.
(5) the Fund will not invest more than 10% of its assets in real
estate investment trusts or investment companies; and
(6) the Fund will not invest more than 5% of its assets in
options, financial futures, or stock index futures, other than
hedging positions or positions that are covered by cash or
securities.
Officers and Directors
The Board of Directors has the responsibility for the overall
management of the Fund, including general supervision and review
of its investment activities. The directors, in turn, elect the
officers of the Fund who are responsible for administering day-to-
day operations of the Fund. The affiliations of the officers and
directors and their principal occupations for the past five years
are listed below. Directors who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated
by an asterisk (*).
Frank H. Abbott, III
1045 Sansome St.
San Francisco, CA 94111
Director
President and Director, Abbott Corporation (an investment
company); and director, trustee or managing general partner, as
the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Harmon E. Burns
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
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.
Robert F. Carlson
2120 Lambeth Way
Carmichael, CA 95608
Director
Former member and past Chairman of the Board, Sutter Community
Hospitals, Sacramento, CA; former member Corporate Board, Blue
Shield of California; formerly Chief Counsel, California
Department of Transportation; and member and past President,,
Board of Administration, California Public Employees Retirement
Systems.
S. Joseph Fortunato
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Director
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.
Roy V. Fox
107 Deepwood Dr.
Georgetown, TX 78628-8301
Director
Retired; formerly Publishing Consultant, Franklin Resources, Inc.
and formerly National Administrative Officer of the Assembly of
Governmental Employees.
*Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
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.
*R. Martin Wiskemann
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
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.
Kenneth V. Domingues
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and Officer and/or
managing general partner, as the case may be, of 36 of the
investment companies in the Franklin 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.
Directors not affiliated with the investment manager are
currently paid fees of $680 per month plus $680 per meeting
attended and are reimbursed for expenses incurred in connection
with attending such meetings. During the fiscal year ended May
31, 1994, fees and expenses totaling $76,398 were paid to
directors of the Fund who are not affiliated with the investment
manager. As indicated above, certain of the directors and
officers hold positions with other companies in the Franklin
Group of Funds(Registered Trademark) and the Templeton Funds
("Franklin Templeton Funds"). The following table indicates the
fees paid by the Fund to its nonaffiliated directors and the
total fees received by such directors from the Fund and from
other Franklin Templeton Funds for which they serve as directors,
trustees or managing general partners.
Number of Frank- Total
Compensation
Aggregate lin Templeton From Franklin
Compensation Boards on Which Templeton
Funds, in-
Name From Fund* Each Serves cluding
the Fund**
Mr. Abbott $17,000 31 $176,870
Mr. Carlson $16,320 1 $ 16,320
Mr. Fortunato $16,320 57 $336,065
Mr. Fox $16,320 1 $ 14,960
* For the fiscal year ended May 31, 1994.
** For the calendar year ended December 31, 1994.
No officer or director received any other compensation directly
from the Fund. As of January 12, 1995, the directors and
officers, as a group, owned of record and beneficially
approximately 888,832 shares or less than 1% of the total
outstanding shares of the Fund. In addition, many of the Fund's
directors own shares in various of the other funds in the
Franklin Group of Funds and the Templeton Group of Funds. Certain
officers or directors 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.
From time to time, the number of Fund shares held in the "street
name" accounts of various securities dealers for the benefit of
their clients or in centralized securities depositories may
exceed 5% of the total shares outstanding. To the best knowledge
of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
Investment Advisory and Other Services
The investment manager of the 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 (the "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 $118 billion in assets for
more than 3.8 million shareholders. The preceding table indicates
those officers and directors who are also affiliated persons of
Distributors and Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Fund to purchase, hold or
sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. The Manager's activities are
subject to the review and supervision of the Fund's Board of
Directors to whom the Manager renders periodic reports of the
Fund's investment activities. The Manager, at its own expense,
furnishes the Fund with office space and office furnishings,
facilities and equipment required for managing the business
affairs of the Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services;
and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers,
directors and employees for the protection of the Fund. The Fund
bears all of its expenses not assumed by the Manager. See the
Statement of Operations in the financial statements at the end of
this SAI for additional details of these expenses.
Pursuant to the management agreement, the 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 average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on average monthly net assets
of the Fund in excess of $100 million up to $250 million; and
9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million. Each
class will pay its share of the fee as determined by the
proportion of the Fund that it represents.
Management fees for the fiscal years ended May 31, 1992, 1993 and
1994 were $8,245,812, $8,666,780 and $8,993,566, respectively.
The management agreement specifies that the management fee will
be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by the Fund
as prescribed by any state in which the Fund's shares are offered
for sale. The most stringent current limit requires the Manager
to reduce or eliminate its fee to the extent that aggregate
operating expenses of the Fund (excluding interest, taxes,
brokerage commissions and extraordinary expenses such as
litigation costs) would otherwise exceed in any fiscal year 2.5%
of the first $30 million of average net assets of the Fund, 2% of
the next $70 million of average net assets of the Fund and 1.5%
of average net assets of the Fund in excess of $100 million.
Expense reductions have not been necessary based on state
requirements.
The management agreement is in effect until April 30, 1996.
Thereafter, it may continue in effect for successive annual
periods providing such continuance is specifically approved at
least annually by a vote of the Fund's Board of Directors or by a
vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the
Fund's directors who are not parties to the management agreement
or interested persons of any such party (other than as directors
of the Fund), cast in person at a meeting called for that
purpose. The management agreement may be terminated without
penalty at any time by the Fund or by the Manager on 30 days'
written notice and will automatically terminate in the event of
its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Fund and
acts as the Fund's transfer agent and dividend-paying agent.
Investor Services is compensated on the basis of a fixed fee per
account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of the 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 Fund's independent auditors. During the
fiscal year ended May 31, 1994, their auditing services consisted
of rendering an opinion on the financial statements of the Fund
included in the Fund's Annual Report and this SAI.
The Fund's Policies Regarding Brokers Used on Portfolio
Transactions
Under the current management agreement with Advisers, the
selection of brokers and dealers to execute transactions in the
Fund's portfolio is made by the Manager in accordance with
criteria set forth in the management agreement and any directions
which the Fund's Board of Directors 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 the 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 Fund seeks 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 the 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 the Fund, specifically including the quotations
necessary to determine the value of the 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 the 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 the Fund's
officers are satisfied that the best execution is obtained, the
sale of Fund shares may also be considered as a factor in the
selection of broker/dealers to execute the Fund's portfolio
transactions.
Because Distributors is a member of the National Association of
Securities Dealers, it is sometimes entitled to obtain certain
fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage
for the benefit of the Fund, any portfolio securities tendered by
the 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 agreement 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 the 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 the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the
Fund.
During the fiscal years ended May 31, 1992, 1993 and 1994, the
Fund paid total brokerage commissions of $43,411, $103,351, and
$23,257, respectively. As of May 31, 1994, the Fund did not own
securities of its 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) 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 the 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 the 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 the Fund to complete an exchange for shares of any of the
investment companies will be effected at the close of business on
the day the request for exchange is received in proper form at
the net asset value then effective.
If a substantial portion of the 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 Fund to initially invest this money in
short-term, interest-bearing money market instruments, unless it
is felt that attractive investment opportunities consistent with
the Fund's investment objectives 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.
Dividend checks which are returned to the Fund marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
The Fund may impose a $10 charge for each returned item ,
against any shareholder account which, in connection with the
purchase of Fund shares, submits a check or a draft which is
returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its
efforts to locate a shareholder if 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 its location services.
Under agreements with certain banks in Taiwan, Republic of China,
the Fund's 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.
