Fund Objective:
Franklin's AGE High Income Fund seeks to provide investors with high current
income, with a secondary objective of principal appreciation, through a
diversified portfolio consisting primarily of high-yield, lower-rated corporate
bonds.
To reduce the volume of mail shareholders receive and to reduce expenses, only
one copy of most Fund reports, such as the Fund's annual and semi-annual
reports, may be mailed to a household. Additional reports may be obtained,
without charge, by calling Fund Information at 1-800/DIAL BEN (1-800/342-5236).
January 15, 1996
Dear Shareholder:
We are pleased to bring you the semi-annual report of Franklin's AGE High Income
Fund for the period ended November 30, 1995.
A continued trend of moderate economic growth accompanied by low and declining
interest rates marked the six-month reporting period.
An improving economy strengthened the financial condition of many corporations,
which had a positive effect on the value of their outstanding debt. However,
economic growth was not as strong as the Federal Reserve Board had anticipated,
and it decreased short-term interest rates to 5.75% from 6.00%, in July. This
also boosted the value of fixed-income securities, as bond prices rise when
interest rates decline. As a result, your fund's Class I shares recorded a
six-month cumulative total return of +5.25% and a one-year total return of
+17.89% for the period ended November 30, 1995, as seen in the Performance
Summary on page 5. Further, your fund continued to meet its objective of high
current income.
During the period, the majority of the fund's total return was derived from
income, as opposed to capital appreciation. Since the economy had been growing
for an extended period of time, investors demanded higher yields from lower
quality bonds as compensation for assuming more credit risk late in the economic
expansion phase. This "spread widening" effect offset much of the potential
principal appreciation typical of a declining interest rate environment,
resulting in fairly stable security prices during the period.
Correspondingly, the market favored lower-risk companies and defensive,
non-cyclical industries during the reporting period. Non-cyclical industries
tend to be less sensitive to economic slowdowns, because they are supported by
nondiscretionary consumer spending on basic necessities such as health care and
food.
Franklin's AGE High Income Fund
Top 10 Holdings on 11/30/95
Based on Total Net Assets
Company % of Total
Industry Net Assets
American Standard, Inc. 2.18%
Industrial
Ralphs Grocery Co. 1.66%
Food Retailing
Fort Howard Corp. 1.98%
Forest & Paper Products
Rogers Communication, Inc. 1.75%
Cable Television/Wireless Communication
RJR Nabisco, Inc. 1.72%
Consumer Goods
Continental Cablevision, Inc. 1.58%
Cable Television
Repap New Brunswick 1.51%
Forest & Paper Products
Comcast Cellular Communications, Inc. 1.51%
Cable Television/Wireless Communication
Delta Airlines, Inc. 1.40%
Transportation
Dr. Pepper/Seven-Up Cos. 1.34%
Food & Beverage
For a detailed listing of portfolio holdings, please see page 7 of this report.
We carefully evaluated each prospective bond issue for risk and total return
potential, and remained favorably inclined toward the health care sector, which
represented 4.8% of the fund's total net assets on November 30, 1995. Marked by
continued growth, the health care industry's consolidation continued, as smaller
providers merged for greater economies of scale to compete within an
HMO-dominated environment. For example, OrNda Healthcorp and Tenet Healthcare
Corp., two hospital companies in which the fund invests, both consolidated and
improved their operations during the reporting period.
Regarding investments in more cyclical industries, the fund concentrated on
larger, market-leading companies whose business reflected improved operations.
Securities of such companies, such as paper producer Fort Howard and United
Airlines, are attractive to investors particularly when markets become
unsettled.
Strong performance and improved financial conditions of individual companies
also contributed greatly to the fund's overall performance. For instance, media
& broadcasting company Pan Am Sat, and Continental Cablevision, both improved
their operations and announced initial public offerings of stock.
Of course, while high yield corporate bonds and Franklin's AGE High Income Fund
fared well during the reporting period, we cannot guarantee this trend will
continue. As stated in the fund's prospectus, investing in Franklin's AGE High
Income Fund entails a greater degree of credit risk relative to investment in a
fund of higher-rated, lower yielding securities. It should not be considered a
complete investment program, and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals. Those on
fixed incomes, including retired individuals, should consider the increased risk
of loss of principal that is present with an investment in higher risk
securities such as those contained in the fund's portfolio.
Many investors have found the fund's broad diversification and professional
management can help to offset the risks involved. Franklin's AGE High Income
Fund contained over 180 positions in its portfolio, and the fund's largest
holding represented only 2.2% of total net assets on November 30, 1995. By
limiting our exposure to any one industry or issuer, we seek to reduce the
impact that a poorly performing security or sector could have on your
investment.
Looking forward to 1996, we anticipate a continuation of the slow to moderate
economic growth and low interest rates exhibited during the reporting period. In
fact, this economic environment prompted the Federal Reserve Board to reduce
short-term rates for a second time this year, from 5.75% to 5.50%, in December.
Consequently, corporations may be able to improve their financial conditions
further. Overall, we believe the high-yield corporate bond market and Franklin's
AGE High Income Fund are well-positioned for 1996.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin's AGE High Income Fund
Performance Summary
Class I Shares
The price of the fund's Class I shares, as measured by net asset value, rose
slightly to $2.78 on November 30, 1995, from $2.77 on May 31, 1995. Your fund
continued to meet its investment objective of providing high current income to
its shareholders. For the six-month period ended November 30, 1995, the fund's
Class I shares paid income distributions totaling 13.2 cents ($0.132) per share.
Based on an annualization of the current monthly dividend of 2.2 cents ($0.022)
per share and the maximum offering price of $2.90 on November 30, 1995, your
fund's Class I share distribution rate was 9.10%. Dividends will vary based on
the earnings of the fund's portfolio, and past distributions are not predictive
of future trends.
Class I shares of Franklin's AGE High Income Fund posted cumulative total
returns of +5.25% and +17.89%, for the six-month and one-year periods ended
November 30, 1995. Total return measures the change in value of an investment
over the periods indicated. It does not include the initial sales charge and
assumes reinvestment of dividends and any capital gains. Past performance cannot
guarantee future results.
Class II Shares
The price of the fund's Class II shares, as measured by net asset value, rose
slightly to $2.78 on November 30, 1995, from $2.77 on May 31, 1995. Your fund
continued to meet its investment objective of providing high current income to
its shareholders. For the six-month period ended November 30, 1995, the fund's
Class II shares paid income distributions totaling 12.2 cents ($0.122) per
share. Based on an annualization of the current monthly dividend of 2.05 cents
($0.0205) per share and the maximum offering price of $2.81 on November 30,
1995, your fund's Class II share distribution rate was 8.75%. Dividends will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Class II shares of Franklin's AGE High Income Fund posted a cumulative total
return of +4.87% for the six-month period ended November 30, 1995. Total return
measures the change in value of an investment over the period indicated. It does
not include sales charges and assumes reinvestment of dividends and any capital
gains. Past performance cannot guarantee future results.
