MANAGER'S DISCUSSION
Your Fund's Objective:
Franklin's AGE High Income Fund seeks to provide investors with high current
income, with a secondary objective of principal appreciation. The fund invests
in a diversified portfolio consisting primarily of high-yield, lower-rated
corporate bonds.
January 15, 1997
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, 1996. During this period, the economy was
marked by a low annualized inflation rate of approximately 3% and moderate
growth in gross domestic product (third quarter GDP increased approximately 2%).
As a result, interest rates declined, with the yield on the 10-year U.S.
Treasury note falling from 6.85% on May 31, 1996, to 6.04% on November 30, 1996.
These conditions were very favorable for the U.S. equity and high-yield bond
markets, and within this environment, your fund's Class I shares generated a
six-month total return of +8.22%, as discussed in the Performance Summary on
page 6.
Industry positioning and individual company selection played significant roles
in the fund's performance. For example, during this six-month period, we
increased the fund's largest sector, Wireless Communications, from 6.8% to 11.0%
of total net assets, to take advantage of the consolidation and deregulation
occurring in the industry. One merger which benefited your fund directly was the
agreement made on August 26, 1996, between MFS Communications, one of our
holdings, and WorldCom. Furthermore, the alliance announced in November 1996
between the giant U.S. long-distance provider MCI Corp. and British Telecom
sparked a price rally in this sector as investors anticipated the next buyout.
Bonds we own issued by IntelCom Group and Intermedia Communications of Florida
rose in price, in part because of these industry developments. Our holdings of
Sprint Spectrum bonds performed well in anticipation of the firm's introduction
of a new wireless technology, called PCS, offering clearer reception and better
security than conventional cellular telephone service.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Several other sectors also aided the fund's performance during this six-month
period. The chemical industry performed well as rising global demand for food,
lower grain supplies, and smaller crop-growing areas increased world demand for
the fertilizer needed by growers to increase crop yields. Industry mergers also
helped to increase the price of several of our bond holdings. In the Metals &
Mining sector, the fund's focus on companies that we considered to be
undervalued rewarded us with rapid price appreciation of their bonds. Two such
companies were Acme Metals and Algoma Steel, both of which produce steel and
steel products for the industrial equipment market. During this six-month
period, the price of our bonds in Acme appreciated by 12.6%, while Algoma's
appreciated 5.0%. Among Automotive companies, a new position in parts-supplier
Collins & Aikman benefited from the growing tendency of car manufacturers to
outsource automotive parts production.
Franklin's AGE High Income Fund
Top 10 Issuers on 11/30/96
Based on Total Net Assets
Company % of Total
Industry Net Assets
American Standard, Inc. 1.84%
Industrial
Cablevision Systems Corp. 1.67%
Cable Television
RJR Nabisco, Inc. 1.46%
Consumer Goods
Rogers Communications, Inc. 1.45%
Cable Television
Continental Cablevision, Inc. 1.39%
Cable Television
Paging Network, Inc. 1.27%
Wireless Communication
PanAmSat Corp. 1.25%
Media & Broadcasting
IMC Fertilizer Group, Inc. 1.22%
Chemicals
Repap New Brunswick 1.21%
Forest & Paper Products
Rapp International Finance Co. 1.21%
Forest & Paper Products
For a detailed listing of portfolio holdings, please see page 10 of this report.
On the sell side, the fund decreased its weightings in various sectors. We
elected to take profits and reduced our weighting in Forest & Paper Products
companies from 7.0% of total net assets to 6.1% because we believed that the
business cycle of this sector had passed its peak. We also reduced our assets
invested in the Food Retailing sector from 6.9% to 5.5% in response to the
changing competitive environment.
Looking forward, we believe that moderate economic growth may continue in the
near future and that inflation may remain subdued, keeping interest rates low.
As long as these trends stay in place, the short-term future appears
constructive. While we do not believe there is significant, near-term risk of
recession, it is important to keep in mind that we are in the sixth year of the
current economic cycle. Because this is a long time by historical standards, we
expect to continue our current policy of maintaining a conservative stance
toward credit risk by investing in higher-quality companies within the
high-yield corporate bond sector. Even though this strategy may not maximize
current yield or short-term results, we feel that such an approach should
provide optimal returns over the long term.
Of course, while high yield corporate bonds and Franklin's AGE High Income Fund
fared well during the reporting period, we cannot guarantee that 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 investing 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 reduce, though not eliminate, the risks involved. On
November 30, 1996, Franklin's AGE High Income Fund had 203 positions in its
portfolio, and the fund's largest issuer represented only 1.84% of total net
assets. 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.
This discussion reflects the strategies we employed for the fund during the past
six months, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the fund.
We believe that our management approach should present a positive, long-term
investment opportunity for shareholders of the fund. As always, we welcome your
questions, appreciate your support, and look forward to serving you in the years
to come.
Sincerely,
Rupert H. Johnson, Jr.
President
Franklin's AGE High Income Fund
PERFORMANCE SUMMARY
Class I
The price of the fund's Class I shares, as measured by net asset value,
increased $0.09, from $2.79 on May 31, 1996, to $2.88 on November 30, 1996. Your
fund met its investment objective of providing high current income to
shareholders. For the six-month period ended November 30, 1996, the fund's Class
I shares paid income distributions totaling 13.2 cents ($0.132) per share. Based
on an annualization of November's monthly dividend of 2.2 cents ($0.022) per
share and the maximum offering price of $3.01 on November 30, 1996, your fund's
distribution rate for Class I shares was 8.77%. Dividends will vary based on the
earnings of the fund's portfolio, and past distributions are not necessarily
predictive of future trends.
Franklin's AGE High Income Fund Class I shares posted cumulative total returns
of +8.22% and +13.87% for the six-month and one-year periods ended November 30,
1996. Cumulative total return measures the change in value of an investment,
assuming reinvestment of dividends, and does not include the initial sales
charge. Past performance is not predictive of future results.
While we expect market volatility in the short term, we have always maintained a
long-term perspective in managing Franklin's AGE High Income Fund, and we
encourage shareholders to do the same. Class I shares, for example, provided an
average annual total return of +11.74% over the past five years, as shown in the
table on page 7.
<TABLE>
<CAPTION>
Franklin's AGE High Income Fund
Class I
Periods ended November 30, 1996
Since
Inception
One-Year Five-Year Ten-Year (12/31/69)
<S> <C> <C> <C> <C>
Cumulative Total Return1 13.87% 81.64% 155.01% 880.90%
Average Annual Total Return2 9.16% 11.74% 9.35% 8.67%
Value of $10,000 Investment3 $10,916 $17,421 $24,441 $93,843
Distribution Rate4 8.77%
30-Day Standardized Yield5 8.80%
11/30/92 11/30/93 11/30/94 11/30/95 11/30/96
One-Year Total Return6 15.97% 16.75% -0.85% 17.89% 13.87%
</TABLE>
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the maximum 4.25% initial
sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the sales charge.
