FRANKLIN'S
AGE HIGH INCOME FUND
PROSPECTUS October 1,
as amended April 8, 1996
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.
An 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 from 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 15
Distributions to Shareholders 17
Taxation of the Fund
and Its Shareholders 19
How to Buy Shares of the Fund 20
Other Programs and Privileges
Available to Fund Shareholders 26
Exchange Privilege 28
How to Sell Shares of the Fund 32
Telephone Transactions 36
Valuation of Fund Shares 37
How to Get Information Regarding
an Investment in the Fund 38
Performance 39
General Information 39
Account Registrations 41
Important Notice Regarding
Taxpayer IRS Certifications 41
Portfolio Operations 42
Useful Terms and Definitions 42
Appendix 43
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.
Class I Class II
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(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%
+++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 YearsFive 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 YearsFive 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>
Class I
Year ended May 31
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
asset value at beginning 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*
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 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."
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.
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 of
the Fund's assets invested in fixed-income securities rated in each of the
rating categories shown and those that are not rated by any NRSRO but deemed
by the Manager to be of comparable 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.
The percentage of the Fund's assets invested in equity securities was 4.08%.
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 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 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.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of 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 subsidiaries. Advisers acts as investment manager or
administrator to 36 U.S. registered investment companies (118 separate
series) with aggregate assets of over $81 billion.
Pursuant to the management agreement, the Manager supervises and implements
the Fund's investment policies and provides certain administrative services
and facilities which are necessary to conduct the Fund's business.
The Manager performs similar services for other funds and there may be times
when the actions taken with respect to the Fund's portfolio will differ from
those taken by the Manager on behalf of other funds. Neither the Manager
(including its affiliates) nor its officers, directors or employees nor the
officers and directors of the Fund are prohibited from investing in
securities held by the Fund or other funds which are managed or administered
by the Manager to the extent such transactions comply with the Fund's Code of
Ethics. Please see "Investment Advisory and Other Services" and "General
Information" in the SAI for further information on securities transactions
and a summary of the Fund's Code of Ethics.
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 Investor Services, 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 are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to 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.
The maximum amount which the Fund may reimburse 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 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 Distributors distribution 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.
Either Distributors or one of its affiliates may pay, from its own resources,
a commission of up to 1% of the purchase price of Class II shares to
securities dealers who initiate and are responsible for such purchases.
During the first year following such purchases, Distributors will retain a
portion of Class II's Rule 12b-1 fees attributable to such shares equal to
0.50% per annum of Class II's average daily net assets to partially recoup
fees Distributors pays to securities dealers in connection with initial
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 the Class I 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 generally 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.
DISTRIBUTION OPTIONS
Distributions from the Fund may be taken in any of these ways:
1. Purchase additional shares of the Fund - The shareholder may purchase
additional shares of the same class of the Fund (without a sales charge or
imposition of a contingent deferred sales charge) by reinvesting capital gain
distributions, or both dividend and capital gain distributions. Class II
shareholders may also reinvest distributions in Class I shares of the Fund.
This is a convenient way to accumulate additional shares and maintain or
increase the shareholder's earnings base.
2. Purchase shares of other Franklin Templeton Funds - Distributions may be
directed to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Class II shareholders may also direct distributions to purchase
Class I shares of another Franklin Templeton Fund. Many shareholders find
this a convenient way to diversify their investments.
3. Receive distributions in cash - Dividends, or both dividend and capital
gain distributions, may be received by the shareholder in cash. The
shareholder may have the money sent directly to the address of record, to
another person, or to a checking account. If the money is to be sent to a
checking account, please see "Electronic Fund Transfers" under "Other
Programs and Privileges Available to Fund Shareholders."
To select one of these options, the shareholder should complete sections 6
and 7 of the Shareholder Application included with this Prospectus, or the
investment representative should be notified of the option preferred. If no
option is selected, dividend and capital gain distributions will be
automatically reinvested in the same class of the Fund. The distribution
option selected may be changed at any time by notifying the Fund by mail or
by telephone. Please allow at least seven days prior to the record date for
the Fund to process the new option.
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 to open a Fund account may be bought with as little as $100 and
additional investments can be made at any time with as little as $25. These
minimums may be waived when shares are purchased by retirement plans. To open
an account, the investor should contact the investment representative or
complete and sign the enclosed Shareholder Application and return it to the
Fund with a check. Please indicate which class of shares to buy. If no class
is specified, the purchase will automatically be invested in Class I shares.
