Franklin's
AGE High
Income Fund
PROSPECTUS October 1, 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.
The 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"). 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 Rule 12b-1 fees, in
choosing the more suitable class given their anticipated investment amount and
time horizon. See "How to Buy Shares of the Fund - Differences Between Class I
and Class II."
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
October 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown on the cover.
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.................................... 2
Financial Highlights............................. 4
About the Fund................................... 5
Investment Objectives and
Policies of the Fund............................ 5
Risk Considerations.............................. 11
Management of the Fund........................... 16
Distributions to Shareholders.................... 17
Taxation of the Fund
and Its Shareholders............................ 19
How to Buy Shares of the Fund.................... 20
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments.............. 28
Other Programs and Privileges
Available to Fund Shareholders.................. 29
Exchange Privilege............................... 31
How to Sell Shares of the Fund................... 34
Telephone Transactions........................... 38
Valuation of Fund Shares......................... 39
How to Get Information Regarding
an Investment in the Fund....................... 40
Performance...................................... 41
General Information.............................. 42
Account Registrations............................ 43
Important Notice Regarding
Taxpayer IRS Certifications..................... 44
Portfolio Operations............................. 44
Appendix......................................... 45
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. These figures are based on aggregate
operating expenses of Fund shares for the fiscal year ended May 31, 1995.
<TABLE>
<CAPTION>
Class I Class II
--------- --------
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(as a percentage of offering price)................................................... 4.25% 1.00%++
Deferred Sales Charge.................................................................. NONE+ 1.00%++
Exchange Fee (per transaction)......................................................... $5.00* $5.00*
Class I Class II
--------- ------------
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees.................................................................. 0.46% 0.46%
Rule 12b-1 Fees.................................................................. 0.07%*** 0.65%**,***
Other Expenses:
Shareholder Servicing Costs.................................................... 0.04% 0.04%
Reports to Shareholders........................................................ 0.05% 0.05%
Other.......................................................................... 0.04% 0.04%
Total Other Expenses............................................................. 0.13% 0.13%**
--------- ------------
Total Fund Operating Expenses.................................................... 0.66% 1.24%
--------- ------------
</TABLE>
++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. (See "How to Buy Shares of the Fund - Purchase Price of Fund Shares"
for the definition of Franklin Templeton Funds and similar references.)
+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% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of 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 of 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 II shares represented an annualized rate
of 0.65%. Total Class II operating expenses for the fiscal year ended May 31,
1995 have been restated to reflect the maximum Rule 12b-1 fees allowed pursuant
to its plan of distribution as though the plan had been in effect for the entire
fiscal year. Class II's plan was effective May 15, 1995.
***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.......... $49* $63 $78 $121
Class II......... $32 $49 $77 $158
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A shareholder would pay the following expenses on the same investment, assuming
no redemption.
One Year Three Years Five Years Ten Years
Class II......... $23 $49 $77 $158
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of 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 Class I and Class
II shares of the Fund. The offering of Class II shares began May 16, 1995. The
information for each of the five fiscal years in the period ended May 31, 1995
has been audited by Coopers & Lybrand L.L.P., independent auditors, whose audit
report appears in the financial statements in the Fund's Annual Report to
Shareholders dated May 31, 1995. The remaining figures, which are also audited,
are not covered by the auditors' current report. See the discussion "Reports to
Shareholders" under "General Information" in this Prospectus.