Class I Shares of the Fund 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, Class I shares of the Fund will be offered
with the following schedule of sales charges:
Sales
Size of Purchase Charge
Up to U.S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2%
Over U.S. $1,000,000 1%
Purchases and Redemptions Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper
form prior to the close of the Exchange (generally 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 the close of the Exchange (generally 1:00 p.m. Pacific
time) will be effected at the Fund's public offering price on the
day it is next calculated. The use of the term "securities
dealer" 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 - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the
Fund - Description of Special Net Asset Value Purchases," certain
categories of investors may purchase Class I shares of the Fund
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. Distributors may make these
payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following
purchase. Other conditions may apply. All terms and conditions
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 Class I 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, including Class II
shares, 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. The shareholder will receive a written
notification from Distributors requesting the remittance. 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
The 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 the Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission
("SEC"). In the case of requests for redemption in excess of such
amounts, the directors 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 Fund does 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 Fund
Due to the relatively high cost of handling small investments,
the Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder whose account has a
value of less than one-half of the initial minimum investment
required for that shareholder, but only where the value of such
account has been reduced by the shareholder's prior voluntary
redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right with respect to any
shareholder whose account has a value of $50 or more. In any
event, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and
allow the shareholder 30 days to make an additional investment in
an amount which will increase the value of the account to at
least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net
asset value of each class as of the close of the Exchange
(generally 1:00 p.m. Pacific time) each day that the Exchange is
open for trading. As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
As stated in the Prospectus, the net asset value per share for
each class of the Fund is determined in the following manner: The
aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by the
Fund, accrued expenses and taxes and any necessary reserves is
deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the respective
class of the Fund outstanding at the time. For the purpose of
determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is
recorded as accrued and dividends are recorded on the ex-dividend
date. 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. Portfolio securities underlying
actively traded call options are valued at their market price as
determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange prior to
the time when assets are valued. Lacking any sales that day or if
the last sale price is outside the bid and ask prices, the
options are valued within the range of the current closing bid
and ask prices if such valuation is believed to fairly reflect
the contract's market value. Other securities for which market
quotations are readily available are valued at the current market
price, which may be obtained from a pricing service, based on a
variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk
and maturity) and/or developments related to specific issues.
Securities and other assets for which market prices are not
readily available are valued at fair value as determined
following procedures approved by the Board of Directors. With the
approval of directors, the Fund may utilize a pricing service,
bank or securities dealer to perform any of the above described
functions.
The 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 values of such securities used in
computing the net asset value of the Fund's shares are determined
as of such times. Occasionally, events affecting the values of
such securities may occur between the time at which they are
determined and the close of the Exchange (generally 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 Board of Directors.
Securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets are valued in a similar
manner, and values are translated into U.S. dollars at the bid
price of their respective currency denomination against U.S.
dollars last quoted by a major bank or, if no such quotation is
available, at the rate of exchange determined in accordance with
policies established by the Board of Directors.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be
purchased at the net asset value determined on the business day
following the dividend record date (sometimes known as "ex-
dividend date"). The processing date for the reinvestment of
dividends may vary from month to month, and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semi-annual reports to its shareholders
regarding the Fund's performance and its portfolio holdings.
Shareholders who would like to receive an interim quarterly
report may phone Fund Information at 1-800 DIAL BEN.
Special Services
The Trust and Institutional Services Division of Distributors
provides specialized services, including recordkeeping, for
institutional investors of the Fund. The cost of these services
is not borne by the Fund.
Investor Services may pay certain financial institutions which
maintain omnibus accounts with the Fund on behalf of numerous
beneficial owners for recordkeeping operations performed with
respect to such beneficial owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an
amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also
charge a fee for their services directly to their clients.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund has elected to be treated
as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The
directors reserve the right not to maintain the qualification of
the Fund as a regulated investment company if they determine such
course of action to be beneficial to the shareholders. In such
case, the Fund will be subject to federal and possibly state
corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of
the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of
the income distributions paid by the Fund may be treated by
corporate shareholders as qualifying dividends for purposes of
the dividends-received deduction under federal income tax law. If
the aggregate qualifying dividends received by the Fund
(generally, dividends from U.S. domestic corporations, the stock
in which is not debt-financed by the Fund and is held for at
least a minimum holding period) is less than 100% of its
distributable income, then the amount of the Fund's dividends
paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate
qualifying dividends received by the Fund for the taxable year.
The amount or percentage of income qualifying for the corporate
dividends-received deduction will be declared by the Fund
annually in a notice to shareholders mailed shortly after the end
of the Fund's fiscal year.
Corporate shareholders should note that dividends paid by the
Fund from sources other than the qualifying dividends it receives
will not qualify for the dividends-received deduction. For
example, any interest income and short-term capital gain (in
excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
Corporate shareholders should also note that availability of the
corporate dividends-received deduction is subject to certain
restrictions. For example, the deduction is eliminated unless the
Fund shares have been held (or deemed held) for at least 46 days
in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to
its investment in Fund shares. The entire dividend, including the
portion which is treated as a deduction, is includable in the tax
base on which the alternative minimum tax is computed and may
also result in a reduction in the shareholder's tax basis in its
Fund shares, under certain circumstances, if the shares have been
held for less than two years. Corporate shareholders whose
investment in the Fund is "debt financed" for these tax purposes
should consult with their tax advisors concerning the
availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the 12-
month period ending October 31 of each year (in addition to
amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, certain distributions which are declared in October,
November or December but which, for operational reasons, may not
be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by
the shareholder on December 31 of the calendar year in which they
are declared. The Fund intends, as a matter of policy, to declare
such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does
not guarantee that its distributions will be sufficient to avoid
any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions
for federal and state income tax purposes. For most shareholders,
gain or loss will be recognized in an amount equal to the
difference between the shareholder's basis in the shares and the
amount received, subject to the rules described below. If such
shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more
than one year.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of the Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
Any loss realized upon the redemption of shares within six months
from the date of their purchase will be treated as a long-term
capital loss to the extent of amounts treated as distributions of
net long-term capital gain during such six-month period.
The Fund is authorized to invest in foreign securities (see the
discussion in the Prospectus under Investment Objectives and
Policies of the Fund). Such investments, if made, will have the
following tax consequences.
Foreign exchange gains and losses realized by the Fund in
connection with certain transactions involving foreign
currencies, foreign currency payables or receivables, foreign
currency-denominated debt securities, foreign currency forward
contracts, and options or futures contracts on foreign currencies
are subject to special tax rules which may cause such gains and
losses to be treated as ordinary income and losses rather than
capital gains and losses and may affect the amount and timing of
the Fund's income or loss from such transactions and in turn its
distributions to shareholders.
In order for the Fund to qualify as a regulated investment
company, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of
qualifying income, and no more than 30% of its annual gross
income may be derived from the sale or other disposition of
securities or certain other instruments held for less than three
months. Foreign exchange gains are presently treated as
qualifying income for purposes of this 90% limitation. Future
Treasury regulations, however, are expected to provide that such
gains may not qualify for purposes of the 90% limitation if such
gains are not directly related to the Fund's principal business
of investing in stock or securities, or options or futures with
respect to such stock or securities.
Currency speculation or the use of currency forward contracts or
other currency instruments for non-hedging purposes may generate
gains deemed to be not directly related to the Fund's principal
business of investing in stock or securities and related options
or futures. Under current law, non-directly-related gains arising
from foreign currency positions or instruments held for less than
three months are treated as derived from the disposition of
securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its
activities involving foreign exchange gains to the extent
necessary to comply with these requirements.
The federal income tax treatment of interest rate and currency
swaps is unclear in certain respects and may in some
circumstances result in the realization of income not qualifying
under the 90% test described above or be deemed to be derived
from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The
Fund will limit its interest rate and currency swaps to the
extent necessary to comply with these requirements.
If the Fund owns shares in a foreign corporation that constitutes
a "passive foreign investment company" (a "PFIC") for federal
income tax purposes and the Fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the
meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it
receives from the PFIC or any gain it derives from the
disposition of such shares, even if such income is distributed as
a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of
deferred taxes arising from such distributions or gains. Any tax
paid by the Fund as a result of its ownership of shares in a PFIC
will not give rise to a deduction or credit to the Fund or to any
shareholder. A PFIC means any foreign corporation if, for the
taxable year involved, either (i) it derives at least 75 percent
of its gross income from "passive income" (including, but not
limited to, interest, dividends, royalties, rents and annuities),
or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce
"passive income."
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until April 30,
1996, Distributors acts as principal underwriter in a continuous
public offering for both classes of the Fund's shares.