<TABLE>
<CAPTION>
Franklin's AGE High Income Fund
Periods ended November 30, 1995
Since Since
One- Five- Ten- Inception Inception
Year Year Year (12/31/69) (05/16/95)
<S> <C> <C> <C> <C> <C>
Cumulative Total Return1
Class I Shares 17.89% 136.70% 161.11% 761.40% --
Class II Shares -- -- -- -- 5.25%
Average Annual Total Return2
Class I Shares 12.69% 17.77% 9.60% 8.47% --
Aggregate Total Return3
Class II Shares -- -- -- -- 3.13%
Distribution Rate4
Class I Shares 9.10%
Class II Shares 8.75%
30-Day Standardized Yield5
Class I Shares 8.98%
Class II Shares 8.72%
</TABLE>
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the current, maximum 4.25% initial
sales charge for Class I shares, or the maximum 1.0% initial sales charge and
1.0% contingent deferred sales charge (CDSC) for Class II shares, applicable to
shares redeemed within the first 18 months of investment. See note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and reflects the current, maximum 4.25%
initial sales charge for Class I shares. See note below.
3. Aggregate total return, which includes the 1.0% initial sales charge,
represents the change in value of an investment since the inception date of the
fund's Class II shares. It also includes the 1.0% CDSC applicable to shares
redeemed within 18 months of purchase. Since Class II shares have existed for
less than one year, average annual total returns are not provided.
4. The distribution rate for Class I shares is based on an annualization of the
fund's current 2.2 cents per share monthly dividend and the maximum offering
price of $2.90 on November 30, 1995. For Class II shares, the distribution rate
is based on an annualization of the fund's current 2.05 cents per share monthly
dividend and the maximum offering price of $2.81 on November 30, 1995.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1995. The fund's high
distribution rate and yield reflect the higher credit risks associated with
certain lower-rated securities in the portfolio, and in some cases, the lower
market prices for these instruments.
Note: Prior to July 1, 1994, the fund's Class I shares were offered at a lower
initial sales charge, with dividends reinvested at the offering price. Thus,
actual total returns for purchasers of shares during that period would have been
different than noted above. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a plan of distribution under Rule
12b-1, which will affect future performance. Class II shares, which the fund
began offering on May 16, 1995, are subject to different fees and expenses,
which will affect their performance. Please see the prospectus for more details
regarding Class I and Class II shares.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Investment return and principal value will fluctuate with
market conditions, and you may have a gain or loss when you sell your shares.
Past performance cannot guarantee future results.
<TABLE>
<CAPTION>
AGE HIGH INCOME FUND, INC.
Statement of Investments in Securities and Net Assets, November 30, 1995
(unaudited)
Face Value
Amount (Note 1)
Bonds 85.1%
Automotive .9%
<C> <C> <C>
$ 16,750,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ............................. $ 17,922,500
-------------
Cable Television8.9%
29,000,000 dBell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99, (original
accretion rate 11.95%), 11.95% thereafter, 07/15/04 ....................... 19,937,500
17,400,000 Cablevision Industries Corp., senior notes, 10.75%, 01/30/02 ............... 18,879,000
5,000,000 Cablevision System Corp., senior sub. deb., 9.875%, 04/01/23 ............... 5,162,500
20,000,000 Cablevision System Corp., SF, senior sub. deb., 10.75%, 04/01/04............ 21,250,000
7,000,000 Century Communications Corp., senior notes, 9.50%, 03/01/05 ................ 7,131,250
3,000,000 Continental Cablevision, Inc., senior deb., 8.875%, 09/15/05................ 3,116,250
8,500,000 Continental Cablevision, Inc., senior deb., 9.50%, 08/01/13 ................ 8,946,250
13,000,000 Continental Cablevision, Inc., senior sub. deb., 11.00%, 06/01/07........... 14,495,000
5,800,000 Continental Cablevision, Inc., senior sub. deb., 9.00%, 09/01/08............ 6,032,000
10,000,000 Helicon Group LP Corp., S.F., senior secured notes, 9.00% coupon to 11/1/96,
11.00% thereafter, 11/01/03 .............................................. 9,550,000
5,000,000 Rogers Cablesystems, Inc., senior secured deb., 10.125%, 09/01/12 .......... 5,175,000
15,300,000 gRogers Cablesystems, Inc., senior secured deb. (Canada), 9.65%, 01/15/14 9,404,468
10,000,000 Rogers Communications, Inc., senior deb., 10.875%, 04/15/04 ................ 10,425,000
7,000,000 cScott Cable Communications, Inc., SF, sub. deb., 12.25%, 04/15/01 5,005,000
20,000,000 Tele-Communications, Inc., senior deb., 9.80%, 02/01/12 .................... 23,384,238
25,500,000 dTelewest Plc., deb., zero coupon to 10/01/00, (original accretion rate 11.00%),
11.00% thereafter, 10/01/07 ............................................... 14,821,875
-------------
182,715,331
-------------
Chemicals 4.3%
18,000,000 Arcadian Partners, SF, senior notes, Series B, 10.75%, 05/01/05 ............ 19,755,000
18,750,000 dHarris Chemical North America, Inc., senior secured disc. notes, zero coupon
to 01/15/96, (original accretion rate 10.25%), 10.25% thereafter, 07/15/01 17,531,250
3,400,000 IMC Fertilizer Group, Inc., senior deb., 9.45%, 12/15/11 ................... 3,621,000
7,000,000 IMC Fertilizer Group, Inc., senior notes, 9.25%, 10/01/00 .................. 7,420,000
6,000,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.125%, 06/15/01 ...... 6,510,000
6,550,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.75%, 06/15/03 ....... 7,188,625
15,000,000 Terra Industries, Inc., senior notes, Series B, 10.50%, 06/15/05 ........... 16,275,000
4,850,000 UCC Investors, senior sub. notes, 11.00%, 05/01/03 ......................... 4,910,625
6,000,000 dUCC Investors, sub. notes, zero coupon to 05/01/98, (original accretion rate
12.00%), 12.00% thereafter, 05/01/05 ...................................... 4,470,000
-------------
87,681,500
-------------
Consumer Goods 4.0%
17,000,000 dColeman Holdings, Inc., senior secured disc. notes, (original accretion rate
10.875%), 0.00%, 05/27/98 ... ............................................. 13,600,000
10,000,000 Florsheim Shoe Co., senior notes, 12.75%, 09/01/02 ......................... 8,150,000
Consumer Goods (cont.)