4. Distribution rate is based on an annualization of the fund's current monthly
dividend of 2.2 cents ($0.022) per share, and the maximum offering price of
$3.01 on November 30, 1996.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio during the 30 days ended November 30, 1996. The fund's high
distribution rate and yield reflect the higher credit risk associated with
certain lower-rated securities in the fund's portfolio and, in some cases, the
lower market prices for these instruments.
6. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include the
initial sales charge.
Note: Prior to July 1, 1994, the fund's Class I shares were offered at a lower
initial sales charge, with dividends reinvestedat 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. All total return figures
assume reinvestment of dividends and capital gains at net asset value, and take
into account the effect of 12b-1 fees from the date of the plan's
implementation. 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 is not predictive of future results.
PERFORMANCE SUMMARY
Class II
The price of the fund's Class II shares, as measured by net asset value,
increased $0.09, from $2.79 on May 31, 1996, to $2.88 on November 30, 1996. Your
fund met its investment objective of providing high current income to
shareholders. For the six-month period ended November 30, 1996, the fund's Class
II shares paid income distributions totaling 12.41 cents ($0.1241) per share.
Based on an annualization of November's monthly dividend of 2.07 cents ($0.0207)
per share and the maximum offering price of $2.91 on November 30, 1996, your
fund's distribution rate for Class II shares was 8.54%. Dividends will vary
based on the earnings of the fund's portfolio, and past distributions are not
necessarily predictive of future trends.
Franklin's AGE High Income Fund Class II shares posted cumulative total returns
of +7.91% and +13.25% for the six-month and one-year periods ended November 30,
1996. Cumulative total return measures the change in value of an investment,
assuming the reinvestment of dividends, and does not include the initial sales
charge. Past performance is not predictive of future results. While we expect
market volatility in the short term, we have always maintained a long-term
perspective in managing Franklin's AGE High Income Fund, and we encourage
shareholders to do the same.
Franklin's AGE High Income Fund
Class II
Periods ended November 30, 1996
Since
Inception
One-Year (5/16/95)
Cumulative Total Return1 13.25% 19.20%
Average Annual Total Return2 11.05% 11.26%
Value of $10,000 Investment3 $11,105 $11,792
Distribution Rate4 8.54%
30-Day Standardized Yield5 8.53%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charges. See Note below.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the maximum 1.00% initial
sales charge and the 1.00% contingent deferred sales charge (CDSC) applicable to
shares redeemed within the first 18 months after purchase. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the specified periods and include the sales charges.
4. Distribution rate is based on an annualization of the fund's current monthly
dividend of 2.07 cents ($0.0207) per share, and the maximum offering price of
$2.91 on November 30, 1996.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio during the 30 days ended November 30, 1996. The fund's high
distribution rate and yield reflect the higher credit risk associated with
certain lower-rated securities in the fund's portfolio and, in some cases, the
lower market prices for these instruments.
Note: All total return figures 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 is not predictive of future results.
FRANKLIN HIGH INCOME TRUST
AGE High Income Fund
Statement of Investments in Securities and Net Assets, November 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Face Value
Amount (Note 1)
Bonds 87.1%
Automotive 1.1%
<C> <S> <C>
$ 9,000,000 Collins & Aikman Products, senior sub. notes, 11.50%, 04/15/06............ $ 9,641,250
16,750,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ........................... 18,801,875
-------------
28,443,125
-------------
Cable Television7.8%
29,000,000 Bell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99,
(original accretion rate 11.95%), 11.95% thereafter, 07/15/04 ........... 25,085,000
17,400,000 Cablevision Industries Corp., senior notes, 10.75%, 01/30/02 ............. 18,426,251
20,000,000 Cablevision Systems Corp., senior sub. deb., 10.50%, 05/15/16 ............ 20,300,000
5,000,000 Cablevision Systems Corp., senior sub. deb., 9.875%, 04/01/23............. 4,775,000
20,000,000 Comcast Cellular Communications, Inc., senior notes, Series B,
(original accretion rate 11.37%), 0.00%, 03/05/00 ....................... 14,550,000
15,000,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 ......................... 15,487,500
3,000,000 Continental Cablevision, Inc., senior deb., 8.875%, 09/15/05 ............. 3,386,568
8,500,000 Continental Cablevision, Inc., senior deb., 9.50%, 08/01/13 .............. 9,919,287
13,000,000 Continental Cablevision, Inc., senior sub. deb., 11.00%, 06/01/07 ........ 14,997,437
5,800,000 Continental Cablevision, Inc., senior sub. deb., 9.00%, 09/01/08 ......... 6,665,540
18,850,000 Diamond Cable Communications Corp., senior disc. notes, zero coupon to
12/15/99, (original accretion rate 11.75%), 11.75% thereafter, 12/15/05.. 13,289,250
10,000,000 Helicon Group L.P. Corp., S.F., senior secured notes, 9.00% coupon to
11/1/96, 11.00% thereafter, 11/01/03..................................... 10,200,000
5,000,000 Rogers Cablesystems, Inc., senior secured deb., 10.125%, 09/01/12 ........ 5,137,500
7,000,000 cScott Cable Communications, Inc., S.F., sub. deb., 12.25%, 04/15/01 ..... 4,935,000
20,000,000 Tele-Communications, Inc., senior deb., 9.80%, 02/01/12 .................. 21,795,999
13,000,000 Telewest Plc., deb., zero coupon to 10/01/00, (original accretion rate 11.00%),
11.00% thereafter, 10/01/07.............................................. 8,888,750
-------------
197,839,082
-------------
Chemicals3.9%
18,000,000 Arcadian Partners, S.F., senior notes, Series B, 10.75%, 05/01/05 ........ 19,935,000
18,750,000 Harris Chemical North America, Inc., senior secured disc. notes, zero coupon
to 01/15/96, (original accretion rate 10.25%), 10.25% thereafter, 07/15/01 19,500,000
3,400,000 IMC Fertilizer Group, Inc., senior deb., 9.45%, 12/15/11 ................. 4,140,013
8,400,000 IMC Fertilizer Group, Inc., senior notes, 9.25%, 10/01/00 ................ 9,217,639
7,800,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.125%, 06/15/01 .... 8,549,978