Distributors pays the expenses of distribution of Fund shares,
including advertising expenses and the costs of printing sales
material and prospectuses used to offer shares to the public. The
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 agreement will continue in effect for successive
annual periods provided that its continuance is specifically
approved at least annually by a vote of the Fund's Board of
Directors, or by a vote of the holders of a majority of the
Fund's outstanding voting securities, and in either event by a
majority vote of the Fund's directors who are not parties to the
underwriting agreement or interested persons of any such party
(other than as directors of the Fund), cast in person at a
meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may
be terminated by either party on 90 days' written notice.
Until April 30, 1994, income dividends for the Class I shares
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 income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
In connection with the offering of the Class I shares, aggregate
underwriting commissions for the fiscal years ended May 31, 1992,
1993 and 1994 were $8,368,994, $7,108,307, and $7,958,366,
respectively. After allowances to dealers, Distributors retained
$1,169,508, $1,021,018, and $1,044,184, during the fiscal years
ended May 31, 1992, 1993 and 1994, respectively. Distributors may
be entitled to reimbursement under the distribution plan relating
to Class I shares as discussed in "Plans of Distribution" below.
Except as noted, Distributors received no other compensation from
the Fund with respect to the Class I shares for acting as
underwriter.
Plans of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I
Plan" and "Class II Plan," respectively, or "Plans") pursuant to
Rule 12b-1 under the 1940 Act.
The Class I Plan
Pursuant to the Class I Plan, the Fund may pay up to a maximum of
0.25%% per annum (0.25 of 1%) of its average daily net assets for
expenses incurred in the promotion and distribution of its
shares. In implementing the Class I Plan, the Board of Directors
determined that 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 Class I shares of the
Fund that were acquired by investors on or after May 1, 1994
("New Assets"), and (ii) the amount obtained by multiplying 0.05%
by the average daily net assets represented by Class I shares of
the Fund that were acquired before May 1, 1994 ("Old Assets").
Such fees will be paid to the current securities dealer 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 the 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 the Plan, such as advertising.
The fee relating to the Class I Plan is an expense of Class I as
a whole, so that all Class I shareholders, regardless of when
they purchased their shares, will bear Rule 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05% plus
0.02%) of Class I's average daily net assets and, as Class I
shares are sold on or after May 1, 1994 (the "Effective Date"),
will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994 increases in relation to
outstanding Class I shares, the expenses attributable to payments
under the Plan will also increase (but will not exceed 0.15% of
average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan,
the Class I Plan permits the Fund's directors to allow the Fund
to pay a full 0.15% on all assets at any time. The approval of
the Fund's Board of Directors would be required to change the
calculation of the payments to be made under the Class I Plan.
Pursuant to the Class I Plan, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum as
stated above) for actual expenses incurred in the distribution
and promotion of Class I 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 Class I 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.
The Fund did not make any payments with respect to the Class I
shares under its Rule 12b-1 Plan during the fiscal year ended May
31, 1994.
The Class I Plan does not permit unreimbursed expenses incurred
in a particular year to be carried over to or reimbursed in
subsequent years.
The Class II Plan
Under the Class II Plan, the Fund is permitted to pay to
Distributors or others annual distribution fees, payable
quarterly, of .50% of Class II's average daily net assets, in
order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of
the Class. All expenses of distribution and marketing over that
amount will be borne by Distributors, or others who have incurred
them, without reimbursement by the Fund. In addition to this
amount, under the Class II Plan, the Fund shall pay 0.15% per
annum, payable quarterly, of the Class' average daily net assets
as a servicing fee. This fee will be used to pay dealers or
others for, among other things, assisting in establishing and
maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on
behalf of the customers, and similar activities related to
furnishing personal services and maintaining shareholder
accounts. Distributors may pay the securities dealer, from its
own resources, a commission of up to 1% of the amount invested at
the time of investment.
In General
In addition to the payments to which Distributors or others are
entitled under the Plans, the Plans also provide that to the
extent the 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 each class 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 a Plan, plus any other payments
deemed to be made pursuant to a Plan, exceed the amount permitted
to be paid pursuant to the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, Section
26(d)4. The terms and provisions of the 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 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 may not be entitled to participate in
the Plans to the extent that applicable federal law prohibits
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 Class I Plan was approved by shareholders on April 22, 1994,
and the Class II Plan was approved by the sole initial
shareholder prior to May 15, 1995, the date as of which the Class
II Plan became effective. Both the Class I and Class II Plans
were approved by the directors of the Fund, including those
directors who are not interested persons, as defined in the 1940
Act. The Class I Plan and the Class II Plan are effective through
April 30, 1996, and are renewable annually by a vote of the
Fund's Board of Directors, including a majority vote of the
directors who are non-interested persons of the Fund 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 directors
be done by the non-interested directors. The Plans and any
related agreement may be terminated at any time, without any
penalty, by vote of a majority of the non-interested directors 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 the 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.
With respect to a Plan, the Plan and any related agreements may
not be amended to increase materially the amount to be spent for
distribution expenses without approval by a majority of such
class of the Fund's outstanding shares, and all material
amendments to the Plan or any related agreements shall be
approved by a vote of the non-interested directors, 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 Board of
Directors at least quarterly on the amounts and purpose of any
payment made under the Plans and any related agreements, as well
as to furnish the Board of Directors with such other information
as may reasonably be requested in order to enable the Board of
Directors to make an informed determination of whether the Plans
should be continued.
General Information
Performance
As noted in the Prospectus, each class may from time to time
quote various performance figures to illustrate its past
performance. Each Class also may occasionally cite statistics to
reflect its volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a class be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by a class are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the
classes 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 that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital
gains 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 and the deduction of all applicable charges
and fees. If a change is made in the sales charge structure,
historical performance information will be restated to reflect
the maximum sales charge currently in effect.
The average annual compounded rates of return for the Class I
shares of the Fund for the one-, five- and ten-year periods ended
on the date of the financial statements included herein were
1.23%, 8.76% and 10.52%, respectively.
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 class may quote total rates
of return in addition to its average annual total return. Such
quotations are computed in the same manner as a class' average
annual compounded rate, except that such quotations will be based
on such class' actual return for a specified period rather than
on its average return over one-, five- and ten-year periods. The
total rates of return for the Class I shares of the Fund for the
one-, five- and ten-year periods ended on the date of the
financial statements included herein were 1.23%, 52.20% and
171.96%, respectively.
In considering the quotations of total return by the Class I
shares, investors should remember that the 4.25% maximum initial
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 the
Fund. The actual performance of an investment will be affected
less by this charge the longer an investor retains the investment
in the Fund.
Yield
Current yield reflects the income per share earned by the Fund's
portfolio investments.
Current yield for each class is determined by dividing the net
investment income per share earned by a class 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 of a
class during the base period. The yield for the Class I shares
for the 30-day period ended on the date of the financial
statements included herein was 8.95%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1) - 1]
----
cd
where:
a = dividends and interest 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 dividends
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 class' 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
dividends per share paid by a class 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 dividend
payout, or a fundamental change in investment policies, it might
be appropriate to annualize the dividends paid over the period
such policies were in effect, rather than using the dividends
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 dividends
and interest, such as premium income from option writing and
short-term capital gains, 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 Class I shares at net asset value, sales literature
pertaining to such class may quote a current distribution rate,
yield, total return, average annual total return and other
measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the Fund as a potential
investment for Individual Retirement Accounts (IRAs), Business
Retirement Plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
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 Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds and classes 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 the Fund
might satisfy their investment objective, advertisements and
other materials regarding the Fund may discuss various measures
of Fund and class 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
dividends.
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
dividends.
c) The New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation,
and finance stocks listed on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Fund Performance Analysis and Lipper - Mutual Fund Yield
Survey - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance
over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
f) 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.
g) Mutual Fund Source Book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for equity funds.
h) 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.
i) 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.
j) 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.
k) Savings and Loan Historical Interest Rates - as published in
the U.S. Savings & Loan League Fact Book.
l) 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.
m) Standard & Poor's 100 Stock Index - an unmanaged index based
on the prices of 100 blue-chip stocks, including 92 industrials,
one utility, two transportation companies, and five financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for options trading.