$ 3,600,000 Herff Jones, Inc., senior sub. notes, 11.00%, 08/15/05 ..................... $ 3,735,000
7,500,000 Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 .......... 6,637,500
15,000,000 Revlon Consumer Products Corp., senior sub. notes, 10.50%, 02/15/03 ........ 15,375,000
4,900,000 dRevlon Worldwide Corp., senior secured disc. notes, (original accretion rate
12.00%), 0.00%, 03/15/98 .................................................. 3,662,750
20,000,000 RJR Nabisco, Inc., senior notes, 9.25%, 08/15/13 ........................... 20,600,000
9,600,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 ............................ 9,744,000
-------------
81,504,250
-------------
Containers & Packaging 1.9%
9,000,000 Container Corp. of America, guaranteed senior notes, Series A, 11.25%, 05/01/04 9,360,000
12,000,000 Container Corp. of America, senior notes, Series A, 9.75%, 04/01/03 ........ 11,925,000
12,000,000 Owens Illinois, Inc., senior sub. notes, 9.75%, 08/15/04 ................... 12,540,000
5,500,000 Owens Illinois, Inc., SF, senior deb., 11.00%, 12/01/03 .................... 6,146,250
-------------
39,971,250
-------------
Energy1.2%
6,750,000 Energy Ventures, senior notes, 10.25%, 03/15/04 ............................ 7,129,688
17,000,000 Gulf Canada Resources, Ltd., senior sub. notes, 9.25%, 01/15/04 ............ 17,481,269
-------------
24,610,957
-------------
Food & Beverages6.1%
9,250,000 Beatrice Foods, Inc., SF, senior sub. notes, 12.00%, 12/01/01 .............. 2,821,250
3,100,000 Curtice-Burns Foods, Inc., senior sub.notes, 12.25%, 02/01/05 .............. 3,208,500
2,500,000 Darling-Delaware Co., Inc., SF, senior sub. notes, 11.00%, 07/15/00 ........ 2,493,750
32,575,000 bDel Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 ......................... 23,779,750
5,950,000 Dominick's Finer Foods, senior sub. deb., 10.875%, 05/01/05 ................ 6,232,625
1,540,000 Dr Pepper Bottling Co. of Texas, senior notes, 10.25%, 02/15/00 ............ 1,593,900
2,000,000 dDr Pepper Bottling Holdings, SF, senior disc. notes, zero coupon to 02/15/98,
(original accretion rate 11.625%), 11.625% thereafter, 02/15/03 ........... 1,595,000
29,593,000 dDr Pepper/Seven-Up Cos., Inc., SF, senior sub. disc. notes, zero coupon to
11/01/97, (original accretion rate 11.50%), 11.50% thereafter, 11/01/02 ... 27,521,490
7,500,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 ................. 7,725,000
14,000,000 Royal Crown Corp., senior secured notes, 9.75%, 08/01/00 ................... 11,690,000
19,000,000 Specialty Foods Corp., senior notes, Series B, 10.25%, 08/15/01 ............ 17,860,000
19,000,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 ............. 18,857,500
-------------
125,378,765
-------------
Food Retailing 6.8%
17,500,000 Brunos Inc., senior sub. notes, 10.50%, 08/01/05 ........................... 16,843,750
18,900,000 Grand Union Co., senior notes, 12.00%, 09/01/04 ............................ 16,726,500
11,600,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01 .............. 11,281,000
Food Retailing (cont.)
$ 14,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 ................. $ 13,055,000
10,000,000 Pathmark Stores, Inc., SF, sub. notes, 11.625%, 06/15/02 ................... 9,800,000
5,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 ........................... 4,312,500
10,000,000 Penn Traffic Co., senior notes, 10.375%, 10/01/04 .......................... 9,162,500
11,000,000 Pueblo Xtra International, senior notes, 9.50%, 08/01/03 ................... 10,175,000
19,250,000 Ralphs Grocery Co., senior notes, 10.45%, 06/15/04 ......................... 19,009,375
13,500,000 Ralphs Grocery Co., senior sub. notes, 11.00%, 06/15/05 .................... 12,926,250
2,000,000 Ralphs Grocery Co., senior sub. notes, 13.75%, 06/15/05 .................... 2,120,000
15,000,000 Smitty's Supervalu, Inc., senior sub. notes, 12.75%, 06/15/04 .............. 14,625,000
-------------
140,036,875
-------------
Forest & Paper Products 6.8%
15,000,000 APP International Finance, guaranteed, 11.75%, 10/01/05 .................... 14,625,000
33,000,000 Fort Howard Corp., senior sub. notes, 9.00%, 02/01/06 ...................... 32,422,500
7,961,256 Fort Howard Corp., SF, pass through trust, 11.00%, 01/02/02 ................ 8,319,512
8,000,000 Repap New Brunswick, FRN, senior notes, 9.50%, 07/15/00 .................... 8,020,000
10,000,000 Repap New Brunswick, senior notes, first priority, 9.875%, 07/15/00 ........ 10,125,000
12,900,000 Repap New Brunswick, senior notes, second priority, 10.625%, 04/15/05 ...... 12,867,750
11,300,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 ....................... 12,599,500
20,000,000 Tembec Finance Corp., senior notes, 9.875%, 09/30/05 ....................... 19,850,000
18,900,000 Tjiwi Kimia International, guaranteed senior notes, 13.25%, 08/01/01 ....... 20,317,500
-------------
139,146,762
-------------
Gaming & Leisure 3.9%
19,900,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 ........................... 22,089,000
7,300,000 Grand Casinos, Inc., first mortgage, 10.125%, 12/01/03 ..................... 7,473,375
9,000,000 Harrahs Operating, Inc., senior sub. notes, 10.875%, 04/15/02 .............. 9,720,000
4,750,000 Players International, Inc., senior notes, 10.875%, 04/15/05 ............... 4,482,813
17,000,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ........................ 18,955,000
22,000,000 b,d.Six Flags Theme Parks, senior sub. notes, zero coupon to 06/15/98, (original
accretion rate 12.25%), 12.25% thereafter, 06/15/05 ....................... 17,105,000
-------------
79,825,188
-------------
Healthcare 4.8%
14,830,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 ........... 15,738,338
3,344,681 Amerisource Distribution Corp., senior deb., PIK, 11.25%, 07/15/05 ......... 3,628,979
20,000,000 Dade International Inc., senior sub. notes, 13.00%, 02/01/05 ............... 22,000,000
9,000,000 bMerit Behavioral Care, senior sub. notes, 11.50%, 11/15/05.................. 9,135,000
16,900,000 OrNda Healthcorp., guaranteed senior sub. notes, 11.375%, 08/15/04 ......... 18,928,000
9,000,000 Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98, 9.625%
thereafter, 12/15/03 ...................................................... 8,583,750
Healthcare (cont.)