8,100,000 IMC Fertilizer Group, Inc., senior notes, Series B, 10.75%, 06/15/03 ..... 8,951,754
15,000,000 Terra Industries, Inc., senior notes, Series B, 10.50%, 06/15/05 ......... 16,387,500
4,850,000 UCC Investors, senior sub. notes, 11.00%, 05/01/03 ....................... 5,213,750
6,000,000 UCC Investors, sub. notes, zero coupon to 05/01/98, (original accretion rate
12.00%), 12.00% thereafter, 05/01/05 .................................... 5,280,000
-------------
97,175,634
-------------
Consumer Goods 3.0%
$ 17,000,000 Coleman Holdings, Inc., senior secured disc. notes, (original accretion rate
10.875%), 0.00%, 05/27/98 ............................................... $ 14,365,000
3,600,000 Herff Jones, Inc., senior sub. notes, 11.00%, 08/15/05 ................... 3,870,000
6,500,000 Playtex Family Products Corp., senior sub. notes, 9.00%, 12/15/03 ........ 6,467,500
15,000,000 Revlon Consumer Products Corp., senior sub. notes, 10.50%, 02/15/03 ...... 15,825,000
4,900,000 Revlon Worldwide Corp., senior secured disc. notes, (original accretion rate
12.00%), 0.00%, 03/15/98 ................................................ 4,250,750
20,000,000 RJR Nabisco, Inc., senior notes, 9.25%, 08/15/13 ......................... 20,450,000
9,600,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 .......................... 9,744,000
-------------
74,972,250
-------------
Containers & Packaging2.2%
9,000,000 Container Corp. of America, senior notes, Series A, 11.25%, 05/01/04 ..... 9,765,000
12,000,000 Container Corp. of America, senior notes, Series A, 9.75%, 04/01/03 ...... 12,600,000
2,600,000 Four M Corp., senior notes, 12.00%, 06/01/06.............................. 2,684,500
12,000,000 Owens Illinois, Inc., senior sub. notes, 9.75%, 08/15/04 ................. 12,510,000
5,500,000 Owens Illinois, Inc., S.F., senior deb., 11.00%, 12/01/03 ................ 6,091,250
13,400,000 Riverwood International Corp., 10.25%, 04/01/06........................... 13,065,000
-------------
56,715,750
-------------
Energy3.3%
22,000,000 bAbraxas Petroleum Corp., senior notes, 11.50%, 11/01/04.................. 22,825,000
12,000,000 Clark USA, Inc., senior notes, 10.875%, 12/01/05 ......................... 12,435,000
6,750,000 Energy Ventures, senior notes, 10.25%, 03/15/04 .......................... 7,340,625
9,400,000 Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06...................... 9,864,125
17,000,000 Gulf Canada Resources, Ltd., senior sub. notes, 9.25%, 01/15/04 .......... 18,147,500
4,300,000 Mesa Operating Co., 11.625%, 07/01/06..................................... 2,950,875
8,600,000 Nuevo Energy Co., senior sub. notes, 9.50%, 04/15/06...................... 9,030,000
-------------
82,593,125
-------------
Financial Services0.5%
10,500,000 bHomeside Finance, Inc., senior notes, 11.25%, 05/15/03................... 11,707,500
-------------
Food & Beverages4.4%
4,567,000 Beatrice Foods, Inc., senior sub. notes, 1.00%, 12/01/26.................. 525,205
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., S.F., senior sub. notes, 11.00%, 07/15/00 .... 2,512,500
24,742,090 Del Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 ....................... 23,504,986
1,540,000 Dr Pepper Bottling Co. of Texas, senior notes, 10.25%, 02/15/00 .......... 1,609,300
2,000,000 Dr Pepper Bottling Holdings, S.F., senior disc. notes, zero coupon to 02/15/98,
(original accretion rate 11.625%), 11.625% thereafter, 02/15/03 ......... 1,870,000
Food & Beverages (cont.)
$ 11,200,000 bInternational Home Foods, senior sub notes, 10.375%, 11/01/06............ $ 11,480,000
14,225,000 PMI Acquisition Corp., senior sub. notes, 10.25%, 09/01/03 ............... 14,722,875
14,000,000 RC/Arbys Corp., senior secured notes, 9.75%, 08/01/00..................... 13,650,000
19,000,000 Specialty Foods Corp., senior notes, Series B, 10.25%, 08/15/01 .......... 18,335,000
19,000,000 Texas Bottling Group, Inc., senior sub. notes, 9.00%, 11/15/03 ........... 19,475,000
-------------
110,893,366
-------------
Food Retailing5.0%
12,500,000 Bruno's, Inc., senior sub. notes, 10.50%, 08/01/05 ....................... 13,031,250
5,950,000 Dominick's Finer Foods, senior sub. deb., 10.875%, 05/01/05 .............. 6,641,688
8,900,000 Grand Union Co., senior notes, 12.00%, 09/01/04 .......................... 9,278,250
11,600,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01 ............ 10,382,000
14,000,000 Pathmark Stores, Inc., senior sub. notes, 9.625%, 05/01/03 ............... 13,860,000
10,000,000 Pathmark Stores, Inc., S.F., sub. notes, 11.625%, 06/15/02 ............... 10,400,000
5,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 ......................... 4,150,000
10,000,000 Penn Traffic Co., senior notes, 10.375%, 10/01/04 ........................ 8,650,000
11,000,000 Pueblo Xtra International, senior notes, 9.50%, 08/01/03 ................. 10,312,500
19,250,000 Ralphs Grocery Co., senior notes, 10.45%, 06/15/04 ....................... 20,140,313
2,000,000 Ralphs Grocery Co., senior sub. notes, 13.75%, 06/15/05 .................. 2,140,000
16,050,000 Smith's Food & Drug Centers, Inc., senior sub. notes, 11.25%, 05/15/07.... 17,695,125
-------------
126,681,126
-------------
Forest & Paper Products5.4%
15,000,000 APP International Finance, company guaranteed, 11.75%, 10/01/05 .......... 16,012,500
7,705,229 Fort Howard Corp., S.F., pass through trust, 11.00%, 01/02/02 ............ 8,129,017
27,900,000 Rapp International Finance Co., company guaranteed, 13.25%, 12/15/05...... 30,480,750
8,000,000 Repap New Brunswick, FRN, senior notes, 8.875%, 07/15/00.................. 7,920,000
10,000,000 Repap New Brunswick, senior notes, first priority, 9.875%, 07/15/00 ...... 10,000,000
12,900,000 Repap New Brunswick, senior notes, second priority, 10.625%, 04/15/05 .... 12,577,500
11,300,000 S.D. Warren Co., senior sub. notes, 12.00%, 12/15/04 ..................... 11,978,000
20,000,000 Tembec Finance Corp., senior notes, 9.875%, 09/30/05 ..................... 18,800,000
18,900,000 Tjiwi Kimia International, company guaranteed senior notes, 13.25%, 08/01/01 21,451,500
-------------
137,349,267
-------------
Gaming & Leisure4.4%
16,400,000 AMF Group, Inc., senior disc. notes, zero coupon to 03/15/01, (original
accretion rate 12.25%), 12.25% thereafter, 03/15/06...................... 10,250,000
19,900,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 ......................... 20,397,500
7,300,000 Grand Casinos, Inc., first mortgage, 10.125%, 12/01/03 ................... 7,345,625
9,000,000 Harrahs Operating, Inc., senior sub. notes, 10.875%, 04/15/02 ............ 9,585,000
Gaming & Leisure (cont.)