From time to time, advertisements or information for the 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 the Fund's or
class' performance to the return on certificates of deposit or
other investments. Investors should be aware, however, that an
investment in the 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 the Fund 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 Fund
will continue this performance as compared to such other
averages.
Other Features and Benefits
The Fund may help investors achieve various investment goals such
as accumulating money for retirement, saving for a down payment
on a home, college cost 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 the Fund cannot guarantee that such goals will be
met.
Miscellaneous Information
The Fund is a member 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 47 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 $118 billion in
assets under management for more than 3.8 million shareholder
accounts and offers 112 U.S.-based mutual funds. The 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.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, 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 decisions must file annual reports of their
securities holdings each January and 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, the 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
In addition to the Financial Statements that follow, see the
unaudited financial statements of the Fund for the six months
ended November 30, 1994, contained in the Semi Annual Report to
Shareholders (Form type N-30D) dated November 30, 1994, which was
filed with the SEC on February 15, 1995, CIK No. 0000002768.
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of AGE High Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of AGE
High Income Fund, Inc. (the Fund), including the statement of investments in
securities and net assets, as of May 31, 1994, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights,
included under the caption "Financial Highlights" for each of the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AGE
High Income Fund, Inc. as of May 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated thereon, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
San Francisco, California
June 27, 1994
18
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS 84.4%
AUTOMOTIVE 1.9%
US $15,010,000 Clevite Industries, Inc., S.F., sub. deb., 12.375%, 06/30/01 .. $ 7,580,050
US 8,200,000 Exide Corp., senior sub. notes, 10.75%, 12/15/02 .............. 8,589,500
US 2,000,000 Lear Seating Corp., senior sub. notes, 11.25%, 07/15/00 ....... 2,115,000
US 15,150,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ................ 15,339,375
------------
33,623,925
------------
CABLE TELEVISION 9.3%
US 17,400,000 Cablevision Industries Corp., senior notes, 10.75%, 01/30/02 .. 17,226,000
US 20,000,000 Cablevision System Corp., S.F., senior sub. deb., 10.75%,
04/01/04 ..................................................... 20,250,000
US 5,000,000 Cablevision System Corp., senior sub. deb., 9.875%, 04/01/23 .. 4,487,500
US 16,000,000 (e)Century Communications Corp., senior disc. notes, (original
accretion rate 8.875%), 0.00%, 03/15/03 ...................... 6,480,000
US 8,000,000 Century Communications Corp., senior notes, 9.50%, 08/15/00.... 7,780,000
US 15,000,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 .............. 14,212,500
US 3,000,000 Continental Cablevision, Inc., senior deb., 8.875%, 09/15/05 .. 2,752,500
US 8,500,000 Continental Cablevision, Inc., senior deb., 9.50%, 08/01/13 ... 7,862,500
US 13,000,000 Continental Cablevision, Inc., senior sub. deb., 11.00%,
06/01/07 ..................................................... 13,390,000
US 5,800,000 Continental Cablevision, Inc., senior sub. deb., 9.00%,
09/01/08 ..................................................... 5,307,000
US 10,000,000 Helicon Group L.P. Corp., S.F., senior secured notes, 9.00%
coupon to 11/1/96, 11.00% thereafter, 11/01/03 ............... 8,750,000
US 5,000,000 Rogers Cablesystems, Inc., senior secured deb., 10.125%,
09/01/12 ..................................................... 4,937,500
CA 15,300,000 Rogers Cablesystems, Inc., senior secured deb., 9.65%,
01/15/14 ..................................................... 9,558,011
US 10,000,000 Rogers Communications, Inc., senior deb., 10.875%, 04/15/04 ... 10,200,000
US 7,000,000 Scott Cable Communications, Inc., S.F., sub. deb., 12.25%,
04/15/01 ..................................................... 6,055,000
US 20,000,000 Tele-Communications, Inc., senior deb., 9.80%, 02/01/12 ....... 20,834,100
US 9,500,000 Turner Broadcasting Systems, Inc., senior deb., 8.40%,
02/01/24 ..................................................... 7,980,000
------------
168,062,611
------------
CHEMICALS 5.4%
US 18,000,000 Arcadian Partners, S.F., senior notes, Series B, 10.75%,
05/01/05 ..................................................... 17,910,000
US 18,750,000 (e)Harris Chemical North America, Inc., senior secured disc. notes,
zero coupon to 01/15/96, (original accretion rate 10.25%),
10.25% thereafter, 07/15/01 .................................. 15,046,875
US 20,000,000 Huntsman Corp., lst mortgage, 11.00%, 04/15/04 ................ 20,250,000
US 2,000,000 IMC Fertilizer Group, Inc., senior deb., 9.45%, 12/15/11 ...... 1,870,000
US 10,000,000 IMC Fertilizer Group, Inc., senior notes, 9.25%, 10/01/00...... 9,500,000
US 6,550,000 IMC Fertilizer Group, Inc., senior notes, 10.75%, 06/15/03 .... 6,713,750
US 6,000,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.125%,
06/15/01 ..................................................... 6,037,500
US 8,000,000 Methanex Corp., senior notes, 8.875%, 11/15/01 ................ 7,920,000
US 3,500,000 Uniroyal Chemical Corporation, senior notes, 10.50%, 05/01/02 . 3,552,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
AGE HIGH INCOME FUND, INC.
- -----------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
COUNTRY* AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CHEMICALS (CONT.)
US $ 4,850,000 Uniroyal Chemical Corporation, senior sub. notes, 11.00%,
05/01/03 ........................................................ $ 4,971,250
US 6,000,000 (e)Uniroyal Chemical Corporation, sub. notes, zero coupon to
05/01/98, (original accretion rate 12.00%), 12.00% thereafter,
05/01/05 ........................................................ 3,975,000
----------
97,746,875
----------
CONSUMER GOODS 3.9%
US 9,000,000 Calmar, Inc., S.F., senior notes, 12.00%, 12/15/97 ............... 8,910,000
US 17,000,000 (e)Coleman Holdings, Inc., senior secured disc. notes, (original
accretion rate 10.875%), 0.00%, 05/27/98 ........................ 11,560,000
US 7,500,000 Playtex Family Products Corp., senior sub. notes, 9.00%,
12/15/03 ........................................................ 6,768,750
US 15,000,000 Revlon Consumer Products Corp., senior sub. notes, 10.50%,
02/15/03 ........................................................ 12,412,800
US 18,700,000 (e)Revlon Worldwide Corp., senior secured disc. notes, (original
accretion rate 12.00%), 0.00%, 03/15/98 ......................... 7,760,500
US 20,000,000 RJR Nabisco, Inc., senior notes, 9.25%, 08/15/13 ................. 17,775,000
US 5,750,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 .................. 5,520,000
----------
70,707,050
----------
CONTAINERS & PACKAGING 2.2%
US 3,360,000 (a),(d),(e)Kane Industries, Inc., senior sub. disc. notes, zero coupon to
02/01/95, (original accretion rate 8.00%), 8.00% thereafter,
02/01/98 ...................................................... 18,480
US 25,500,000 Owens Illinois, Inc., S.F., senior deb., 11.00%, 12/01/03 ..... 27,348,750
US 12,000,000 Owens Illinois, Inc., senior sub. notes, 9.75%, 08/15/04 ...... 11,910,000
----------
39,277,230
----------
ENERGY 2.5%
US 6,750,000 (b)Energy Ventures, senior notes, 10.25%, 03/15/04 ............... 6,547,500
US 17,000,000 Gulf Canada Resources, Ltd., senior sub. notes, 9.25%,
01/15/04 ..................................................... 15,640,000
US 3,985,000 (a),(d)Synergy Group, Inc., senior sub. notes, 11.625%, 03/15/97 ..... 3,626,350
US 18,000,000 Transco Energy Co., senior notes, 11.25%, 07/01/99 ............ 19,035,144
----------
44,848,994
----------
FOOD & BEVERAGES 7.4%
US 9,250,000 Beatrice Foods, Inc., S.F., senior sub. notes, 12.00%,
12/01/01 ..................................................... 10,128,750
US 9,500,000 Coca Cola Bottling Group Southwest, Inc., senior sub. notes,
9.00%, 11/15/03 .............................................. 8,597,500
US 2,500,000 Darling-Delaware Co., Inc., S.F., senior sub. notes, 13.75%
coupon to 01/01/95, 11.00% thereafter, 07/15/00............... 2,500,000
US 26,129,000 (b)Del Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 ............ 26,194,323
US 1,540,000 Dr Pepper Bottling Co. of Texas, senior notes, 10.25%,
02/15/00 ..................................................... 1,555,400
US 2,000,000 (e)Dr Pepper Bottling Holdings, S.F., senior disc. notes, zero
coupon to 02/15/98, (original accretion rate 11.625%), 11.625%
thereafter, 02/15/03 ......................................... 1,330,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
FOOD & BEVERAGES (CONT.)