<TABLE>
<CAPTION>
Year ended May 31
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Per Share Operating Performance
Net asset value at beginning
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
of year $2.70 $2.81 $2.72 $2.37 $2.53 $3.18 $3.37 $3.58 $3.83 $3.71
Net investment income........ 0.26 0.27 0.30 0.31 0.34 0.41 0.43 0.44 0.44 0.48
Net realized & unrealized
gains (loss)
on investments and foreign
currencies 0.074 (0.113) 0.054 0.340 (0.122) (0.636) (0.188) (0.218) (0.228) 0.133
Total from investment
operations 0.334 0.157 0.354 0.650 0.218 (0.226) 0.242 0.222 0.212 0.613
Less distributions:
Distributions from net
investment income (0.264) (0.267) (0.264) (0.300) (0.359) (0.424) (0.432) (0.432) (0.462) (0.492)
Distributions from
realized capital gains - - - - - - - - - (0.001)
Distributions from
paid-in capital..... - - - - (0.019) - - - - -
Total distributions..........(0.264) (0.267) (0.264) (0.300) (0.378) (0.424) (0.432) (0.432) (0.462) (0.493)
Net asset value at end
of period....... $2.77 $2.70 $2.81 $2.72 $2.37 $2.53 $3.18 $3.37 $3.58 $3.83
Total Return*................13.34% 5.19% 13.33% 28.48% 10.18% (8.13)% 6.97% 6.32% 5.25% 17.02%
Ratios/Supplemental Data
Net assets at end of
year (in 000's)... $1,908,853 $1,817,481 $1,935,919 $1,864,195 $1,587,656 $1,675,212 $2,243,494 $1,828,108 $1,639,596 $669,782
Ratio of expenses to
average net assets 0.66% 0.59% 0.56% 0.58% 0.59% 0.56% 0.56% 0.57% 0.59% 0.67%
Ratio of net investment
income to average
net assets................ 9.71% 9.61% 10.78% 12.18% 14.87% 14.47% 13.06% 12.72% 11.46% 11.66%
Portfolio turnover rate.... 28.56% 42.32% 38.33% 43.70% 28.55% 17.59% 28.82% 24.11% 22.50% 21.88%
Class II
May 16, 1995 to
May 31, 1995
Per Share Operating Performance*
<S> <C>
Net asset value at beginning of period ....................................................... $2.76
Net investment income......................................................................... -
Net realized & unrealized gains on investments and foreign currencies......................... 0.01
Total from investment operations......................................................... 0.01
Net asset value at end of period............................................................... $2.77
Total Return*.................................................................................. 0.36%
Ratios/Supplemental Data
Net assets at end of period (in 000's)........................................................ $713
Ratio of expenses to average net assets....................................................... 1.14%**
Ratio of net investment income to average net assets.......................................... 6.91%**
Portfolio turnover rate....................................................................... 28.56%
</TABLE>
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the deferred contingent sales charge. The total return for Class I
shares also 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 ("multiclass"
structure) with a par value of $0.01: 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 - Organization and 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% 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
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 nationally recognized
statistical rating organizations ("NRSROs") (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, however, 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, 1995, approximately 83.4% of the Fund's net assets were invested in
lower rated bonds (those having a rating below the four highest grades assigned
by the NRSROs) 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 NRSROs 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 average annual compounded rates of return for the Class I shares, as
calculated pursuant to the formula prescribed by the SEC, for the one-, five-
and ten-year periods ended on May 31, 1995, were 8.52%, 13.31% and 9.43%,
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. For additional information, see the SAI.
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 bank collateral with an initial market value of 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
Transactions in options, including options on foreign currencies and foreign
securities, forward contracts and interest rate swaps are generally considered
"derivative securities."
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, including options on foreign currencies and
foreign securities, and forward contracts 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 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. These lower-rated fixed-income securities are considered by the
NRSROs, 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, 1995, two
issues (from one issuer) out of 174 issues (excluding short-term securities and
cash equivalents) in the Fund's portfolio were in default. In the fiscal year
ended May 31, 1995, two issues defaulted, and a total of seven issues defaulted
over the prior three years. Defaulted issues represented 0.04% of the net assets
of the Fund at May 31, 1995. 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.
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. 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 treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. 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 may be required to dispose of portfolio securities to meet the
distribution requirements and such sales may be subject to the risk factors
discussed above. The Fund is not limited in the amount of its assets that may be
invested in such securities.
Asset Composition Table
A credit rating by an NRSRO evaluates only the safety of principal and interest
of the bond, and does not consider the market value risk associated with an
investment in such a bond. The table below shows the percentage invested in each
of the specific S&P rating categories and those that are not rated by any NRSRO
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, 1995. The Appendix includes a description of each
rating category.