DECIDING WHICH CLASS TO BUY
When deciding which class of shares to buy, the investor should consider a
number of factors, including the amount expected to be invested and the
length of time the investor expects to hold the investment. If the investor
plans to invest $1 million or more in a single payment or qualifies to buy
Class I shares at net asset value, Class II shares may not be bought.
Generally, the investor should consider buying Class I shares if:
o The investor expects to invest in the Fund over the long term;
o the investor qualifies to buy Class I shares at a reduced sales charge; or
o the investor intends to purchase $1 million or more over time.
The investor should consider Class II shares if:
o The investor expects to invest less than $100,000 in Franklin Templeton
Funds; and
o the investor intends to make substantial redemptions within approximately
six years or less of investment.
Class I shares are generally more attractive for long-term investors because
of Class II's higher Rule 12b-1 fees, which accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income
dividends for Class II shareholders. If the investor qualifies to buy Class I
shares at a reduced sales charge based upon the size of the purchase or
through the Letter of Intent or Rights of Accumulation programs, but intends
to hold the shares less than approximately six years, the investor should
evaluate whether it is more economical to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for the
investor to buy Class I shares since there is no front-end sales charge, even
though these purchases may be subject to a contingent deferred sales charge.
Any purchase of $1 million or more will therefore be automatically invested
in Class I shares. The investor may accumulate more than $1 million in Class
II shares through purchases over time, but if it is the intention to do this,
the investor should determine whether it would be more beneficial to buy
Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
The investor may buy shares at the public offering price of the class, unless
the investor qualifies to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is
1% and, unlike Class I shares, does not vary based upon the size of the
purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
Class I
<S> <C> <C> <C>
Under $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 None***
Class II
Under $1,000,000+..................... 1.00%** 1.01% 1.00%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times
reallow the entire sales charge to the securities dealer. A securities dealer
who receives 90% or more of the sales commission may be deemed an underwriter
under the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class
I shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places
using standard rounding criteria.
QUANTITY DISCOUNTS IN SALES CHARGES - CLASS I SHARES ONLY
As shown in the table above, the sales charge an investor may pay when buying
Class I shares may be reduced based upon the size of the purchase.
Rights of Accumulation. To determine if the investor may pay a reduced sales
charge, add the cost or current value, whichever is higher, of Class I and
Class II shares in other Franklin Templeton Funds, as well as those of the
investor's spouse, children under the age of 21 and grandchildren under the
age of 21, to the amount of the current Class I purchase. To receive the
reduction, the investor or the investor's investment representative must
notify Distributors that the investment qualifies for a discount.
Letter of Intent. The investor may purchase Class I shares at a reduced sales
charge by completing the Letter of Intent section of the Shareholder
Application. A Letter of Intent is a commitment by the investor to invest a
specified dollar amount during a 13 month period. The amount the investor
agrees to invest determines the sales charge to be paid on Class I shares.
The investor or the investor's investment representative must inform the Fund
that the Letter is in effect each time shares are purchased.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
THE INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING:
o The investor authorizes Distributors to reserve five percent (5%) of the
amount of the total intended purchase in Class I shares registered in the
investor's name.
o The investor grants Distributors a security interest in these shares and
appoint Distributors as attorney-in-fact with full power of substitution to
redeem any or all of these reserved shares to pay any unpaid sales charge if
the investor does not fulfill the terms of the Letter.
o The Fund will include the reserved shares in the total shares owned by the
investor as reflected on the periodic statements.
o The investor will receive dividend and capital gain distributions on the
reserved shares; the Fund will pay or reinvest these distributions as the
investor directs.
o Although the investor may exchange the shares, the investor may not
liquidate reserved shares until the Letter is completed or pay the higher
sales charge.
o The Fund's policy of reserving shares does not apply to certain benefit
plans described under "Purchases at Net Asset Value."
More information about the Letter of Intent privilege is included in the SAI
or the investor may call the Shareholder Services Department.
Group Purchases. An individual who is a member of a qualified group such as
the Assembly of Governmental Employees ("AGE") may purchase Class I shares at
the reduced sales charge applicable to the group as a whole. The sales charge
is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will 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.
Distributors defines a qualified group as 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.
In addition, a qualified group must have more than 10 members, and be
available to arrange for meetings between our representatives and group
members. It must also agree to include sales and other materials related to
the Franklin Templeton Funds in publications and mailings to its members at
reduced or no cost to Distributors, and 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 continue
automatically until the investor notifies the Fund and the employer to
discontinue further investments. Due to the varying procedures used by
employers to handle payroll deductions, there may be a delay between the time
of the payroll deduction and the time the money reaches the Fund. The
purchase is invested at the applicable offering price per share determined on
the day that the Fund receives both the check and the payroll deduction data
in required form.