US $43,550,000 (e)Dr Pepper/Seven-Up Cos., Inc., S.F., senior sub. disc. notes,
zero coupon to 11/01/97, (original accretion rate 11.50%),
11.50% thereafter, 11/01/02 .................................. $ 33,533,500
US 7,500,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 .... 7,575,000
US 17,000,000 Royal Crown Corp., senior secured notes, 9.75%, 08/01/00....... 16,192,500
US 19,000,000 Specialty Foods Corp., senior notes, Series B, 10.25%,
08/15/01 ..................................................... 18,572,500
US 9,500,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 8,656,875
------------
134,836,348
------------
FOOD RETAILING 6.6%
US 9,500,000 Food 4 Less Supermarkets, Inc., S.F., senior notes, 10.45%,
04/15/00 ..................................................... 9,547,500
US 2,000,000 Food 4 Less Supermarkets, Inc., S.F., senior sub. notes,
13.75%, 06/15/01 ............................................. 2,190,000
US 12,500,000 (c),(e)Grand Union Capital Corp., senior notes, Series B, zero coupon
to 07/15/99, (original accretion rate 15.00%), 15.00%
thereafter, 07/15/04 ......................................... 5,187,500
US 17,700,000 (c),(e)Grand Union Capital Corp., senior sub. notes, Series A,
(original accretion rate 16.50%), 0.00%, 01/15/07 ............ 2,168,250
US 2,955,000 (g)Kash N' Karry Food Stores, Inc., S.F., sub. deb., 14.00%,
02/01/01 ..................................................... 1,049,025
US 10,000,000 Kroger Co., senior sub. notes, 10.00%, 05/01/99 ............... 10,350,000
US 11,600,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01 . 12,528,000
US 10,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02 .... 10,250,000
US 14,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 .... 13,090,000
US 5,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 .............. 4,575,000
US 10,000,000 Penn Traffic Co., senior notes, 10.375%, 10/01/04 ............. 10,200,000
US 11,000,000 Pueblo Xtra International, senior notes, 9.50%, 08/01/03 ...... 10,065,000
US 21,000,000 Ralphs Grocery Co., senior sub. notes, 10.25%, 07/15/02 ....... 21,105,000
US 8,000,000 Vons Cos., Inc., senior sub. notes, 9.625%, 04/01/02 .......... 8,120,000
------------
120,425,275
------------
FOREST & PAPER PRODUCTS 4.3%
US 16,000,000 Container Corp. of America, senior notes, Series A, 9.75%,
04/01/03 ..................................................... 15,680,000
US 9,000,000 Container Corp. of America, guaranteed senior notes, Series A,
11.25%, 05/01/04 ............................................. 9,337,500
US 8,102,924 Fort Howard Corp., S.F., pass through trust, 11.00%, 01/02/02 . 8,204,211
US 25,500,000 Fort Howard Corp., senior sub. notes, 9.00%, 02/01/06 ......... 21,738,750
US 7,500,000 Fort Howard Corp., sub. notes, 10.00%, 03/15/03 ............... 7,031,250
US 16,000,000 Stone Container, senior notes, 9.875%, 02/01/01 ............... 15,280,000
------------
77,271,711
------------
GAMING & LEISURE 2.5%
US 1,249,800 (a)Divi Hotels, Inc., secured cvt. sub. deb., 0.00%, 02/07/02 .... 212,466
US 17,500,000 Embassy Suites, Inc., guaranteed senior sub. notes, 10.875%,
04/15/02 ..................................................... 18,637,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
GAMING & LEISURE (CONT.)
US $20,000,000 John Q. Hammons Hotels, 1st mortgage, 8.875%, 02/15/04 ........ $ 18,000,000
US 10,000,000 (b)Red Roof Inns, Inc., senior notes, 9.625%, 12/15/03 ........... 9,300,000
------------
46,149,966
------------
HEALTHCARE 5.1%
US 14,830,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%,
11/01/02 ..................................................... 13,791,900
US 6,001,000 ALCO Health Distribution Corp., senior deb., PIK, 11.25%,
07/15/05 ..................................................... 6,226,038
US 10,800,000 (e)American Medical, Inc., junior sub. disc. deb., zero coupon to
11/25/95, (original accretion rate 15.00%), 15.00% thereafter,
11/26/05 ..................................................... 18,738,000
US 7,500,000 American Medical Holding, Inc., senior sub. notes, 13.50%,
08/15/01 ..................................................... 8,456,250
US 8,000,000 Healthsouth Rehabilitation Co., senior sub. notes, 9.50%,
04/01/01 ..................................................... 7,800,000
US 18,000,000 Healthtrust, Inc. - The Hospital Co., sub. notes, 10.75%,
05/01/02 ..................................................... 18,720,000
US 11,500,000 Healthtrust, Inc. - The Hospital Co., sub. notes, 10.25%,
04/15/04 ..................................................... 11,643,750
US 9,000,000 Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98,
9.625% thereafter, 12/15/03 .................................. 7,065,000
------------
92,440,938
------------
HOME BUILDING .7%
US 12,660,774 (a),(d)Walter Industries, Inc., extendable senior sub. reset notes,
PIK, 16.625%, 01/01/95 ....................................... 12,091,039
------------
INDUSTRIAL 6.3%
US 14,000,000 (e)American Standard, Inc., S.F., senior sub. deb., zero coupon
to 06/01/98, (original accretion rate 10.50%), 10.50%
thereafter, 06/01/05 ......................................... 8,680,000
US 23,000,000 American Standard, Inc., senior deb., 11.375%, 05/15/04 ....... 24,121,250
US 8,350,000 American Standard, Inc., senior sub. notes, 9.875%, 06/01/01 .. 8,162,125
US 5,000,000 Coltec Industries, Inc., senior notes, 9.75%, 11/01/99 ........ 5,050,000
US 18,000,000 Coltec Industries, Inc., senior sub. notes, 10.25%, 04/01/02 .. 18,360,000
US 24,000,000 (e)Eagle Industries, Inc., senior notes, zero coupon to 07/15/98,
(original accretion rate 10.50%), 10.50% thereafter, 07/15/03. 15,240,000
US 12,000,000 Inter-City Products Corp., senior secured notes, 9.75%,
03/01/00 ..................................................... 10,500,000
US 10,376,061 Thermadyne Industries, Inc., senior sub. notes, 10.25%,
05/01/02 ..................................................... 10,064,780
US 14,387,336 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ..... 13,955,716
------------
114,133,871
------------
MEDIA & BROADCASTING 5.5%
US 12,000,000 Ackerley Communications, Inc., senior secured notes, Series B,
10.75%, 10/01/03 ............................................. 12,060,000
US 6,000,000 Act III Broadcasting, senior sub. notes, 9.625%, 12/15/03 ..... 5,850,000
US 16,000,000 Continental Broadcasting, Ltd., senior sub. notes, 10.625%,
07/01/03 ..................................................... 16,160,000
US 19,075,000 Infinity Broadcasting Corp., senior sub. notes, 10.375%,
03/15/02 ..................................................... 19,742,625
US 10,500,000 K-III Communications Corp., S.F., senior notes, 10.625%,
05/01/02 ..................................................... 10,736,250
US 15,000,000 New World Television, Inc., S.F., senior notes, 11.00%,
06/30/05 ..................................................... 15,300,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
MEDIA & BROADCASTING (CONT.)