$ 4,750,000 Players International, Inc., senior notes, 10.875, 04/15/05 .............. $ 4,726,250
17,000,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ...................... 18,785,000
22,000,000 Six Flags Theme Parks, senior sub. notes, zero coupon to 06/15/98,
(original accretion rate 12.25%), 12.25% thereafter, 06/15/05 ........... 20,350,000
22,000,000 Trump Atlantic City, first mortgage, 11.25%, 05/01/06..................... 20,790,000
-------------
112,229,375
-------------
Healthcare3.0%
14,830,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 ......... 15,460,275
9,000,000 Merit Behavioral Care, senior sub. notes, 11.50%, 11/15/05 ............... 9,675,000
16,900,000 OrNda Healthcorp., senior sub. notes, 11.375%, 08/15/04 .................. 19,392,750
9,000,000 Sola Group, Ltd., senior sub. notes, 6.00% coupon to 12/15/98, 9.625%
thereafter, 12/15/03..................................................... 8,685,000
3,400,000 Tenet Healthcare Corp., senior notes, 9.625%, 09/01/02 ................... 3,774,000
4,000,000 Tenet Healthcare Corp., senior notes, 8.625%, 12/01/03 ................... 4,280,000
12,300,000 Tenet Healthcare Corp., senior sub. notes, 10.125%, 03/01/05 ............. 13,653,000
-------------
74,920,025
-------------
Industrial6.5%
17,200,000 b,gAllied Waste North America, Inc., senior sub. notes, 10.25%, 12/01/06.. 17,673,000
23,000,000 American Standard, Inc., senior deb., 11.375%, 05/15/04 .................. 24,840,000
22,850,000 American Standard, Inc., S.F., senior sub. deb., zero coupon to 06/01/98,
(original accretion rate 10.50%), 10.50% thereafter, 06/01/05 ........... 21,593,250
5,000,000 Coltec Industries, Inc., senior notes, 9.75%, 11/01/99 ................... 5,375,000
18,000,000 Coltec Industries, Inc., senior sub. notes, 10.25%, 04/01/02 ............. 18,990,000
15,150,000 Goss Graphic Systems, Inc., senior sub. notes, 12.00%, 10/15/06........... 15,377,250
15,050,000 Harvard Industries, Inc., senior notes, 12.00%, 07/15/04.................. 13,168,750
12,600,000 Inter-City Products Corp., senior secured notes, 9.75%, 03/01/00 ......... 12,820,500
9,400,000 bIntertek Finance PLC, senior sub. notes, 10.25%, 11/01/06................ 9,646,750
10,376,000 Thermadyne Industries, Inc., senior sub. notes, 10.25%, 5/01/02........... 10,739,160
14,387,000 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ................ 14,728,691
-------------
164,952,351
-------------
Lodging2.2%
20,000,000 HMH Properties, Inc., senior notes, 9.50%, 05/15/05 ...................... 20,825,000
20,000,000 John Q. Hammons Hotels, Inc., first mortgage, 8.875%, 02/15/04 ........... 19,725,000
4,500,000 John Q. Hammons Hotels, Inc., first mortgage, 9.75%, 10/01/05 ............ 4,590,000
10,000,000 Red Roof Inns, Inc., senior notes, 9.625%, 12/15/03 ...................... 10,100,000
-------------
55,240,000
-------------
Media & Broadcasting7.9%
$ 12,000,000 Ackerley Communications, Inc., senior secured notes, Series B,
10.75%, 10/01/03 ........................................................ $ 12,810,000
8,700,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ........... 9,265,500
7,000,000 Benedek Broadcasting, senior notes, 11.875%, 03/01/05 .................... 7,577,500
24,500,000 Benedek Communications, senior disc. notes, zero coupon to 05/15/01,
(original accretion rate 13.25%), 13.25% thereafter, 05/15/06............ 13,597,500
17,500,000 EZ Communications, Inc., senior sub. notes, 9.75%, 12/01/05 .............. 17,806,250
7,100,000 Granite Broadcasting Corp., senior sub. notes, Series A, 10.375%, 05/15/05 7,242,000
6,400,000 Hollinger International, Inc., 9.25%, 02/01/06............................ 6,256,000
5,075,000 Infinity Broadcasting Corp., senior sub. notes, 10.375%, 03/15/02 ........ 5,392,188
20,000,000 Lamar Advertising Co., senior sub. notes, 9.625%, 12/01/06................ 20,425,000
18,000,000 PanAmSat Capital Corp., L.P., S.F., senior sub. disc. notes, zero coupon to
08/01/98, (original accretion rate rate 11.375%), 11.375% thereafter, 08/01/03 16,650,000
19,000,000 SCI Television, Inc., senior secured notes, 11.00%, 06/30/05.............. 20,425,000
19,200,000 SFX Broadcasting, Inc., senior sub. notes, 10.75%, 05/15/06............... 20,112,000
14,400,000 Sinclair Broadcasting Group, senior sub. notes, 10.00%, 09/30/05 ......... 14,616,000
16,400,000 Sullivan Broadcast Holdings, deb., 13.25%, 12/15/06....................... 17,425,000
9,500,000 Turner Broadcasting Systems, Inc., senior deb., 8.40%, 02/01/24 .......... 9,351,619
-------------
198,951,557
-------------
Metals & Mining4.4%
23,400,000 Acme Metals, Inc., senior secured disc. notes, zero coupon to 08/01/97,
(original accretion rate 13.50%), 13.50% thereafter, 08/01/04 ........... 23,575,500
20,000,000 AK Steel Corporation, senior notes, 10.75%, 04/01/04 ..................... 21,650,000
18,000,000 Algoma Steel, Inc., first mortgage, 12.375%, 07/15/05 .................... 19,012,500
17,000,000 Envirosource, Inc., senior notes, 9.75%, 06/15/03 ........................ 15,895,000
27,800,000 Gulf States Steel, first mortgage, 13.50%, 04/15/03 ...................... 26,410,000
3,090,000 Ucar Global Enterprises, Inc., senior sub. notes, 12.00%, 01/15/05 ....... 3,568,950
-------------
110,111,950
-------------
Retail0.4%
10,000,000 Florsheim Shoe Co., senior notes, 12.75%, 09/01/02 ....................... 10,500,000
-------------
Restaurants1.6%
10,850,000 Family Restaurants, Inc., senior notes, 9.75%, 02/01/02 .................. 7,540,750
2,000,000 Flagstar Corp., senior notes, 10.75%, 09/15/01 ........................... 1,820,000
11,000,000 Flagstar Corp., senior notes, 10.875%, 12/01/02 .......................... 10,065,000
13,614,000 Flagstar Corp., S.F., senior sub. deb., 11.25%, 11/01/04 ................. 6,568,755
5,900,000 Foodmaker, Inc., senior notes, 9.25%, 03/01/99 ........................... 5,944,250
8,400,000 Foodmaker, Inc., senior sub. notes, 9.75%, 06/01/02 ...................... 8,421,000
-------------
40,359,755
-------------
Technology & Information Systems1.4%
$ 10,000,000 ADT Operations, senior sub. notes, 9.25%, 08/01/03 ....................... $ 10,700,000
7,500,000 Bell & Howell Co., senior deb., zero coupon to 03/01/00, (original accretion
rate 11.50%), 11.50% thereafter, 03/01/05................................ 5,437,500
3,550,000 Bell & Howell Co., senior notes, 9.25%, 07/15/00.......................... 3,621,000
6,500,000 Bell & Howell Co., senior sub. notes, 10.75%, 10/01/02.................... 6,922,500
7,300,000 bCelestica International, Inc., senior sub. notes, 10.50%, 12/31/06....... 7,560,063
-------------
34,241,063
-------------
Textiles & Apparel1.2%
10,300,000 cForstmann & Co., Inc., S.F., senior sub. notes, 14.75%, 04/15/99 ........ 5,201,500