$ 3,400,000 Tenet Healthcare Corp., senior notes, 9.625%, 09/01/02 ..................... $ 3,723,000
4,000,000 Tenet Healthcare Corp., senior notes, 8.625%, 12/01/03 ..................... 4,135,000
12,300,000 Tenet Healthcare Corp., senior sub. notes, 10.125%, 03/01/05 ............... 13,407,000
-------------
99,279,067
-------------
Home Building .9%
18,196,000 Walter Industries, Inc., senior notes, Series B, 12.19%, 03/15/00 .......... 18,446,195
-------------
Industrial 6.0%
23,000,000 American Standard, Inc., senior deb., 11.375%, 05/15/04 .................... 25,587,500
22,850,000 dAmerican Standard, Inc., SF, senior sub. deb., zero coupon to 06/01/98,
(original accretion rate 10.50%), 10.50% thereafter, 06/01/05 ............. 19,222,563
5,000,000 Coltec Industries, Inc., senior notes, 9.75%, 11/01/99 ..................... 5,143,750
18,000,000 Coltec Industries, Inc., senior sub. notes, 10.25%, 04/01/02 ............... 18,495,000
29,000,000 dEagle Industries, Inc., senior notes, zero coupon to 07/15/98, (original accretion
rate 10.50%), 10.50% thereafter, 07/15/03 ................................. 23,490,000
12,600,000 Inter-City Products Corp., senior secured notes, 9.75%, 03/01/00 ........... 7,875,000
10,376,000 Thermadyne Industries, Inc., senior sub. notes, 10.25%, 05/01/02 ........... 10,531,640
14,387,000 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 .................. 14,458,935
-------------
124,804,388
-------------
Lodging 2.6%
1,249,800 dDivi Hotels, Inc., secured cvt. sub. deb., (original accretion rate 0.00%),
0.00%, 01/28/02 ........................................................... 218,715
20,000,000 HMH Properties, Inc., senior notes, 9.50%, 05/15/05 ........................ 20,050,000
20,000,000 John Q. Hammons Hotels, first mortgage, 8.875%, 02/15/04 ................... 19,550,000
4,500,000 bJohn Q. Hammons Hotels, first mortgage, 9.75%, 10/01/05 .................... 4,505,625
10,000,000 Red Roof Inns, Inc., senior notes, 9.625%, 12/15/03 ........................ 9,800,000
-------------
54,124,340
-------------
Media & Broadcasting 5.5%
12,000,000 Ackerley Communications, Inc., senior secured notes, Series B, 10.75%, 10/01/03 12,840,000
8,700,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ............. 8,656,500
7,000,000 bBenedek Broadcasting, senior notes, 11.875%, 03/01/05 ...................... 7,551,250
17,500,000 EZ Communications, Inc., senior sub. notes, 9.75%, 12/01/05 ................ 17,412,500
7,100,000 Granite Broadcasting Corp., senior sub. notes, Series A, 10.375%, 05/15/05 . 7,259,750
5,075,000 Infinity Broadcasting Corp., senior sub. notes, 10.375%, 03/15/02 .......... 5,474,656
15,000,000 New World Television, Inc., SF, senior notes, 11.00%, 06/30/05 ............. 15,975,000
18,000,000 dPan Am Sat Capital Corp., LP, SF, senior sub. disc. notes, zero coupon to
08/01/98, (original accretion rate 11.375%), 11.375% thereafter, 08/01/03 . 14,580,000
14,400,000 Sinclair Broadcasting Group, senior sub. notes, 10.00%, 09/30/05 ........... 14,724,000
9,500,000 Turner Broadcasting Systems, Inc., senior deb., 8.40%, 02/01/24 ............ 9,393,125
-------------
113,866,781
-------------
Metals & Mining 4.5%
$ 23,400,000 dAcme Metals, Inc., senior secured disc. notes, zero coupon to 08/01/97, (original
accretion rate 13.50%), 13.50% thereafter, 08/01/04 ....................... $ 18,369,000
20,000,000 AK Steel Corporation, senior notes, 10.75%, 04/01/04 ....................... 22,025,000
18,000,000 gAlgoma Steel, Inc., first mortgage (Canada), 12.375%, 07/15/05 ............. 15,795,000
17,000,000 Envirosource, Inc., senior notes, 9.75%, 06/15/03 .......................... 14,875,000
20,000,000 Gulf States Steel, first mortgage, 13.50%, 04/15/03 ........................ 17,800,000
3,090,000 Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 01/15/05 ......... 3,522,600
-------------
92,386,600
-------------
Oil/Gas .6%
12,000,000 b,h Clark USA, Inc., senior notes, 10.875%, 12/01/05 ........................... 12,270,000
-------------
Restaurants 2.0%
10,850,000 Family Restaurants, Inc., senior notes, 9.75%, 02/01/02 .................... 5,967,500
2,000,000 Flagstar Corp., senior notes, 10.75%, 09/15/01 ............................. 1,855,000
11,000,000 Flagstar Corp., senior notes, 10.875%, 12/01/02 ............................ 10,120,000
13,614,000 Flagstar Corp., SF, senior sub. deb., 11.25%, 11/01/04 ..................... 10,006,290
5,900,000 Foodmaker, Inc., senior notes, 9.25%, 03/01/99 ............................. 5,442,750
8,400,000 Foodmaker, Inc., senior sub. notes, 9.75%, 06/01/02 ........................ 7,266,000
-------------
40,657,540
-------------
Technology & Information Systems 1.3%
10,000,000 ADT Operations, guaranteed senior sub. notes, 9.25%, 08/01/03 .............. 10,662,500
7,500,000 dBell & Howell Co., senior deb., zero coupon to 03/01/00, (original accretion
rate 11.50%), 11.50% thereafter, 03/01/05.................................. 4,856,250
3,550,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00 ........................... 3,647,625
6,500,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02 ..................... 6,971,250
-------------
26,137,625
-------------
Textiles & Appare l2.2%
10,300,000 cForstmann & Co., Inc., SF, senior sub. notes, 14.75%, 04/15/99 ............. 4,171,500
15,000,000 Hartmarx Corp., senior sub. notes, 10.875%, 01/15/02 ....................... 13,650,000
3,356,000 JPS Textiles Group, Inc., SF, disc. notes, 10.85%, 06/01/99 ................ 2,936,500
10,056,000 JPS Textiles Group, Inc., SF, sub. notes, 10.25%, 06/01/99 ................. 8,799,000
6,000,000 WestPoint Stevens, Inc., senior notes, 8.75%, 12/15/01 ..................... 6,120,000
10,000,000 WestPoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 ................ 10,100,000
-------------
45,777,000
-------------
Transportation 4.2%
9,000,000 Delta Air Lines, Inc., SF, pass-through equipment trust, 10.06%, 01/02/16 .. 10,550,358
15,000,000 Delta Air Lines, Inc., SF, pass-through equipment trust, 10.50%, 04/30/16 .. 18,213,643
19,000,000 Gearbulk Holding, Ltd., senior notes, 11.25%, 12/01/04 ..................... 20,187,500
Transportation (cont.)