Average Weighted
S&P Rating Percentage of Assets
AAA.................................. 6.33%
A-................................... 0.59%
BBB.................................. 0.33%
BBB-................................. 2.34%
BB+.................................. 5.15%
BB................................... 4.73%
BB-.................................. 12.41%
B+................................... 17.44%
B*................................... 32.45%
B-................................... 13.89%
CCC+................................. 1.59%
CCC.................................. 1.07%
CCC-................................. 1.47%
D.................................... 0.21%
*7.09% 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 U.S.
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. 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
its share price. 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 S&P'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 (the "Board") 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 34 U.S. registered investment
companies (115 separate series) with aggregate assets of over $77 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, 1995, 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, 1995, expenses borne by Class I shares of
the Fund, including fees paid to Advisers and to Investor Services, totaled
0.66% of the average monthly net assets of such class. Class II's annualized
expenses for the period from May 15, 1995, to May 31, 1995, totaled 1.24%.
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. Under each Plan, the class may 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 Fund pays to Distributors for distribution expenses
and related expenses up to 0.50% per annum of Class II's daily net assets,
payable quarterly. Such fees may be used in order to compensate Distributors or
others for providing distribution and related services and bearing certain
expenses of the Class. 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 following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.50% per annum of
Class II's average daily net assets 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 shareholders' 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, 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. 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. Shareholders in Class I funds may
direct their dividends and capital gain distributions for investment in another
Class I Franklin Templeton Fund at net asset value. Shareholders in Class II
funds may direct their dividends and capital gain distributions for investment
in either a Class I or Class II Franklin Templeton Fund at net asset value.
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 a Class I
Franklin Templeton Fund, 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. 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 intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. 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
paid by the Fund and 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.
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
domestic debt securities. 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 to
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.
Differences Between Class I and Class II. Class I and Class II shares differ in
the amount of their front-end sales charges and Rule 12b-1 fees as well as the
circumstances under which the contingent deferred sales charge applies.
Generally Class I shares have higher front-end sales charges than Class II
shares and comparatively lower 12b-1 fees. Voting rights of each class will be
the same on matters affecting the Fund as a whole, but each will vote separately
on matters affecting its class.
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 a maximum of
0.15% per annum of average daily net assets of the class. Class I shares may be
purchased at a reduced front-end sales charge 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. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 0.65% per annum
of the average daily net assets of Class II shares, 0.50% of which will be
retained by Distributors during the first year of investment.
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 higher operating expenses (which will accumulate
over time to outweigh the difference in front-end sales charges) and lower
income dividends for Class II shares. 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 should
seriously 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 may not purchase Class II shares.
See "Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
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.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to the investor. Class II purchases of
$1 million or more may, however, 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.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase. There are no conversions features attached to either class of shares.
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 showing front-end sales charges or underwriting
commissions and dealer concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000.............................. 4.25% 4.44% 4.00%
$100,000 but less than $250,000................. 3.50% 3.63% 3.25%
$250,000 but less than $500,000................. 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000............... 2.15% 2.20% 2.00%
$1,000,000 or more.............................. NONE NONE (see below)**
</TABLE>
*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 or more 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(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and (c)
the U.S. 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,
as indicated in the table below:
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million)............... 1.00% 1.01% 1.00%
</TABLE>
*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% 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 and payments made in
connection with sales of shares of the Franklin Templeton Funds. Compensation
may include financial assistance to securities dealers and payments made 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, children under the age of 21 and grandchildren under the age of 21. 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 subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares 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
365 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. Under this privilege 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. Matured shares will be reinvested at net
asset value and will not be subject to a new contingent deferred sales charge.
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 365 days after the redemption. The 365 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 365 days of the payment date of such distribution.
Class II shareholders may also invest such distributions at net asset value in a
Class I Franklin Templeton Fund. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase order. Additional
information may be obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."
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 was subject to a front-end sales charge or a
contingent deferred sales charge 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 365 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 its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services 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 the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted in order 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 the 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 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 the contingency period of the class. 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% semiannually, 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% 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
the Franklin Templeton 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 the contingency period of the class, a
contingent deferred sales charge will be imposed. Before making an exchange,
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(R) 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 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 in the Franklin
Tempelton Funds was made pursuant to the privilege permitting purchases at net
asset value as discussed under "How to Buy Shares of the Fund." 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 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.
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 during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I 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 "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge" for a discussion of investments subject to a 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.