15,000,000 Hartmarx Corp., senior sub. notes, 10.875%, 01/15/02 ..................... 14,625,000
10,000,000 WestPoint Stevens, Inc., senior sub. deb., 9.375%, 12/15/05 .............. 10,325,000
-------------
30,151,500
-------------
Transportation4.5%
9,000,000 Delta Air Lines, Inc., S.F., pass-through equipment trust, 10.06%, 01/02/16 10,967,120
15,000,000 Delta Air Lines, Inc., S.F., pass-through equipment trust, 10.50%, 04/30/16 19,054,500
19,000,000 Gearbulk Holding, Ltd., senior notes, 11.25%, 12/01/04 ................... 20,805,000
4,900,000 Howmet Corp., senior sub. notes, 10.00%, 12/01/03 ........................ 5,365,500
2,600,000 bNewport News Shipbuilding, senior notes, 8.625%, 12/01/06................ 2,645,500
5,100,000 bNewport News Shipbuilding, senior sub. notes, 9.25%, 12/01/06............ 5,202,000
25,000,000 Sea Containers Ltd., senior notes, 10.50%, 07/01/03....................... 25,687,500
20,422,000 United Airlines, S.F., pass-through equipment trust, Series B-2, 9.06%, 09/26/14 22,814,642
-------------
112,541,762
-------------
Utilities2.0%
17,500,000 California Energy, senior notes, zero coupon to 01/15/97, (original accretion
rate 10.25%), 10.25% thereafter, 01/15/04 ............................... 18,375,000
12,900,000 El Paso Electric Co., first mortgage, 9.40%, 05/01/11..................... 13,803,000
4,500,000 Midland Funding II, S.F., senior lease obligation, Series A, 11.75%, 07/23/05 5,017,500
11,500,000 Midland Funding II, S.F., senior lease obligation, Series B, 13.25%, 07/23/06 13,512,500
-------------
50,708,000
-------------
Wireless Communication11.0%
26,950,000 Arch Communications Group, Inc., senior disc. notes, zero coupon to 03/15/01,
(original accretion rate 10.875%), 10.875% thereafter, 03/15/08.......... 15,361,500
27,250,000 Dial Call Communications, units, senior disc. notes, zero coupon to 04/15/99,
(original accretion rate 12.25%), 12.25% thereafter, 04/15/04............ 19,075,000
29,000,000 IntelCom Group, Inc., senior disc. notes, zero coupon to 05/01/01,
(original accretion rate 12.50%), 12.50% thereafter, 05/01/06 ........... 18,076,280
Wireless Communication (cont.)
$ 27,000,000 Intermedia Communications of Florida, Inc., senior disc. notes, zero coupon
to 05/15/01, (original accretion rate 12.50%), 12.50% thereafter, 05/15/06 $ 17,887,500
36,400,000 bInternational Wireless Communication, units, senior disc. notes, zero coupon to
08/15/01, (original accretion rate 14.00%), 14.00% thereafter, 08/15/01.. 20,020,000
17,000,000 MFS Communications Co., Inc., senior disc. notes, zero coupon to 01/15/01,
(original accretion rate 8.875%), 8.875% thereafter, 01/15/06 ........... 12,388,750
22,300,000 Millicom International Cellular, S.A., senior disc. notes, zero coupon to 06/01/00,
(original accretion rate 13.50%), 13.50% thereafter, 06/01/06............. 13,268,500
15,000,000 Nextel Communications, senior disc. notes, (original accretion rate 9.75%),
0.00%, 08/15/04.......................................................... 9,993,750
38,165,000 bOccidente Y Caribe Celular, units, zero coupon to 03/15/01 (original accretion
rate 14.00%), 14.00% thereafter, 03/15/04 ............................... 19,082,500
17,000,000 Paging Network, Inc., senior sub. notes, 10.125%, 08/01/07................ 17,148,750
14,800,000 bPaging Network, Inc., senior sub. notes, 10.00%, 10/15/08 ............... 14,874,000
30,000,000 Rogers Cantel Mobile Communications, Inc., senior secured deb.,
9.75%, 06/01/16.......................................................... 31,350,000
23,200,000 Sprint Spectrum L.P., senior disc. notes, zero coupon to 08/01/01,
(original accretion rate 12.50%), 12.50% thereafter, 08/15/06 ........... 15,196,000
18,530,000 Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06..................... 19,039,575
30,500,000 Teleport Communications Group, senior disc. notes, 11.125%, 07/01/07...... 20,854,375
30,500,000 Wireless One Inc., 13.50%, 08/01/06....................................... 15,097,500
-------------
278,713,980
-------------
Total Bonds (Cost $2,118,965,677) ........................................ 2,197,991,543
-------------
Foreign Currency Notes0.7%
South Africa
108,800,000 fESCOM, E168, utility deb., 11.00%, 06/01/08 (Cost $24,628,132) .......... 17,419,330
-------------
Shares,
Warrants
& Rights
Common Stocks2.8%
146,076 Beatrice Foods, Inc., cvt. com. .......................................... 2,483,292
741,331 a,dBucyrus-Erie Co. ...................................................... 6,115,981
168,149 aDarling Delaware Co. .................................................... 5,611,973
27,800 aGulf States Steel ....................................................... 139,000
111,234 aKash N' Karry Food Stores, Inc. ......................................... 2,878,180
950,964 a,dNVR, Inc. ............................................................. 9,628,511
39,757 aPenn Traffic Co. ........................................................ 203,755
2,291,953 a,dPrice Communications Corp. ............................................ 18,622,118
510,000 RJR Nabisco Holdings Corp. ............................................... $ 16,320,000
45,177 a,bSmith's Food & Drug Centers, Inc. ..................................... 1,366,604
97,500 a,bSpecialty Food Corp. .................................................. 48,750
262,400 Sullivan Broadcast Holdings .............................................. 2,624,000
38,615 aThermadyne Holdings Corp. ............................................... 907,453
189,505 aWalter Industries, Inc., Class A ........................................ 2,510,941
-------------
Total Common Stocks (Cost $98,362,734) ................................... 69,460,558
-------------
Preferred Stocks3.7%
191,782 Cablevision System Corp., 11.125% pfd., Series L.......................... 16,972,707
199,000 First Nationwide Bank, 11.50% pfd. ....................................... 22,686,000
13,100 Fresenius Medical Care, 9.00%, 12/01/06................................... 13,329,250
11,927 PanAmSat Corp., L.P., 12.75%, pfd., PIK .................................. 14,968,511
24,429 Time Warner, Inc., 10.25%, pfd. .......................................... 26,597,074
-------------
Total Preferred Stocks (Cost $88,225,139) ................................ 94,553,542
-------------
Partnership Units0.3%
415,000 Freeport-McMoRan Resource Partners, Ltd., depository units (Cost $4,846,782) 7,210,625
-------------
Warrants & Rights0.3%
86,719 aBeatrice Foods, Inc. .................................................... 5,419,938
8,030 aFoodmaker, Inc. ......................................................... 197,418
232,762 aGaylord Container Corp. ................................................. 1,469,310