$ 4,900,000 b,h Howmet Corp., senior sub. notes, 10.00%, 12/01/03 .......................... $ 5,047,000
9,500,000 Southern Pacific Rail Corp., senior notes, 9.375%, 08/15/05 ................ 10,355,000
20,422,000 United Airlines, SF, pass-through equipment trust, Series B-2, 9.06%, 09/26/14 21,687,755
-------------
86,041,256
-------------
Utilities 1.9%
22,500,000 dCalifornia Energy, senior notes, zero coupon to 01/15/97, (original accretion
rate 10.25%), 10.25% thereafter, 01/15/04 ................................. 21,150,000
1,500,000 dCMS Energy Corp., senior notes, Series B, zero coupon to 10/01/95, (original
accretion rate 9.875%), 9.875% thereafter, 10/01/99 ....................... 1,556,088
4,500,000 Midland Funding II, SF, senior lease obligation, Series A, 11.75%, 07/23/05 4,665,558
11,500,000 Midland Funding II, SF, senior lease obligation, Series B, 13.25%, 07/23/06 12,616,165
-------------
39,987,811
-------------
Wireless Communication 3.8%
20,000,000 dComcast Cellular Communications, Inc., senior notes, Series B, (original
accretion rate 11.37%), 0.00%, 03/05/00 ................................... 15,300,000
15,000,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 ........................... 15,675,000
27,250,000 dDial Call Communications, units, senior disc. notes, zero coupon to 04/15/99,
(original accretion rate 12.25%), 12.25% thereafter, 04/15/04 ............. 14,783,124
15,000,000 dNextel Communications, senior disc. notes, (original accretion rate 9.75%),
0.00%, 08/15/04 .......................................................... 7,856,250
12,000,000 Paging Network, Inc., senior sub. notes, 10.125%, 08/01/07 ................. 12,810,000
10,500,000 Rogers Cantel Mobile Communications, Inc., SF, senior sub. notes,
10.75%, 11/01/01 .......................................................... 11,077,500
-------------
77,501,874
-------------
Total Bonds (Cost $1,746,306,577)........................................... 1,750,073,855
-------------
Foreign Currency Notes 1.2%
South Africa
108,800,000 gESCOM, E168, utility deb., 11.00%, 06/01/08 (Cost $25,220,943).............. 23,991,034
-------------
Foreign Government Agencies 1.2%
Mexico 1.0%
28,000,000 United Mexican States, FRN, Series D, 6.875%, 12/31/19 ..................... 19,320,000
4,000,000 United Mexican States, Series B, 6.25%, 12/31/19 ........................... 2,465,000
-------------
21,785,000
-------------
Venezuela .2%
10,000,000 Republic of Venezuela, FRN, 6.813%, 12/18/07 ............................... 4,612,500
-------------
Total Foreign Government Agencies (Cost $28,710,765)................. 26,397,500
-------------
Common Stocks 3.6%
741,331 a,e Bucyrus-Erie Co. ........................................................... $ 6,301,314
168,149 aDarling Delaware Co. ....................................................... 4,035,576
611,655 a,e Divi Hotels, Inc. .......................................................... 160,254
362,001 aGaylord Container Corp. .................................................... 3,348,509
20,000 Gulf States Steel........................................................... 200,000
111,234 aKash N' Karry Food Stores, Inc. ............................................ 2,836,467
1,436,971 a,e NVR, Inc. .................................................................. 14,010,467
39,757 aPenn Traffic Co. ........................................................... 516,841
2,291,953 a,e Price Communications Corp. ................................................. 18,335,624
546,646 aPullman Co. ................................................................ 5,261,468
510,000 RJR Nabisco Holdings Corp. ................................................. 14,853,750
97,500 a,b Specialty Food Corp. ....................................................... 231,563
38,615 Thermadyne Holdings Corp. .................................................. 622,667
189,505 aWalter Industries, Inc., Class A ........................................... 2,463,565
-------------
Total Common Stocks (Cost $128,034,056)..................................... 73,178,065
-------------
Preferred Stocks 1.9%
199,000 First Nationwide Bank, 11.50% pfd. ......................................... 22,288,000
379,837 aGlendale Federal Bank, 1.00% cvt. pfd., Series D ........................... 6,124,872
10,518 PanAmSat Corp., LP, 12.75%, pfd., PIK ...................................... 11,648,685
-------------
Total Preferred Stocks (Cost $36,448,887)................................... 40,061,557
-------------
Partnership Units .4%
415,000 Freeport-McMoRan Resource Partners, Ltd., depository units (Cost $6,441,167) 7,885,000
-------------
aWarrants & Rights .3%
27,250 Dial Page, Inc. ............................................................ 6,813
8,030 Foodmaker, Inc. ............................................................ 104,069
465,524 Gaylord Container Corp. .................................................... 4,306,097
16,789 Grand Union Co., Series 1................................................... 6,296
33,577 Grand Union Co., Series 2................................................... 4,197
5,896 Kendall International, Inc., rights ........................................ 390,622
120,000 NVR, Inc. .................................................................. 255,000
20,000 Payless Cashways, Inc. ..................................................... 5,000
15,000 Smitty's Supervalu, Inc. ................................................... 105,000
-------------
Total Warrants & Rights (Cost $3,025,070)............................ 5,183,094
-------------
Total Common Stocks, Preferred Stocks, Partnership Units,
and Warrants & Rights (Cost $173,949,180)........................... 126,307,716
-------------
Total Long Term Investments (Cost $1,974,187,465).................... 1,926,770,105
-------------
fReceivables from Repurchase Agreements 4.6%
$ 92,483,758 Joint Repurchase Agreement, 5.90%, 12/01/95 (Cost $93,748,596)
Bear Stearns & Co. Inc., (Maturity Value $14,234,307)
Collateral: U.S. Treasury Bills, 03/14/96
U.S. Treasury Notes, 5.50% - 8.875%, 04/30/97 - 12/31/99
Chase Manhattan Bank N.A., (Maturity Value $14,234,307)
Collateral: U.S. Treasury Notes, 5.25% - 7.50%, 12/31/96 - 07/31/98
Daiwa Securities America, Inc., (Maturity Value $14,234,307)
Collateral: U.S. Treasury Notes, 5.625% - 7.875%, 01/31/96 - 11/30/99
Donaldson, Lufkin, & Jenrette, (Maturity Value $14,234,307)
Collateral: U.S. Treasury Notes, 5.875% - 8.00%, 12/31/96 - 11/30/99
Nikko Securities Co. International, Inc., (Maturity Value $14,234,307)
Collateral: U.S. Treasury Notes, 5.50% - 8.50%, 04/30/97 - 03/31/00
Swiss Bank Corp., (Maturity Value $14,234,307)
Collateral: U.S. Treasury Notes, 6.125%, 05/31/97
UBS Securities Inc., (Maturity Value $8,358,119)
Collateral: U.S. Treasury Bills, 06/27/96
U.S. Treasury Notes, 5.375% - 5.50%, 11/30/97 - 11/15/98 ..... $ 93,748,596
-------------
Total Investments (Cost $2,067,936,061)98.3%.................. 2,020,518,701
Other Assets and Liabilities, Net1.7%......................... 35,747,513
-------------
Net Assets 100.0%............................................ $2,056,266,214
=============
At November 30, 1995, the net unrealized depreciation based on the cost of