US $ 3,500,000 News America Holdings, Inc., guaranteed senior deb., 9.25%,
02/01/13 ..................................................... $ 3,462,522
US 25,000,000 (e)PanAmSat Capital Corp., L.P., S.F., senior sub. disc. notes,
zero coupon to 08/01/98, (original accretion rate 11.375%),
11.375% thereafter, 08/01/03 ................................. 16,125,000
------------
99,436,397
------------
METALS & MINING 3.9%
US 20,000,000 AK Steel Corporation, senior notes, 10.75%, 04/01/04 .......... 20,375,000
US 11,042,000 (a),(d)Bucyrus-Erie Co., senior notes, 16.00%, 01/01/96 .............. 6,335,348
US 17,000,000 Envirosource, Inc., senior notes, 9.75%, 06/15/03 ............. 15,555,000
US 11,000,000 Horsehead Industries, Inc., S.F., sub. notes, 14.00%, 06/01/99. 10,505,000
US 19,000,000 Joy Technologies, Inc., senior notes, 10.25%, 09/01/03 ........ 18,525,000
------------
71,295,348
------------
RESTAURANTS 2.6%
US 10,850,000 Family Restaurants, Inc., senior notes, 9.75%, 02/01/02 ....... 9,873,500
US 2,000,000 Flagstar Corp., senior notes, 10.75%, 09/15/01 ................ 1,955,000
US 11,000,000 Flagstar Corp., senior notes, 10.875%, 12/01/02 ............... 10,725,000
US 13,614,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 ...... 12,626,985
US 2,900,000 Foodmaker, Inc., senior notes, 9.25%, 03/01/99 ................ 2,704,250
US 11,500,000 Foodmaker, Inc., senior sub. notes, 9.75%, 06/01/02 ........... 10,177,500
------------
48,062,235
------------
RETAIL .5%
US 10,000,000 Eckerd Corp., senior sub. notes, 9.25%, 02/15/04 .............. 9,525,000
------------
TECHNOLOGY & INFORMATION SYSTEMS 1.3%
US 10,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03.. 9,550,000
US 7,500,000 (e)Bell & Howell Co., senior deb., zero coupon to 03/01/00,
(original accretion rate 11.50%), 11.50% thereafter, 03/01/05. 4,031,250
US 3,550,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00............... 3,408,000
US 6,500,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 ........ 6,630,000
------------
23,619,250
------------
TEXTILES & APPAREL 4.2%
US 20,500,000 Collins & Aikman Group, Inc., S.F., senior sub. deb., 11.875%,
06/01/01 ..................................................... 20,781,875
US 10,300,000 Forstmann & Co., Inc., S.F., senior sub. notes, 14.75%,
04/15/99 ..................................................... 11,445,875
US 15,000,000 Hartmarx Corp., senior sub. notes, 10.875%, 01/15/02 .......... 14,775,000
US 4,000,000 JPS Textiles Group, Inc., S.F., sub. disc. notes, 10.85%,
06/01/99 ..................................................... 3,995,000
US 12,000,000 JPS Textiles Group, Inc., S.F., sub. notes, 10.25%, 06/01/99 .. 11,460,000
US 6,000,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 ........ 5,490,000
US 10,000,000 WestPoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ... 9,062,500
------------
77,010,250
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TRANSPORTATION 3.9%
US $ 9,000,000 Delta Air Lines, Inc., S.F., pass through equipment trust,
10.06%, 01/02/16 ............................................. $ 8,589,510
US 15,000,000 Delta Air Lines, Inc., S.F., pass through equipment trust,
10.50%, 04/30/16 ............................................. 14,869,935
US 19,500,000 Southern Pacific Rail Corp., senior notes, 9.375%, 08/15/05 ... 19,207,500
US 10,000,000 Southern Pacific Transportation Co., S.F., senior secured
notes, Series B, 10.50%, 07/01/99 ............................ 10,587,500
US 20,422,000 United Airlines, S.F., pass through trust, Series B-2, 9.06%,
09/26/14 ..................................................... 17,818,195
--------------
71,072,640
--------------
UTILITIES 2.3%
US 22,500,000 (e) California Energy, senior notes, zero coupon to 01/15/97,
(original accretion rate 10.25%), 10.25% thereafter, 01/15/04. 17,063,528
US 10,000,000 (e) CMS Energy Corp., senior notes, Series B, zero coupon to
10/01/95, (original accretion rate 9.875%), 9.875% thereafter,
10/01/99 ..................................................... 9,030,960
US 4,500,000 Midland Funding II, S.F., senior lease obligation, Series A,
11.75%, 07/23/05 ............................................. 4,526,240
US 11,500,000 Midland Funding II, S.F., senior lease obligation, Series B,
13.25%, 07/23/06 ............................................. 12,041,696
--------------
42,662,424
--------------
WIRELESS COMMUNICATION 2.1%
US 20,000,000 (e) Comcast Cellular Communications, Inc., senior notes, Series B,
(original accretion rate 11.37%), 0.00%, 03/05/00............. 12,000,000
US 27,250,000 (e) Dial Call Communications, units, senior disc. notes, zero
coupon to 04/15/99, (original accretion rate 12.25%), 12.25%
thereafter, 04/15/04 ......................................... 15,941,250
US 10,500,000 Rogers Cantel Mobile Communications, Inc., S.F., senior sub.
notes, 10.75%, 11/01/01 ...................................... 10,920,000
--------------
38,861,250
--------------
TOTAL BONDS (COST $1,584,740,401) ....................... 1,533,160,627
--------------
FOREIGN CURRENCY NOTES 1.1%
SOUTH AFRICA
ZA 108,800,000 ESCOM, E168, utility deb., 11.00%, 06/01/08 (Cost $24,942,668). 19,854,852
--------------
FOREIGN GOVERNMENT AGENCIES 2.1%
MEXICO 1.5%
US 15,000,000 United Mexican States, floating rate notes, Series D, 4.25%,
12/31/19 ..................................................... 13,125,000
US 13,000,000 United Mexican States, floating rate notes, Series D, 4.328%,
12/31/19 ..................................................... 11,375,000
US 4,000,000 United Mexican States, Series B, 6.25%, 12/31/19 .............. 2,720,000
--------------
27,220,000
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN GOVERNMENT AGENCIES (CONT.)