16,789 aGrand Union Co., Series 1 ............................................... 6,296
33,578 aGrand Union Co., Series 2 ............................................... 4,197
36,400 aInternational Wireless Communication Holding ............................ 335
5,896 aKendall International, Inc., rights ..................................... 747,531
27,250 aNextel Communications, Inc. ............................................. 272
-------------
Total Warrants & Rights (Cost $5,876,550) ................................ 7,845,297
-------------
Total Common Stocks, Convertible Common Stocks,
Preferred Stocks, Partnership Units, and Warrants & Rights
(Cost $184,211,205) ..................................................... 165,740,772
-------------
Total Long Term Investments (Cost $2,340,905,014) ........................ 2,394,480,895
-------------
Face
Amount
eReceivables from Repurchase Agreements3.8%
$ 96,230,234 Joint Repurchase Agreement, 5.678%, 12/02/96 (Maturity Value 96,707,557)
(Cost $96,661,823)
B.A. Securities, Inc., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 5.75% - 6.625%, 03/31/97 - 09/30/97
Bear, Stearns & Co., Inc.,
Collateral: U.S. Treasury Bills, 12/19/96 - 05/29/97 (Maturity Value 11,037,453)
U.S. Treasury Notes, 5.125% - 8.50%, 04/15/97 - 11/15/98
B.T. Securities Corp., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 5.875%, 11/15/99
CIBC Wood Gundy Securities Corp., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 6.625% - 7.25%, 02/15/98 - 06/30/01
Daiwa Securities America, Inc., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 6.125%, 08/31/98
Fuji Securities, Inc., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 5.50% - 8.00%, 01/15/97 - 08/31/00
Greenwich Capital Markets, Inc., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 6.00% - 6.25%, 05/31/98 - 08/31/00
SBC Warburg, Inc., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 5.875%, 03/31/99
UBS Securities L.L.C., (Maturity Value 10,708,763)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 05/31/97 - 07/31/98...... $ 96,661,823
-------------
Total Investments (Cost $2,437,566,837)98.7% ............................. 2,491,142,718
Other Assets and Liabilities, Net1.3% .................................... 32,625,841
-------------
Net Assets100.0%.......................................................... $2,523,768,559
=============
At November 30, 1996, the net unrealized appreciation based on the cost of
investments for income tax purposes of $2,437,566,837 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost..................................... $ 134,147,185
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value..................................... (80,571,304)
-------------
Net unrealized appreciation............................................... $ 53,575,881
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
L.P. - Limited Partnership
PIK - Payment-in-Kind
S.F. - Sinking Fund
aNon-income producing.
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cSee Note 6 regarding defaulted securities.
dSee Note 8 regarding holdings of 5% voting securities.
eFace amount for repurchase agreements is for the underlying collateral.
See Note 1(g) regarding joint repurchase agreement.
fFace amount is stated in foreign currency and value is stated in U.S. dollars.
gSee Note 1(h) regarding securities purchased on a when-issued basis.
The accompanying notes are an integral part of these financial statements.
FRANKLIN HIGH INCOME TRUST
AGE High Income Fund
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
November 30, 1996 (unaudited)
Assets:
<S> <C>
Investments in securities, at value (identified cost $2,340,905,014).......................... $2,394,480,895
Receivables from repurchase agreements, at value and cost..................................... 96,661,823
Cash.......................................................................................... 842,752
Receivables:
Dividends and interest....................................................................... 47,665,108
Capital shares sold.......................................................................... 3,318,127
-------------
Total assets................................................................................... 2,542,968,705
-------------
Liabilities:
Payables:
Investment securities purchased on a when-issued basis (Note 1)................................ 17,200,000
Capital shares repurchased..................................................................... 268,031
Management fees................................................................................ 966,838
Distribution fees.............................................................................. 506,160
Shareholder servicing costs.................................................................... 136,446
Accrued expenses and other liabilities........................................................ 122,671
-------------
Total liabilities.............................................................................. 19,200,146
-------------
Net assets, at value........................................................................... $2,523,768,559
=============
Net assets consist of:
Undistributed net investment income........................................................... $ 10,470,699
Unrealized depreciation on investments and translation of assets and
liabilities denominated in foreign currencies................................................. 53,542,957
Accumulated net realized loss from investments and foreign currency transactions.............. (387,313,626)
Class I capital shares........................................................................ 2,766,717,820
Class II capital shares....................................................................... 80,350,709
-------------
Net assets, at value........................................................................... $2,523,768,559
=============
Class I Shares:
Net assets, at value.......................................................................... $2,439,039,870
=============
Shares outstanding............................................................................ 847,358,430
=============
Net asset value per share*.................................................................... $2.88
=============
Class II Shares:
Net assets, at value.......................................................................... $84,728,689
=============
Shares outstanding............................................................................ 29,405,349
=============
Net asset value per share*.................................................................... $2.88
=============
</TABLE>
*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.