investments for income tax purposes of $2,067,936,061 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost..................................... $ 87,242,439
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value..................................... (134,659,799)
-------------
Net unrealized depreciation............................................... $ (47,417,360)
=============
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
LP - Limited Partnership
PIK - Payment-in-Kind
SF - Sinking Fund
aNon-income producing.
bSee Note 6 regarding Rule 144A securities.
cSee Note 7 regarding defaulted securities.
dZero coupon/Step-up bonds. The current effective yield may vary. The original
accretion rate will remain constant.
eSee Note 9 regarding holdings of 5% voting securities.
fFace amount for repurchase agreements is for the underlying collateral. See
Note 1(f) regarding Joint Repurchase Agreement.
gFace amount is stated in foreign currency and value is stated in U.S. dollars.
hSee Note 1(g) regarding securities purchased on a when-issued basis.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
AGE HIGH INCOME FUND, INC.
Financial Statements
Statement of Assets and Liabilities
November 30, 1995 (unaudited)
<S> <C>
Assets:
Investments in securities, at value (identified cost $1,974,187,465)......................... $1,926,770,105
Receivables from repurchase agreements, at value and cost.................................... 93,748,596
Receivables:
Dividends and interest...................................................................... 44,204,642
Investment securities sold.................................................................. 9,841,024
Capital shares sold......................................................................... 5,412,200
Prepaid expenses............................................................................. 134,110
-------------
Total assets............................................................................ 2,080,110,677
-------------
Liabilities:
Payables:
Investment securities purchased:
Regular delivery........................................................................... 2,471,979
When-issued or delayed delivery basis (Note 1)............................................. 16,900,000
Management fees............................................................................. 792,198
Capital shares repurchased.................................................................. 3,521,598
Distribution fees........................................................................... 153,693
Shareholder servicing costs................................................................. 4,995
-------------
Total liabilities....................................................................... 23,844,463
-------------
Net assets, at value.......................................................................... $2,056,266,214
=============
Net assets consist of:
Undistributed net investment income.......................................................... $ 15,254,751
Net unrealized depreciation on investments and translation of assets and
liabilities denominated in foreign currency................................................. (47,427,192)
Net realized loss............................................................................ (468,666,185)
Class I capital shares....................................................................... 7,334,364
Class II capital shares...................................................................... 64,209
Additional paid-in capital................................................................... 2,549,706,267
-------------
Net assets, at value.......................................................................... $2,056,266,214
=============
Class I Shares:
Net assets, at value......................................................................... $2,038,400,610
=============
Shares outstanding........................................................................... 733,436,447
=============
Net asset value per share*................................................................... $2.78
=============
Class II Shares:
Net assets, at value......................................................................... $ 17,865,604
=============
Shares outstanding........................................................................... 6,420,936
=============
Net asset value per share*................................................................... $2.78
=============
*Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
AGE HIGH INCOME FUND, INC.
Financial Statements (cont.)
Statement of Operations
for the six months ended November 30, 1995 (unaudited)
<S> <C>
Investment income:
Interest (Note 1) ........................................................................... $96,740,026
Dividends ................................................................................... 2,188,262
-------------
Total Income........................................................................... $ 98,928,288
Expenses:
Management fees (Note 5)..................................................................... 4,620,282
Distribution fees - Class I (Note 5)......................................................... 789,437
Distribution fees - Class II (Note 5)........................................................ 23,171
Shareholder servicing costs (Note 5)......................................................... 470,442
Reports to shareholders...................................................................... 391,660
Custodian fees............................................................................... 115,413
Professional fees............................................................................ 43,229
Directors' fees and expenses................................................................. 37,430
Registration and filling fees................................................................ 28,054
Other........................................................................................ 36,341
-------------
Total expenses.......................................................................... 6,555,459
-------------
Net investment income................................................................... 92,372,829
-------------
Realized and unrealized gain from investments and foreign currencies:
Net realized gain on:
Investments................................................................................. 23,540
Foreign currency transactions............................................................... 105,904
Net unrealized appreciation (depreciation) on:
Investments.................................................................................. 10,584,253
Translation of assets and liabilities denominated in foreign currencies...................... (83,364)
-------------
Net realized and unrealized gain on investments and foreign currencies........................ 10,630,333
-------------
Net increase in net assets resulting from operations......................................... $103,003,162
=============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
AGE HIGH INCOME FUND, INC.
Financial Statements (cont.)