VENEZUELA .6%
US $20,000,000 Republic of Venezuela, 4.312%, 12/18/07 ....................... $ 11,175,000
--------------
TOTAL FOREIGN GOVERNMENT AGENCIES (COST $36,588,856) .... 38,395,000
--------------
<CAPTION>
SHARES/
WARRANTS
------------
<S> <C> <C> <C>
(a) COMMON STOCKS 1.4%
US 168,149 Darling Delaware Co. .......................................... 1,933,714
US 611,655 (f) Divi Hotels, Inc. ............................................. 74,622
US 103,000 Dr Pepper/Seven-Up Cos., Inc. ................................. 2,523,500
US 302,965 Envirodyne Industries, Inc. ................................... 1,401,213
US 155,795 Gaylord Containers Corp., Class A ............................. 817,924
US 1,436,971 (f) NVR, Inc. ..................................................... 10,058,797
US 39,757 Penn Traffic Co. .............................................. 1,446,161
US 1,833,563 (f) Price Communications Corp. .................................... 7,105,057
US 97,500 (b) Specialty Food Corp. .......................................... 146,250
US 38,615 Thermadyne Holdings Corp. ..................................... 521,303
--------------
TOTAL COMMON STOCKS (COST $78,613,165) .................. 26,028,541
--------------
PREFERRED STOCKS 1.0%
US 378,839 Glendale Federal Bank, 1.00% cvt. pfd., Series D .............. 3,693,680
US 2,550,000 RJR Nabisco Holdings Corp., $.835 cvt. pfd. ................... 15,300,000
--------------
TOTAL PREFERRED STOCKS (COST $24,189,325) ............... 18,993,680
--------------
PARTNERSHIP UNITS .4%
US 415,000 Freeport-McMoRan Resource Partners, Ltd., depository units
(Cost $8,190,392) ............................................ 7,573,750
--------------
(a) WARRANTS & RIGHTS .3%
US 8,030 Foodmaker, Inc. ............................................... 134,180
US 827,526 Gaylord Container Corp. ....................................... 3,206,663
US 6,253 Gilbert Robinson Holdings Corp. ............................... 625
US 9,982 Glendale Federal Bank ......................................... 100
US 1,215 (c) Grand Union Capital Corp. ..................................... 1,136,827
US 5,896 Kendall International, Inc. ................................... 190,145
US 120,000 NVR, Inc. ..................................................... 345,000
US 20,000 Payless Cashways, Inc. ........................................ 311,200
--------------
TOTAL WARRANTS & RIGHTS (COST $5,250,267) ............... 5,324,740
--------------
TOTAL COMMON STOCKS, PREFERRED STOCKS, PARTNERSHIP UNITS,
AND WARRANTS & RIGHTS (COST $116,243,149) ............. 57,920,711
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,762,515,074) ....... 1,649,331,190
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS
COMMERCIAL PAPER 4.0%
$46,000,000 Associates Corp. of North America, 4.265% - 4.606%, 06/10/94 -
07/25/94...................................................... $ 46,000,000
26,000,000 General Electric Capital Corp., 4.315% - 4.403%, 06/08/94 -
07/25/94...................................................... 26,000,000
--------------
TOTAL COMMERCIAL PAPER (COST $72,000,000) ............... 72,000,000
--------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $1,834,515,074)................................... 1,721,331,190
--------------
(h), (i) RECEIVABLES FROM REPURCHASE AGREEMENT 3.9%
74,149,310 Joint Repurchase Agreement, 4.26%, 06/01/94 (Maturity Value
$71,239,771) (Cost $71,231,342)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 05/31/95 -
02/15/99.................................................... 71,231,342
--------------
TOTAL INVESTMENTS (COST $1,905,746,416) 98.6% ...... 1,792,562,532
OTHER ASSETS AND LIABILITIES, NET 1.4% ............. 24,918,111
--------------
NET ASSETS 100.0% .................................. $1,817,480,643
==============
At May 31, 1994, the net unrealized depreciation based on the
cost of investments for income tax purposes of $1,905,746,416
was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost ........ $ 38,202,209
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value ........ (151,386,093)
--------------
Net unrealized depreciation ................................... $ (113,183,884)
==============
</TABLE>
PORTFOLIO ABBREVIATIONS: COUNTRY LEGEND:
PIK - Payment in Kind CA - Canada
S.F. - Sinking Fund US - United States of America
L.P. - Limited Partnership ZA - South Africa
* Securities traded in currency of country indicated.
(a) Non-income producing.
(b) See Note 6 regarding Rule 144A securities.
(c) See Note 7 regarding restricted securities.
(d) See Note 8 regarding defaulted securities.
(e) Zero coupon/Step-up bonds. The current effective yield may vary. The
original accretion rate by security, as reported, will remain constant.
(f) See Note 11 regarding holdings of 5% or more of voting securities.
(g) Due to the uncertainty of future interest payments, the fund discontinued
the accrual of income on 2/1/94, the date the last interest payment was
received.
(h) Face amount for repurchase agreements is for the underlying collateral.
(i) See Note 1 regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
Assets:
Investment in securities, at value
(identified cost $1,834,515,074) $1,721,331,190
Receivables from repurchase
agreement, at value and cost 71,231,342
Cash 526,322
Receivables:
Dividends and interest 39,448,446
Capital shares sold 1,868,582
--------------
Total assets 1,834,405,882
--------------
Liabilities:
Payables:
Investment securities purchased 15,150,000
Capital shares repurchased 633,180
Management fees 702,193
Distribution fees 208,113
Shareholder servicing costs 55,480
Accrued expenses and other liabilities 176,273
--------------
Total liabilities 16,925,239
--------------
Net assets, at value $1,817,480,643
==============
Net assets consist of:
Undistributed net investment income
(Note 1) $ 19,300,345
Unrealized depreciation on investments
and translation of assets and liabilities
denominated in foreign currencies (113,223,856)
Accumulated net realized loss (499,248,524)
Capital shares 6,731,359
Additional paid-in capital 2,403,921,319
--------------
Net assets, at value $1,817,480,643
==============
Representative computation of net asset
value and offering price per share:
Net asset value and
redemption price per share
($1,817,480,643 / 673,135,886
shares outstanding) $ 2.70
==============
Maximum offering price
(100/96 of $2.70)+ $ 2.81
==============
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1994
Investment income:
Interest $194,820,043
Dividends 2,404,390
Realized foreign currency
gain (Note 1) 771,420
------------
Total Income $197,995,853
Expenses:
Management fees (Note 5) 8,993,566
Shareholder servicing
costs (Note 5) 690,897
Distribution fees (Note 5) 208,113
Reports to shareholders 836,450
Custodian fees 348,342
Registration fees 87,752
Professional fees 84,890
Directors' fees and expenses 76,398
Other 75,129
------------
Total expenses 11,401,537
------------
Net investment income 186,594,316
------------
Realized and unrealized loss
on investments:
Net realized loss (3,681,910)
Net unrealized depreciation
on investments and
translation of assets and
liabilities denominated in
foreign currencies (70,177,283)
------------
Net realized and unrealized loss
on investments (73,859,193)
------------
Net increase in net assets
resulting from operations $112,735,123
============
+ Effective July 1, 1994, the sales charge has been increased to a maximum of
4.25% (100/95.75). On sales of $100,000 or more, the offering price is reduced
as stated in the section of the Prospectus entitled "How to Buy Shares of the
Fund."
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MAY 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................ $ 186,594,316 $ 201,682,653
Net realized loss from security transactions ................................. (3,681,910) (12,409,017)
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in foreign currencies.. (70,177,283) 56,295,929
--------------- ---------------
Net increase in net assets resulting from operations ..................... 112,735,123 245,569,565
Distributions to shareholders:
From undistributed net investment income ..................................... (182,753,717) (179,176,964)
Increase (decrease) in net assets from capital share transactions
(Notes 1 and 3) ............................................................. (48,419,402) 5,330,729
--------------- ---------------
Net increase (decrease) in net assets .................................... (118,437,996) 71,723,330
Net assets:
Beginning of year ............................................................. 1,935,918,639 1,864,195,309
--------------- ---------------
End of year (including undistributed net investment income of
$19,300,345 - 1994 and $32,126,360 - 1993) .................................... $ 1,817,480,643 $ 1,935,918,639
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
AGE High Income Fund, Inc. (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITIES VALUATIONS: Portfolio securities listed on a securities exchange
or on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is
no such reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from a pricing service, which are
based on a variety of factors, including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific securities. Portfolio securities which
are traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Other securities for which market quotations are not available,
if any, are valued in accordance with procedures established by the Board of
Directors. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.
Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and these values are
translated into U.S. Dollars at current market quotations of their respective
currency denomination against U.S. Dollars last quoted by a major bank or, if
no such quotation is available, at the rate of exchange determined in
accordance with procedures established by the Board of Directors.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Directors -- see Notes 6 and
7.
B. INCOME TAXES: The Fund intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code
and to make the requisite distributions to its shareholders which will be
sufficient to relieve it from income and excise taxes. Therefore, no income tax
provision is required.
C. SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification
for both financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount is amortized as
required by the Internal Revenue Code.
Distributions from undistributed net investment income, and net realized
capital gains from security transactions, to the extent they exceed available
capital loss carryovers, are generally made during each year to avoid the 4%
excise tax imposed on regulated investment companies by the Internal Revenue
Code.
Net investment income differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities - see Note 8.
E. FOREIGN CURRENCY TRANSLATION: The accounting records of the Fund are
maintained in U.S. Dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. Dollars at the rate of exchange of such
currencies against U.S. Dollars on the date of the valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are
recognized when reported by the custodian bank.
29
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. REPURCHASE AGREEMENTS: The Fund may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to
be used to invest in one or more repurchase agreements. The value and face
amount of the Joint Repurchase Agreement has been allocated to the Fund based
on its pro rata interest at May 31, 1994.
The Fund may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. In a repurchase agreement, the Fund purchases a U.S.