PURCHASES AT NET ASSET VALUE
The investor may invest money from the following sources in Class I shares of
the Fund without paying front-end or contingent deferred sales charges. The
investor may also purchase Class II shares without paying front-end or
contingent deferred sales charges if the source of the investment proceeds is
included in paragraph (i) below:
(i) a distribution that the investor has received from a Franklin Templeton
Fund or a real estate investment trust ("REIT") sponsored or advised by
Franklin Properties, Inc., if the distribution is returned within 365 days of
its payment date. The investor may reinvest Class II distributions in either
Class I or Class II shares, but Class I distributions may only be invested in
Class I shares under this privilege. For more information, see "Distribution
Options" under "Distributions to Shareholders" or call Shareholder Services
at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to
those of the Fund, if (a) the investor's investment in that fund was subject
to either a front-end or contingent deferred sales charge at the time of
purchase, (b) the fund is not part of the Franklin Templeton Funds, and (c)
the redemption occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing
401(k) plan), up to the total amount of the distribution. The distribution
must be returned to the Fund within 365 days of the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if the investor
then reinvests the redemption proceeds under an employee benefit plan
qualified under Section 401 of the Code, in shares of the Fund.
The investor may also reinvest the proceeds from a redemption of any of the
Franklin Templeton Funds in Class I or Class II shares of the Fund at net
asset value. To do so, the investor must (a) have paid a sales charge on the
purchase or sale of the original shares, (b) reinvest the redemption money in
the same class of shares, and (c) request the reinvestment of the money
within 365 days of the redemption date. The investor may reinvest up to the
total amount of the redemption proceeds under this privilege. 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. While the investor will receive
credit for any contingent deferred sales charge paid on the shares redeemed,
a new contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and
will not be subject to a new contingent deferred sales charge. Shares
exchanged into other Franklin Templeton Funds are not considered "redeemed"
for this privilege (see "Exchange Privilege").
If the investor immediately reinvested the redemption proceeds in a Franklin
Bank Certificate of Deposit ("CD") but would like to reinvest them back into
the Franklin Templeton Funds as described above, the investor will have 365
days from the date the CD (including any rollover) matures to do so.
If the investor's securities dealer or another financial institution
reinvests the money in the Fund at net asset value for the investor, that
person or institution may charge the investor a fee for this service.
A 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 the investor has a loss on the redemption, the loss
may be disallowed if reinvested in the same fund within a 30-day period. For
more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of
the Fund at net asset value regardless of the source of the investment
proceeds. If the investor or the investor's account is included in one of the
categories below, none of the Class I shares purchased will be subject to
front-end or contingent deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of
the employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in
comprehensive fee programs. These programs, sometimes known as wrap fee
programs, are sponsored by the broker-dealer and either advised by the
broker-dealer or by another registered investment advisor affiliated with
that broker;
(vii) 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 the Manager on arbitrage rebate calculations. If the investor is
a securities dealer who has executed a dealer agreement with Distributors
and, through its services, an eligible governmental authority invests in the
Fund at net asset value, Distributors or one of its affiliates may make a
payment, out of its own resources, to the securities dealer in an amount not
to exceed 0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family
members. Although the investor may pay sales charges on investments in
accounts opened after the association has ended, the shareholder may continue
to invest in accounts opened while they were associated without paying sales
charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1
million in Franklin Templeton Funds over a 13 month period. Distributors will
accept orders for such accounts 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;
(x) group annuity separate accounts offered to retirement plans;
(xi) trustees or other fiduciaries purchasing securities for certain
retirement plans of organizations with collective retirement plan assets of
$1 million or more, without regard to where such assets are currently
invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements for Designated Retirement Plans and those described under "Group
Purchases," above.
IF THE INVESTOR QUALIFIES TO BUY SHARES AT NET ASSET VALUE AS DISCUSSED IN
THIS SECTION, PLEASE SPECIFY IN WRITING THE PRIVILEGE THAT APPLIES TO THE
PURCHASE AND INCLUDE THAT WRITTEN STATEMENT WITH THE PURCHASE ORDER.
DISTRIBUTORS WILL NOT BE RESPONSIBLE FOR PURCHASES THAT ARE NOT MADE AT NET
ASSET VALUE IF THIS WRITTEN STATEMENT IS NOT INCLUDED WITH THE ORDER.
For more information, please see the SAI.
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.
Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for 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 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 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 advisors concerning investment decisions within their
plans.