Retirement Plan 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 under "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
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. Shares of each class will be transferred on
the same basis as described above for exchanges.
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.
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 scheduled 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 scheduled 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 the
Franklin Templeton 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
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. 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
In order to recover commissions paid to securities dealers, Class I investments
of $1 million or more and any Class II investments redeemed within the
contingency period (12 months for Class I and 18 months for Class II) 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.
In determining whether 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) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period of the class; (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 591/2; 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 of a specified dollar amount, unless otherwise
specified, 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 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
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.
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 execute various telephone transactions,
including: (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, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) 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 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.
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
scheduled 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 front-end 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 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. The value of a foreign security is determined as of
the close of trading on the foreign exchange on which it is traded or as of the
schedule closing of trading on the Exchange, if that is earlier, and that value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at noon, New York time, on the day the value of the foreign security
is determined. If no sale is reported at that time, the mean between the current
bid and ask price is used. Occasionally, events which affect the values of
foreign securities and foreign exchange rates may occur between the times at
which they are determined and the close of the exchange and will, therefore, not
be reflected in the computation of the Fund's net asset value. If events
materially affect the value of these foreign securities occur during such
period, then these securities will be valued in accordance with procedures
established by the Board.
Over the counter securities are valued within the range of the most recent
quoted bid and ask price. 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. 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, except that the Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. 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. 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(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
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 or Templeton
departments, telephone numbers and hours of operation to call. The same numbers
may be used when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in 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
several measures of 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 front-end 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 front-end 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' total return, current yield
or distribution rate may be in any future period.
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. To reduce the volume of mail sent to one household as well as to
reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional 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.
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 class by state corporation law, or (3) required to be
voted on separately by class 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, the proposal
would affect 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.
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 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.
C - This rating is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears
FRANKLIN
AGE HIGH
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 OCTOBER 1, 1995
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").................... 2
Officers and Directors............ 5
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")..................... 8
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions... 9
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")....... 10
Additional Information Regarding
Taxation (See also the Prospectus
"Taxation of the Fund and Its
Shareholders")................... 13
The Fund's Underwriter............ 15
General Information............... 17
Financial Statements.............. 21
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 October 1, 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 shown 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 manager to treat a
restricted security as liquid, including the investment manager's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Fund's investment manager 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 aggregate 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, 1994 and 1995 was 42.32% and 28.56%, 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 (74) Director
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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 42 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (67) Director
2120 Lambeth Way
Carmichael, CA 95608
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 (63) Director
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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 57 of the investment companies in the Franklin Templeton Group of Funds.
Roy V. Fox (77) Director
107 Deepwood Dr.
Georgetown, TX 78628-8301
Retired; formerly Publishing Consultant, Franklin Resources, Inc. and formerly
National Administrative Officer of the Assembly of Governmental Employees.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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 43 of the investment companies
in the Franklin Templeton Group of Funds.
*R. Martin Wiskemann (68) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
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 20 of the
investment companies in the Franklin Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Directors not affiliated with the investment manager ("nonaffiliated directors")
are currently paid fees of $680 per month plus $680 per meeting attended. As
indicated above, certain of the Fund's nonaffiliated directors also serve as
directors, trustees or managing general partners of other investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds (the
"Franklin Templeton Group of Funds") from which they may receive fees for their
services. The following table indicates the total fees paid to nonaffiliated
directors by the Fund and by other funds in the Franklin Templeton Group of
Funds.
Number of Boards in
Total Fees Total Fees Received From the Franklin Templeton
Received the Franklin Templeton Group of Funds On
Name From Fund* Group of Funds** Which Each Serves
- --------------------------------------------------------------------------------
Frank H. Abbott, III. $15,640 $176,870 31
Robert F. Carlson.... 13,600 14,960 1
S. Joseph Fortunato.. 15,640 336,065 57
Roy V. Fox........... 14,960 14,960 1
*For the fiscal year ended May 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 162 U.S.
based mutual funds or series.
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. 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. For
additional information concerning director compensation and expenses, please see
the Fund's Annual Report to Shareholders.
As of July 5, 1995, the directors and officers, as a group, owned of record and
beneficially approximately 679,644 shares or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's directors also own shares in
various of the other funds in the Franklin Templeton Group of Funds.