Government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for
as a loan by the Fund to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. Government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Fund, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Fund's custodian and held
until resold to the dealer or bank. At May 31, 1994, the outstanding joint
repurchase agreement held by the Fund had been entered into on that date.
G. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS: Effective May 31,
1994, the Fund adopted AICPA Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. As a result,
components of net assets have been reclassified to present financial statement
amounts and distributions in accordance with Statement of Position 93-2.
Accordingly, amounts as of May 31, 1994 have been restated to reflect an
increase in additional paid-in capital of $12,792,023, a decrease in
undistributed net investment income of $16,666,614 and a decrease in
accumulated net realized loss of $3,874,591.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At May 31, 1994, for tax purposes, the Fund had capital loss carryovers as
follows:
<TABLE>
<S> <C> <C>
Expiring in: 1995 $ 35,165,075
1996 94,919,282
1997 163,832
1998 85,786,601
1999 192,912,531
2000 63,753,106
2001 14,304,993
2002 12,243,104
------------
$499,248,524
============
</TABLE>
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Fund are the same as for financial statement purposes at May 31, 1994.
30
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. CAPITAL STOCK
At May 31, 1994, there were 5,000,000,000 shares of $.01 par value capital
stock authorized and paid-in capital aggregated $2,410,652,678. Transactions in
the Fund's shares for the years ended May 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------------------------------------
1994 1993
--------------------------- ------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold.................................... 82,294,240 $ 233,932,626 77,771,775 $ 212,836,581
Shares issued in connection with merger
(Note 10)..................................... -- -- 844,265 1,745,959
Shares issued in reinvestment of distributions. 25,263,574 71,552,168 24,830,665 67,770,053
Shares redeemed................................ (114,808,451) (326,553,156) (86,131,621) (235,639,792)
Changes from exercise of exchange privilege:
Shares sold................................... 224,078,533 629,917,742 125,977,242 344,309,559
Shares redeemed............................... (231,793,045) (657,268,782) (140,944,314) (385,691,631)
------------ ------------ ------------ ------------
Net increase (decrease).................. (14,965,149) $ (48,419,402) 2,148,012 $ 5,330,729
============ ============ ============ ============
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended May 31, 1994 aggregated $791,325,971 and
$980,163,626, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees, computed monthly on the net assets of the Fund on the
last day of the month at an annualized rate of 5/8 of 1% of the first $100
million of net assets, 1/2 of 1% of net assets in excess of $100 million up to
$250 million, and 45/100 of 1% of net assets in excess of $250 million. Fees
incurred by the Fund aggregated $8,993,566 for the year ended May 31, 1994. The
terms of the management agreement provide that aggregate annual expenses of the
Fund be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Fund's shares are registered. There were no reimbursements to the
Fund under this provision during the year ended May 31, 1994.
In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. receives commissions on sales of the
Fund's capital stock. Commissions received by Franklin/Templeton Distributors,
Inc. and the amounts which were subsequently paid to other dealers for the year
ended May 31, 1994 totaled $7,958,366 and $6,914,182, respectively. Commissions
are deducted from the gross proceeds received from the sale of the capital
stock of the Fund, and as such are not expenses of the Fund.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Fund pays costs on a per shareholder account basis. Such
costs incurred for the year ended May 31, 1994 aggregated $690,897, of which
$643,957 was paid to Franklin/Templeton Investor Services, Inc.
Effective May 1,1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of
0.15% per annum of the Fund's average daily net assets for costs incurred in
the promotion, offering and marketing of the Fund's shares. Fees incurred by
the Fund under the agreement aggregated $208,113 for the year ended May
31,1994.
31
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
Certain officers and directors of the Fund are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc. and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
6. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At May 31, 1994, the Fund held 144A
securities with a value aggregating $42,188,073 representing 2.3% of the Fund's
net assets. See accompanying statement of investments in securities and net
assets for specific information on such securities.
7. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Fund may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Fund values these
restricted securities as disclosed in Note 1. At May 31, 1994, the Fund held
restricted securities with a value aggregating $8,492,577, representing 0.47%
of the Fund's net assets. Such securities are:
<TABLE>
<CAPTION>
Face Acquisition
Amount Security Date Cost Value
- ------------ ------------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
$12,500,000 Grand Union Capital Corp., senior notes, Series B,
zero coupon to 07/15/99, (original accretion rate 15.00%),
15.00% thereafter, 07/15/04................................ 07/22/92 $4,232,703 $5,187,500
17,700,000 Grand Union Capital Corp., senior sub. notes, Series A,
(original accretion rate 16.50%), 0.00%, 01/15/07.......... 07/22/92 1,572,746 2,168,250
Warrants
----------
1,215 Grand Union Capital Corp..................................... 07/22/92 1,136,827 1,136,827
----------
$8,492,577
==========
</TABLE>
8. CREDIT RISK AND DEFAULTED SECURITIES
Although the Fund has a diversified portfolio, the Fund has 84.1% of its net
assets invested in lower rated and comparable quality unrated high yield
securities. Investments in higher yield securities are accompanied by a greater
degree of credit risk and such lower quality securities tend to be more
sensitive to economic conditions than are higher rated securities. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities, because such securities are generally unsecured
and are often subordinated to other creditors of the issuer. At May 31, 1994,
the Fund held 4 defaulted securities issued by 4 separate companies with a
value aggregating $22,071,217, representing 1.2% of the Fund's net assets. For
more information as to specific securities, see the accompanying statement of
investments in securities and net assets.
For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due
to unpaid interest income on defaulted bonds for the current reporting period.
32
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
9. OTHER CONSIDERATIONS
Franklin Advisers, Inc., as the Fund's Manager, may serve as a member of
various bondholders' committees, representing bondholders' interests in certain
corporate restructuring negotiations. Currently, the Manager serves on the
bondholders' committees for Synergy Group and Bucyrus-Erie. As a result of this
involvement in these committees, Franklin Advisers, Inc. may be in possession
of certain material non-public information. The Fund's Manager has not sold nor
does it intend to sell any of its holdings in these securities while in
possession of material non-public information in contravention of the Federal
Securities Laws.
10. ACQUISITION OF FRANKLIN PENNSYLVANIA INVESTORS FUND - HIGH INCOME PORTFOLIO
On June 26, 1992, the Fund acquired all of the net assets of Franklin
Pennsylvania High Income Portfolio pursuant to a plan of reorganization
approved by the shareholders of the Pennsylvania High Income Portfolio on that
date.
The acquisition was accomplished by a tax-free exchange of AGE High Income Fund
shares for all the net assets of the Pennsylvania High Income Portfolio, which
is accounted for as a pooling-of-interests without restatement for financial
reporting purposes.
The selected financial information and shares outstanding immediately before
and after the acquisition for the funds were as follows:
<TABLE>
<CAPTION>
Unrealized
Net Asset Undistributed Accumulated Appreciation
Value Shares Exchange Net Investment Net Realized (Depreciation)
Net Assets Per Share Outstanding Ratio Income Loss on Investments
------------- --------- ----------- -------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania High
Income Portfolio... $ 1,745,959 $8.01 218,029 2.95494559 $ -- $ (167,226) $ 48,460
AGE High Income
Fund............... 1,855,999,272 2.71 685,519,638 9,068,937 (487,423,783) (105,335,714)
Combined............ 1,857,745,231 2.71 686,163,903 9,068,937 (487,591,009) (105,287,254)
</TABLE>
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
Investments in portfolio companies, 5% or more of whose outstanding voting
securities are held by the Fund, are defined in the Investment Company Act of
1940 as affiliated companies. The Fund had investments in such affiliated
companies at May 31, 1994, which amounted to $17,238,476.
12. SUBSEQUENT EVENTS
On May 17, 1994 and June 21, 1994 the Board of Directors declared distributions
of $0.022 per share from undistributed net investment income to shareholders of
record at the end of business on May 31, 1994 and June 30, 1994, payable on
June 15, 1994 and July 15, 1994, respectively.
13. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
period are set forth in the Prospectus under the caption "Financial
Highlights."
33
<PAGE>
AGE HIGH INCOME FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
34