GENERAL
The Fund continuously offers its shares through securities dealers who have
an agreement with Distributors. The Fund and Distributors may refuse any
order for the purchase of shares.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law. Banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I 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. These breakpoints are reset every 12
months for purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in
paragraphs (ix), (xi) or (xii) under "Purchases at Net Asset Value" above and
up to 0.75% of the purchase price to securities dealers who initiate and are
responsible for purchases made at net asset value by Non-Designated
Retirement Plans. These payments may not be made to securities dealers or
others in connection with the sale of Fund shares if the payments might be
used to offset administration or recordkeeping costs for retirement plans or
circumstances suggest that plan sponsors or administrators might use or
otherwise allow the use of Rule 12b-1 fees to offset such costs. Please see
the SAI for the breakpoints applicable to these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price.
To partially recoup these payments, Distributors will keep part of the Rule
12b-1 fees assessed to the shares during the first year following their
purchase.
Either Distributors or one of its affiliates, out of its own resources, may
also provide additional compensation to securities dealers in connection with
the sale of shares of the Franklin Templeton Funds. In some cases, this
compensation may be available only to securities dealers whose
representatives have sold or are expected to sell significant amounts of
shares of the Franklin Templeton Funds. Compensation may include financial
assistance and payments made in connection with conferences, sales or
training programs for employees of the securities dealer, seminars for the
public, advertising, sales campaigns and/or shareholder services, programs
regarding one or more of the Franklin Templeton Funds and other programs or
events sponsored by securities dealers, and payment for travel expenses of
invited registered representatives and their families, including lodging, in
connection with business meetings or seminars located within or outside the
U.S. Securities dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the National Association of Securities Dealers, Inc. None of
this compensation is paid for by the Fund or its shareholders.
For additional information about shares of the Fund, please see the SAI. The
SAI also includes a listing of the officers and directors of the Fund who are
affiliated with Distributors. See "Officers and Directors."
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 from 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
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, the investor can arrange to have money transferred
automatically from the checking account to the Fund each month to buy
additional shares. Please refer to the Automatic Investment Plan Application
at the back of this Prospectus for the requirements of the program. The
investor's investment representative may also assist the investor. Of course,
the market value of the Fund's shares may fluctuate and a systematic
investment plan such as this will not assure a profit or protect against a
loss. The investor may terminate the program at any time by notifying
Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows the investor to receive regular
payments from the account on a monthly, quarterly, semiannual or annual
basis. To establish a Systematic Withdrawal Plan, the value of the account
must be at least $5,000 and the minimum payment amount for each withdrawal
must be at least $50. Please keep in mind that $50 is merely the minimum
amount and is not a recommended amount. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
To establish a Systematic Withdrawal Plan, please complete the Systematic
Withdrawal Plan section of the Shareholder Application included with this
Prospectus and indicate the preferred option for payments. The investor may
choose to receive payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - The investor may
direct payments to purchase the same class of shares of another Franklin
Templeton Fund.
2. Receive payments in cash - The investor may choose to receive payments in
cash. The money may be sent directly to the investor, to another person, or
to a checking account. For instructions on sending the money to a checking
account, please see "Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once the plan is established, any distributions paid by the
Fund will be automatically reinvested in the investor's account. Payments
under the plan will be made from the redemption of an equivalent amount of
shares in the account, generally on the first business day of the month in
which a payment is scheduled. The investor will generally receive the
payments within three to five days after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust
the shares in the investor's account if payments exceed distributions
received from the Fund. This is especially likely to occur if there is a
market decline. If a withdrawal amount exceeds the value of the investor's
account, the account will be closed and the remaining balance in the account
will be sent to the investor. Redemptions under a Systematic Withdrawal Plan
are considered a sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the investor's actual yield or
income, part of the payment may be a return of the investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either
in plan balance or, where share certificates are outstanding, deposited with
the Fund. The investor should ordinarily not make additional investments in
the Fund of less than $5,000 or three times the amount of annual withdrawals
under the plan because of the sales charge on additional purchases. Shares
redeemed under the plan may also be subject to a contingent deferred sales
charge. Please see "Contingent Deferred Sales Charge" under "How to Sell
Shares."
The investor may terminate a Systematic Withdrawal Plan, change the amount
and schedule of withdrawal payments, or suspend one payment by notifying
Investor Services in writing at least seven business days prior to the end of
the month preceding a scheduled payment. The Fund may also terminate a
Systematic Withdrawal Plan by notifying the shareholder in writing and will
automatically terminate a Systematic Withdrawal Plan if all shares in the
account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
The investor may choose to have distributions from the Fund or payments under
a Systematic Withdrawal Plan sent directly to a checking account. If the
checking account is maintained at a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If the investor chooses this option, fifteen days should be allowed
for initial processing. Any payments made during that time will be sent to
the address of record on the shareholder's account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of buying, selling 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 and policies. The shares of most of these 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 another Franklin Templeton Fund
eligible for sale in the shareholder's state of residence and in conformity
with that 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 of the other Franklin Templeton Funds.