FRANKLIN HIGH INCOME TRUST
AGE High Income Fund
Financial Statements (cont.)
<TABLE>
<CAPTION>
Statement of Operations
for the six months ended November 30, 1996 (unaudited)
Investment income:
<S> <C>
Interest (Note 1).............................................................. $115,481,467
Dividends...................................................................... 4,052,539
-------------
Total income.................................................................... $119,534,006
Expenses:
Management fees (Note 5)....................................................... 5,480,865
Distribution fees - Class I (Note 5)........................................... 1,264,543
Distribution fees - Class II (Note 5).......................................... 203,359
Shareholder servicing costs (Note 5)........................................... 657,290
Reports to shareholders........................................................ 590,280
Registration and filing fees................................................... 110,278
Professional fees.............................................................. 56,587
Directors' fees and expenses................................................... 41,598
Custodian fees................................................................. 6,781
Other.......................................................................... 29,939
-------------
Total expenses.................................................................. 8,441,520
-------------
Net investment income.......................................................... 111,092,486
-------------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized loss on:
Investments..................................................................... (3,316,755)
Foreign currency transactions................................................... (163,920)
Net unrealized appreciation on:
Investments..................................................................... 83,017,702
Translation of assets and liabilities denominated in foreign currency........... 127,224
-------------
Net realized and unrealized gain on investments and foreign currency............ 79,664,251
-------------
Net increase in net assets resulting from operations............................ $190,756,737
=============
The accompanying notes are an integral part of these financial statements.
FRANKLIN HIGH INCOME TRUST
AGE High Income Fund
Financial Statements (cont.)
Statements of Changes in Net Assets for the six months ended November 30, 1996
(unaudited) and for the year ended May 31, 1996
Six months Year
ended ended
November 30, 1996 May 31, 1996
------------ -----------
Increase in net assets:
Operations:
<S> <C> <C>
Net investment income....................................................... $ 111,092,486 $ 187,342,385
Net realized loss from investments and foreign currency transactions........ (3,480,675) (7,697,149)
Net unrealized appreciation on investments and translation of assets
and liabilities denominated in foreign currencies.......................... 83,144,926 28,326,112
------------ -----------
Net increase in net assets resulting from operations........................ 190,756,737 207,971,348
Distributions to shareholders from undistributed net investment income:
Class I.................................................................... (107,097,863) (192,694,968)
Class II................................................................... (2,639,380) (1,595,105)
Increase in net assets from capital share transactions (Note 3)............. 212,947,176 306,555,171
------------ -----------
Net increase in net assets.................................................. 293,966,670 320,236,446
Net assets:
Beginning of year.......................................................... 2,229,801,889 1,909,565,443
------------ -----------
End of year (including undistributed net investment income
of $10,470,699 - 11/30/96 and $9,555,454 - 5/31/96)....................... $2,523,768,559 $2,229,801,889
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN HIGH INCOME TRUST
AGE High Income Fund
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin High Income Trust (the Trust) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. On May 14, 1996, the Board of Trustees of AGE High Income Fund,
Inc. approved an Agreement and Plan of Reorganization (the Agreement) whereby
the Fund would be reorganized and its domicile changed from a Colorado
corporation to a Delaware business trust. In connection with these changes, the
Trust's name was also changed to Franklin High Income Trust, formerly known as
the AGE High Income Fund, Inc. On September 13, 1996, shareholders of AGE High
Income Fund, Inc. approved the Agreement. At November 30, 1996, the Trust
consisted of one fund, the AGE High Income Fund (the Fund). The Fund seeks to
provide a high level of current income while seeking capital appreciation.
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. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. The Fund may utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Directors (the Board). Securities for which
market quotations are not available, and securities restricted as to resale, are
valued in accordance with procedures established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. 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, these
securities will be valued in accordance with 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.
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.
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.
Original issue discount 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 - see Note 6. Net realized capital gains and losses differ for
financial statement and tax purposes primarily due to differing treatment of
foreign currency transactions.
e. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
f. 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 the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
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, gains or losses realized
between the trade date and settlement dates on security transactions, 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 or depreciation on
translation of assets and liabilities denominated in foreign currencies arise
from changes in the value of assets and liabilities, other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. Repurchase Agreement:
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.
A repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by underlying U.S. government securities, which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At November 30, 1996, all
outstanding repurchase agreements held by the Fund had been entered into on
November 29,1996.
h. Securities Purchased on a When-Issued or Delayed Delivery Basis:
The Fund may purchase 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
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
h. Securities Purchased on a When-Issued or Delayed Delivery Basis: (cont.)
be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of holding the
securities, it may sell the 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 their purchase commitments.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At May 31, 1996, for tax purposes, the Fund had capital loss carryovers as
follows:
Expiring in: 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
-------------
$373,770,443
=============
In addition, from November 1, 1995 through May 31, 1996, the Fund incurred
approximately $10,493,762 of net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
having arisen in the year ended May 31, 1997.
Capital loss carryovers of $92,197,226 expired at May 31, 1996 and were
reclassified to paid-in-capital pursuant to Statement of Position (SOP) 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
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,
1996.
3. CAPITAL STOCK
At November 30, 1996, there were 5,000,000,000 Class I shares of $0.01 par value
capital stock authorized, of which 2,000,000,000 shares were designated as Class
I and 2,000,000,000 shares were designated as Class II. The remaining
1,000,000,000 shares were designated as Advisor Class shares. Advisor Class
shares are not yet available for sale. Transactions in the Fund's shares for the
six months ended November 30, 1996 and the year ended May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
----------------------- -----------------------
Shares Amount Shares Amount
---------- ------------ ---------- -----------
Class I Shares:
<S> <C> <C> <C> <C>
Shares sold................................... 129,035,806 $361,501,394 231,372,319 $643,863,590
Shares issued in reinvestment of distributions 16,206,518 45,088,556 29,097,278 80,632,284
Shares redeemed............................... (81,919,972) (229,832,579) (166,521,367) (463,301,557)
---------- ------------ ---------- -----------
Net increase.................................. 63,322,352 $176,757,371 93,948,230 $ 261,194,317
========== ============ ========== ===========
3. CAPITAL STOCK (cont.)
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
------------------- --------------------
Shares Amount Shares Amount
-------- ---------- -------- ---------
Class II Shares:
<S> <C> <C> <C> <C>
Shares sold........................................... 15,022,397 $42,173,918 17,825,471 $49,705,233
Shares issued in reinvestment of distributions ....... 491,429 1,372,051 273,548 760,988
Shares redeemed....................................... (2,629,288) (7,356,164) (1,835,828) (5,105,367)
-------- ---------- -------- ---------
Net increase.......................................... 12,884,538 $36,189,805 16,263,191 $45,360,854
======== ========== ======== =========
</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, 1996 aggregated $311,378,858
and $141,011,065, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers),
provides investment advice, administrative services, office space and facilities
to the Fund, and receives fees computed monthly based on the net assets of the
Fund on the last day of the month as follows:
Annualized Fee Rate Month End Net Assets
- ------------- ----------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over 250 million
Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Fund. The fee
is paid by Advisers and computed monthly based on average daily net assets. It
is not a separate expense of the Fund.