Statements of Changes in Net Assets
for the six months ended November 30, 1995 (unaudited)
and for the year ended May 31, 1995
Six months Year
ended ended
November 30, 1995 May 31, 1995
----------------- -----------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................................................... $ 92,372,829 $ 172,668,215
Net realized gain (loss) from investments and foreign currency transactions 129,444 (4,004,670)
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign currency.................. 10,500,889 55,295,775
------------ ------------
Net increase in net assets resulting from operations.................... 103,003,162 223,959,320
Distributions to shareholders from undistributed net investment income:
Class I .................................................................... (93,377,118) (176,150,325)
Class II ................................................................... (266,705) --
Increase in net assets from capital share transactions (Note 3)............... 137,341,432 44,275,805
------------ ------------
Net increase in net assets.............................................. 146,700,771 92,084,800
Net assets:
Beginning of period.......................................................... 1,909,565,443 1,817,480,643
------------ ------------
End of period (including undistributed net investment income of $15,254,751 -
11/30/95 and $16,419,841 - 5/31/95)......................................... $2,056,266,214 $1,909,565,443
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
AGE HIGH INCOME FUND, INC.
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
AGE High Income Fund, Inc. (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended.
The Fund offers two classes of shares, Class I and Class II. Class I shares are
sold with a higher front-end sales charge than Class II shares. Each class of
shares may be subject to a contingent deferred sales charge and has the same
rights, except with respect to the effect of the respective sales charges, the
distribution fees borne by each class, voting rights on matters affecting a
single class and the exchange privilege of each class.
The offering of Class II shares began May 16, 1995, at which time all previously
outstanding shares became Class I shares. Realized and unrealized gains or
losses and net investment income, other than class specific expenses, are
allocated daily to each class of shares based upon the relative proportion of
net assets of each class.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Securities Valuations:
Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and asked prices. Securities for
which market quotations are readily available are valued at current market
values, obtained from pricing services, which are based on a variety of factors,
including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Manager. Securities
for which market quotations are not available, if any, are valued in accordance
with procedures established by the Board of Directors (the Board).
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 close of trading on the New
York Stock 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 asked prices
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, unless material. If events which
materially affect the value of these foreign securities occur during such
period, then these securities will be valued in accordance with procedures
approved by the Board.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board.
b. Income Taxes:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is required.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily. Bond
discount, if any, is amortized as required by the Internal Revenue Code.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions.
Net realized capital gain (loss) differs for financial statement and tax
purposes primarily due to differing treatments of foreign currency transactions.
e. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of such currencies against U.S. dollars on the
date of the valuation. Purchases and sales of securities, income and expenses
are translated at the rate of exchange quoted on the day the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian bank.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, currency gains or losses
realized between the trade date and settlement dates on securities transactions,
and the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of
the amounts actually received or paid. Net unrealized appreciation/depreciation
on translation of assets and liabilities denominated in foreign currencies
arises from changes in the value of assets and liabilities other than
investments in securities at semi-fiscal year end, resulting from changes in
exchange rates.
f. Repurchase Agreements:
The Fund may enter into a Joint Repurchase Agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve system. The
value and face amount of the Joint Repurchase Agreement are allocated to the
Fund based on its pro-rata interest.
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At November 30, 1995, all outstanding repurchase agreements held
by the Fund had been entered into on that date.
g. Securities Purchased on a When-Issued or Delayed Delivery Basis:
The Fund may trade securities on a when-issued or delayed delivery basis, with
payment and delivery scheduled for a future date. These transactions are subject
to market fluctuations and are subject to the risk that the value at delivery
may be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date. These
securities are identified on the accompanying Statement of Investments in
Securities and Net Assets. The Fund has set aside sufficient investment
securities as collateral for these purchase commitments.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At May 31, 1995, for tax purposes, the Fund had capital loss carryovers as
follows:
Expiring in: 1996 $ 94,919,282
1997 163,832
1998 85,786,601
1999 192,912,531
2000 63,753,106
2001 14,304,993
2002 12,243,104
2003 4,606,276
------------
$468,689,725
============
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Fund are the same as for financial statement purposes at November 30,
1995.
3. CAPITAL STOCK
At November 30, 1995, there were 2,500,000,000 Class I shares and 2,500,000,000
Class II shares of $0.01 par value capital stock authorized and paid-in capital
aggregated $2,539,266,701 and $17,838,139, respectively. Transactions in the
Fund's shares for the six months ended November 30, 1995 and the year ended May
31, 1995 were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1995 May 31, 1995
----------------- -----------------
Class I Shares: Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares sold.................................... 46,063,633 $ 127,883,638 52,443,355 $139,551,551
Shares issued in reinvestment of distributions. 14,132,621 39,031,912 27,202,050 71,798,174
Shares redeemed................................ (35,399,893) (98,216,661) (75,584,219) (200,243,386)
Changes from exercise of exchange privilege:
Shares sold................................... 56,149,320 155,857,702 180,273,401 478,238,917
Shares redeemed............................... (37,597,082) (104,343,854) (167,382,625) (445,778,895)
----------- ----------- ---------- -----------
Net increase............................. 43,348,599 $ 120,212,737 16,951,962 $ 43,566,361
=========== =========== ========== ===========
Class II Shares:*
Shares sold.................................... 5,925,993 $ 16,468,403 254,368 $ 700,469
Shares issued in reinvestment of distributions. 39,729 110,015 -- --
Shares redeemed................................ (216,201) (602,202) -- --
Changes from exercise of exchange privilege:
Shares sold................................... 467,911 1,302,893 3,252 8,975
Shares redeemed............................... (54,116) (150,414) -- --
----------- ----------- ---------- -----------
Net increase............................. 6,163,316 $ 17,128,695 257,620 $ 709,444
========== =========== ========== ===========
*For the six months ended November 30, 1995 and the period May 16, 1995
(effective date) to May 31, 1995.
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the six months ended November 30, 1995 aggregated $241,018,744
and $169,043,404, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Pursuant to a management agreement, Franklin Advisers, Inc. (Advisers) provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees, computed monthly on the net assets of the Fund on the
last day of the month at an annualized rate of .625% of 1% of the first $100
million of net assets, .50% of 1% of net assets in excess of $100 million up to
$250 million, and .45% of 1% of net assets in excess of $250 million. The terms
of the management agreement provide that aggregate annual expenses of the Fund
be limited to the extent necessary to comply with the limitations set forth in
the laws, regulations and administrative interpretations of the states in which
the Fund's shares are registered. For the six months ended November 30, 1995,
the Fund's expenses did not exceed these limitations.
In its capacity as underwriter for the capital stock of the Fund,
Franklin/Templeton Distributors, Inc. (Distributors), receives commissions on
sales of the Fund's capital stock. Commissions are deducted from the gross
proceeds received from the sale of the capital stock of the Fund, and as such
are not expenses of the Fund. Distributors may also make payments, out of its
own resources, to the dealers for certain sales of Class I and Class II shares.