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 $128 billion in assets worldwide for over 3.8 million shareholders,
in addition to foundations and endowments, employee benefit plans, and
individuals.
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. Under the
terms of the management agreement, the Manager provides 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. See the
Statement of Operations in the financial statements included in the Fund's
Annual Report to Shareholders dated May 31, 1995.
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, 1993, 1994 and 1995 were
$8,666,780, $8,993,566 and $8,263,271, 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, 1995,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated May 31, 1995.
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 past three fiscal years ended May 31, 1995, the Fund paid total
brokerage commissions of $103,351, $23,257 and $7,790. As of May 31, 1995, 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 fund 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.
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 - in U.S. dollars Charge
- ------------------------------ ------
Up to $100,000................ 3%
$100,000 to $1,000,000........ 2%
Over $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 scheduled closing 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 scheduled closing of the Exchange 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.
Description of 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. 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 as of
the scheduled closing 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.
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 scheduled closing 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 times at which they are determined and the scheduled closing of the
Exchange which will not be reflected in the computation of the Funds 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.
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 scheduled 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 value as
determined by the management and approved in good faith 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 Franklin Templeton Institutional Services Department 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, a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividendsreceived 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 provided 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 federal 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 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 another Franklin Templeton Fund 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.
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.
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 derived by the Fund with respect to the Fund's business of investing in
stock or securities, or options or forward contracts with respect to such stock
or securities, constitute qualifying income for purposes of this 90% limitation.
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 forward contracts. 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 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
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 federal
income 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."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares of stock held by
the Fund in a PFIC would be treated as an excess distribution received by the
Fund in the current year, eliminating the deferral and the related interest
charge. Such excess distribution amounts are treated as ordinary income, which
the Fund will be required to distribute to shareholders even though the Fund has
not received any cash to satisfy this distribution requirement. These
regulations would be effective for taxable years ending after promulgation of
the proposed regulations as final regulations.
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 Fund's shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1993, 1994 and 1995 were
$7,108,307, $7,958,366 and 5,036,874, respectively. After allowances to dealers,
Distributors retained $1,021,018, $1,044,184 and $322,400 during the fiscal
years ended May 31, 1993, 1994 and 1995, respectively. Distributors may be
entitled to reimbursement or compensation under the Rule 12b-1 distribution plan
relating to both classes 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 0.15% per
annum (0.15 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 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 pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's average daily net assets, payable
quarterly. Such fees may be used 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 to or
reimbursed in subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If a bank
were prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans 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.
The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of 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.
For the fiscal year ended May 31, 1995, the total amounts paid by the Fund
pursuant to the Plans for Class I and Class II shares were $1,293,780 and $97,
respectively, which were used for the following purposes.
Dollar Amount
Advertising $165,676
Printing and mailing of prospectuses
to other than current shareholders $119,509
Payments to underwriters $ 46,633
Payments to brokers or dealers $962,059
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 front-end sales charge in effect currently.
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 May 31, 1995, were 8.52%,
13.31% and 9.43%, 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 May 31, 1995 were 8.52%, 86.75% and 146.26%,
respectively.
In considering the quotations of total return by the Class I shares, investors
should remember that the 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 May 31, 1995 was 9.26%.
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 advisors
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.
n) Salomon Brothers Combined Corporate Index - an unmanaged composite of the
Salomon High Yield Market Index and the corporate component of the Salomon Broad
Investment Grade Index. The index includes corporate issues rated AAA to CCC.
Comparisons of performance assume reinvestment of dividends.
o) CS First Boston High Yield Index - an unmanaged index constructed to mirror
the public high yield debt market. The index represents a total of 250 sectors
and contains issues rated BBB and below. Comparisons of performance assume
reinvestment of dividends.
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 2.4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton Worldwide, Inc., a pioneer in international investing. Together,
the Franklin Templeton Group has over $128 billion in assets under management
for more than 3.8 million shareholder accounts, in addition to foundations and
endowments, employee benefit plans, and individuals, and offers 114 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
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated May 31, 1995, including the auditors' report, are incorporated
herein by reference.