b. Shareholders Services Agreement
Under the terms of a shareholder services agreement with Franklin/Templeton
Investors Services, Inc., (Investor Services) the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the six months ended November 30, 1996, aggregated $657,290 of which $633,160
was paid to Investor Services.
c. Distribution Plans and Underwriting Agreement
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Fund will reimburse Franklin/Templeton
Distributors, Inc., (Distributors) in an amount up to a maximum of 0.15% per
annum for Class I and 0.65% per annum for Class II, of the average daily net
assets of such class, for costs incurred in the promotion, offering and
marketing of the Fund's shares. The Plans do not permit nor require payments of
excess costs after termination. Fees incurred by the Fund under the Plans
aggregated $1,467,902 for the six months ended November 30, 1996.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
c. Distribution Plans and Underwriting Agreement (cont.)
In its capacity as underwriter for the capital stock of the Fund, 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 dealers for certain sales of the Fund's
shares. Commissions received by Distributors, the amounts paid to other dealers,
and any applicable contingent deferred sales charges for the six months ended
November 30, 1996, were as follows:
Class I Class II
-------- -------
Total commissions received........................ $5,095,871 $410,012
Paid to other dealers............................. $4,900,609 $778,084
Contingent deferred sales charge.................. $ 0 $ 27,675
d. Other Affiliated Parties and Transactions
Certain officers and directors of the Fund are also officers and/or directors of
Distributors, Advisers, FT Services, and Investor Services, all wholly-owned
subsidiaries of Franklin Resources, Inc.
6. CREDIT RISK AND DEFAULTED SECURITIES
The Fund's portfolio is primarily 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 rated 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 yielding securities, because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. At
November 30, 1996, the Fund held two defaulted securities issued by two
companies with a value aggregating $10,136,500, representing .40% 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.
There are certain credit risks due to the manner in which the Fund is invested,
which may subject the Fund more significantly to economic changes occurring in
certain industries, sectors or counties. The Fund has investments in excess of
10% of net assets in the Wireless Communication Industry.
7. OTHER CONSIDERATIONS
Advisers, as the Fund's Manager, may serve as a member of various credit
committees, representing credit interests in certain corporate restructuring
negotiations. Currently, Advisers serves on the credit committees for
Bucyrus-Erie and Grand Union. 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.
8. 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, 1996, with a value in the amount of $34,366,610. For
more information as to specific securities, see the accompanying Statement of
Investments in Securities and Net Assets.
9. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
are as follows:
Year ended May 31,
Six Months Ended
Class I November 30, 1996 1996 1995 1994 1993 1992
---------- ------- ------- ------- ------- -------
Per Share Operating
Performance
Net asset value at beginning
<S> <C> <C> <C> <C> <C> <C>
of period....................... $2.79 $2.77 $2.70 $2.81 $2.72 $2.37
---------- ------- ------- ------- ------- -------
Net investment income............ .13 .25 .26 .27 .30 .31
Net realized and unrealized
gain (loss) on securities....... .092 .034 .074 (.113) .054 .340
---------- ------- ------- ------- ------- -------
Total from investment operations. .222 .284 .334 .157 .354 .650
Less distributions from net
investment income............... (.132) (.264) (.264) (.267) (.264) (.300)
---------- ------- ------- ------- ------- -------
Net asset value at end of period. $2.88 $2.79 $2.77 $2.70 $2.81 $2.72
========== ======= ======= ======= ======= =======
TOTAL RETURN *................... 8.22% 10.75% 13.34% 5.19% 13.33% 28.48%
Ratios/Supplemental Data
Net assets at end of period
(in 000's)...................... $2,439,040 $2,183,738 $1,908,853 $1,817,481 $1,935,919 $1,864,195
Ratio of expenses to average
net assets...................... .70%+ .70% .66% .59% .56% .58%
Ratio of net investment income
to average net assets........... 9.44%+ 9.07% 9.71% 9.61% 10.78% 12.18%
Portfolio turnover rate.......... 6.38% 19.87% 28.56% 42.32% 38.33% 43.70%
9. FINANCIAL HIGHLIGHTS (cont.)
Six Months Ended
November 30, 1996 1996 1995**
---------- ------- -------
Class II Shares:
Per Share Operating
Performance
Net asset value at beginning
of period....................... $2.79 $2.77 $2.76
---------- ------- -------
Net investment income............ .13 .25 --
Net realized and unrealized
gain (loss) on securities....... .084 .017 .010
---------- ------- -------
Total from investment operations. .214 .267 .010
Less distributions from net
investment income............... (.124) (.247) --
---------- ------- -------
Net asset value at end of period. $2.88 $2.79 $2.77
========== ======= =======
TOTAL RETURN*.................... 7.91% 10.06% .36%
Ratios/Supplemental Data
Net assets at end of period
(in 000's)...................... $84,729 $46,064 $713
Ratio of expenses to average
net assets...................... 1.23%+ 1.25% 1.14%+
Ratio of net investment income
to average net assets........... 8.79%+ 8.50% 6.91%+
Portfolio turnover rate.......... 6.38% 19.87% 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 contingent deferred 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, and capital gains at
net asset value. Effective May 1, 1994, with the implementation of the Rule
12b-1 distribution plan for Class I shares, the sales charge on reinvested
dividends was eliminated.
**For the period May 16, 1995 (effective date) to May 31, 1995.
+Annualized
Franklin AGE High Income Fund Semi-Annual Report November 30, 1996.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the asset allocation of the fund's portfolio on
November 30, 1996, based on total net assets.
<TABLE>
<CAPTION>
Asset Allocation by Asset Class on November 30, 1996
<S> <C>
Bonds 88.3%
Equities 6.6%
Short-Term Obligations & 5.1%
Other Net Assets
</TABLE>