Commissions received by Distributors and the amounts paid to other dealers for
the six months ended November 30, 1995 were as follows:
<TABLE>
<CAPTION>
Class I Class II
--------- ----------
<S> <C> <C>
Total commissions received............................... $4,246,585 $182,684
========= ========
Paid to other dealers.................................... $4,089,046 $332,601
========= ========
</TABLE>
Distributors also received contingent deferred sales charges relating to
transactions in the Fund in the amounts of $128 and $5,061 for Class I and Class
II shares, respectively.
Under the terms of a shareholder service agreement, the Fund pays
Franklin/Templeton Investor Services, Inc. (Investor Services) a fee for each
shareholder account. Shareholder servicing costs incurred by the Fund for the
six months ended November 30, 1995 aggregated $470,442.
Under the terms of Distribution Plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940, the Fund will reimburse Distributors in an amount up to a
maximum of 0.15% per annum for Class I and 0.65% per annum for Class II's
average daily net assets for costs incurred in the promotion, offering and
marketing of the Fund's shares. Fees incurred by the Fund under the agreements
aggregated $812,608 for the six months ended November 30, 1995.
Certain officers and directors of the Fund are also officers and/or directors of
Distributors, Advisers, and Investor Services, all wholly-owned subsidiaries of
Franklin Resources, Inc.
6. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 1. At November 30, 1995, the Fund held 144A
securities with a value aggregating $79,625,188 representing 3.87% of the Fund's
net assets. See the accompanying Statement of Investments in Securities and Net
Assets for specific information on such securities.
7. CREDIT RISK AND DEFAULTED SECURITIES
Although the Fund has a diversified portfolio, 82.3% of its portfolio is
invested in lower rated and comparable quality unrated high yield securities.
Investments in high yield securities are accompanied by a greater degree of
credit risk and such lower quality securities tend to be more sensitive to
economic conditions than higher rated securities. The risk of loss due to
default by the issuer may be significantly greater for the holders of high yield
securities, because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. At November 30, 1995, the Fund
held two defaulted securities issued by two separate companies with a value
aggregating $9,176,500, representing 0.45 % of the Fund's net assets. For more
information as to specific securities, see the accompanying Statement of
Investments in Securities and Net Assets.
For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due to
unpaid interest income on defaulted bonds for the current reporting period.
8. OTHER CONSIDERATIONS
Advisers, as the Fund's Manager, may serve as a member of various bondholders'
committees, representing bondholders' interests in certain corporate
restructuring negotiations. Currently, the Manager serves on the bondholders'
committees for Bucyrus-Erie, Scott Cable and Forstmann Textiles. As a result of
this involvement in these committees, Advisers may be in possession of certain
material non-public information. Advisers has not sold nor does it intend to
sell any of its holdings in these securities while in possession of material
non-public information in contravention of the Federal Securities Laws.
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
Investments in portfolio companies, 5% or more of whose outstanding voting
securities are held by the Fund, are defined in the Investment Company Act of
1940 as affiliated companies. The Fund had investments in such affiliated
companies at November 30, 1995, which amounted to $38,807,659. For more
information as to specific securities, see the accompanying Statement of
Investments in Securities and Net Assets.
10. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year are
as follows:
<TABLE>
<CAPTION>
For the year ended May 31,
----------------------------------
Six Months Ended
November 30, 1995 1995 1994 1993 1992 1991
----------------- ---- ---- ---- ---- ----
Class I Shares:
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value at beginning
of year....................... $2.77 $2.70 $2.81 $2.72 $2.37 $2.53
---------- ---------- ---------- ---------- ---------- ----------
Net investment income.......... .13 .26 .27 .30 .31 .34
Net realized and unrealized gain
(loss) on investment and
foreign currencies............ .012 .074 (.113) .054 .340 (.122)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations .142 .334 .157 .354 .650 .218
---------- ---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income......... (.132) (.264) (.267) (.264) (.300) (.359)
Paid-in capital............... .-- .-- .-- .-- .-- (.019)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions............ (.132) (.264) (.267) (.264) (.300) (.378)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of year. $2.78 $2.77 $2.70 $2.81 $2.72 $2.37
========== ========== ========== ========== ========== ==========
TOTAL RETURN*.................. 5.25% 13.34% 5.19% 13.33% 28.48% 10.18%
</TABLE>
10. FINANCIAL HIGHLIGHTS (cont.)
<TABLE>
<CAPTION>
For the year ended May 31,
----------------------------------
Six Months Ended
November 30, 1995 1995 1994 1993 1992 1991
----------------- ---- ---- ---- ---- ----
Class I Shares: (cont.)
<S> <C> <C> <C> <C> <C> <C>
Ratios/Supplemental Data
Net assets at end of year
(in 000's)..................... $2,038,401 $1,908,853 $1,817,481 $1,935,919 $1,864,195 $1,587,656
Ratio of expenses to average
net assets................... .66%+ .66% .59% .56% .58% .59%
Ratio of net investment income
to average net assets......... 9.32%+ 9.71% 9.61% 10.78% 12.18% 14.87%
Portfolio turnover rate........ 8.94% 28.56% 42.32% 38.33% 43.70% 28.55%
</TABLE>
Six Months Ended Period Ended
November 30, 1995 May 31, 1995**
----------------- ------------
Class II Shares:
Per Share Operating Performance
Net asset value at beginning
of year........................ $2.77 $2.76
---------- ----------
Net investment income........... .13 .--
Net realized and unrealized
gain on investment and
foreign currencies............. .002 .010
---------- ----------
Total from investment operations .132 .010
Distributions from net
investment income.............. (.122) .--
---------- ----------
Net asset value at end of year.. $2.78 $2.77
========== ==========
TOTAL RETURN*................... 4.87% .36%
Ratios/Supplemental Data
Net assets at end of year
(in 000's).................... $17,866 $713
Ratio of expenses to average
net assets..................... 1.24%+ 1.14%+
Ratio of net investment income
to average net assets.......... 8.98%+ 6.91%+
Portfolio turnover rate......... 8.94% 28.56%
*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 and assumes reinvestment of
dividends and capital gains, if any, at net asset value. Prior to May 1, 1994,
dividends were reinvested at the maximum offering price.
**For the period May 16, 1995 (effective date) to May 31, 1995.
+Annualized
++Ratios for the six months ended November 30, 1995 have been calculated using
the daily average net asset during the period.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