Class II shares may be exchanged for Class II shares of any of the other
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, 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, limitations on a fund's sale
of its shares, minimum holding periods for exchanges at net asset value, 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 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
value 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 Templeton 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, 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 Class II shareholders purchase shares of
Money Fund II directly. Class II shares exchanged for shares of Money Fund II
will continue to age, for purposes of calculating the contingent deferred
sales charge, because they continue to be subject to Rule 12b-1 fees. The
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 contingent deferred sales charge. 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 exchange
shares directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
MARKET TIMERS
Market Timers will be charged a $5.00 administrative service fee for each
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 Market Timers.
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Market
Timer, group or 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, (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 by Market Timers, 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 Market Timer, 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. The purchase side of an exchange 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 will receive the price calculated on
the following business day. The net asset value per share of each class 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. 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 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 that are members of a national securities
exchange or a clearing agency or that 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 about telephone redemptions 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, qualified retirement plans and government entities that qualify
to purchase shares at net asset value pursuant to the terms of this
Prospectus) that 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 calling
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, all or a portion
of 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 on shares held less than the
contingency period; (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. Shares subject to a contingent deferred sales charge will then be
redeemed 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: specified net asset value purchases discussed under "How to
Buy Shares of the Fund - Purchases at Net Asset Value"; exchanges; any
account fees; distributions from an individual retirement plan account due to
death or disability or upon periodic distributions based on life expectancy;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination
or plan transfer; redemptions initiated by the Fund due to an account falling
below the minimum specified account size; redemptions following the death of
the shareholder or beneficial owner; and 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). 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.
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.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of
a specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check
will generally reduce this delay, shares purchased with these checks will
also be held pending clearance. Shares purchased by federal funds wire are
available for immediate redemption. 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 , 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
By calling Investor Services at 1-800/632-2301, shareholders of the Fund and
their investment representative of record, if any, may be able to execute
various telephone transactions including to: (i) effect a change in address,
(ii) change a dividend option (see "Restricted Accounts" below), (iii)
transfer Fund shares in one account to another identically registered account
in the Fund, (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 redemption,
distribution, or dividend payment changes. 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.
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 privilege will be difficult to execute because of heavy
telephone volume. In these situations, shareholders may wish to contact their
investment representative for assistance or send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses
resulting from the inability of a shareholder to execute a telephone
transaction.
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).
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, shareholders may access TeleFACTS(R). By calling the
TeleFACTS system day or night at 1-800/247-1753, shareholders may obtain
account information, current price and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund.
In addition, shareholders may process an exchange, within the same class,
into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
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 list of Franklin departments, telephone
numbers and hours of operation is provided.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00p.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 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.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see the SAI), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders.
Dividends or distributions paid to shareholders of a class are reflected in
the current distribution rate, which may be quoted to shareholders. The
current distribution rate is computed by dividing the total amount of
dividends per share paid by a class during the past 12 months by a current
maximum offering price for that class of shares. Under certain circumstances,
such as when there has been a change in the amount of dividend payout or a
fundamental change in investment policies, it might be appropriate to
annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect
all recurring charges against a class' income and will assume the payment of
the maximum sales charge on the purchase of that class of shares. When there
has been a change in the sales charge structure, the historical performance
figures will be restated to reflect the new rate. The investment results of
each class, like all other investment companies, will fluctuate over time;
thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' performance 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 each
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. Account transfers may be effected 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 team responsible for the day-to-day management of the Fund's portfolio
is: 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 from Stanford University and a
Master of Business Administration degree 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.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Directors of the Fund.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that:
(i) are sponsored by an employer with at least 200 employees; (ii) have
aggregate plan assets of at least $1 million; or (iii) agree to invest at
least $1 million in any of the Franklin Templeton Funds over a 13 month
period. Distributors determines the qualifications for Designated Retirement
Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based
on predetermined market indicators, or any person or group whose transactions
seem to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the Fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the Fund by
the number of shares outstanding. When an investor buys, sells or exchanges
shares, the Fund will use the NAV per share for the applicable class next
calculated after the Fund receives the investor's request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value
per share of the class plus the front-end sales charge. The front-end sales
charge is 4.25% for Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - 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.
Trust Company - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly-owned subsidiaries of Resources.
U.S. - United States.
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.
