As filed with the Securities and Exchange Commission on July 21, 1998
File Nos.
2-30203
811-1608
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ______
Post-Effective Amendment No. __39__ (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __24__ (X)
FRANKLIN HIGH INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on October 1, 1998 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest:
AGE High Income Fund - Class I
AGE High Income Fund - Class II
AGE High Income Fund - Advisor Class
FRANKLIN HIGH INCOME TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
AGE High Income Fund - Class I & Class II
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"
Information
4. General Description "How Is the Trust Organized?";
of Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Fund?"; "How Taxation
Affects the Fund and Its
Shareholders"; "Transaction
Procedures and Special
Requirements"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "Who Manages the Fund?"; "How Do
Being Offered I Buy Shares?"; "May I Exchange
Shares for Shares of Another
Fund?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage
Your Account"; "Useful Terms and
Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN HIGH INCOME TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
AGE High Income Fund - Advisor Class
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"
Information
4. General Description "How Is the Trust Organized?";
of Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual
of Fund Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Fund?"; "How Taxation
Affects the Fund and Its
Shareholders"; "Transaction
Procedures and Special
Requirements"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "Who Manages the Fund?"; "How do
Being Offered I Buy Shares?"; "May I Exchange
Shares for Shares of Another
Fund?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage
Your Account"; "Useful Terms and
Definitions"
8. Redemption or Repurchase "May I Exchange Shares for
Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN HIGH INCOME TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
AGE High Income Fund - Class I & Class II
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information See Prospectus "How Is the Trust
and History Organized?"
13. Investment Objective "How Does the Fund Invest Its
Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and Other
and Other Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How Does the Fund Buy
and Other Practices Securities for Its Portfolio?"
18. Capital Stock and See Prospectus "How Is the Trust
Other Securities Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and Exchange
and Pricing of Shares?"; "How Are Fund Shares
Securities Being Valued?"; "Financial Statements"
Offered
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How Does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN HIGH INCOME TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
AGE High Income Fund - Advisor Class
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information See Prospectus "How Is the Trust
and History Organized?"
13. Investment Objective "How Does the Fund Invest Its
Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and Other
and Other Services Services";
17. Brokerage Allocation "How Does the Fund Buy
and Other Practices Securities for Its Portfolio?"
18. Capital Stock and See Prospectus "How Is the Trust
Other Securities Organized?"
19. Purchase, Redemption "How do I Buy, Sell and Exchange
and Pricing of Shares?"; "How Are Fund Shares
Securities Being Valued?"; "Financial Statements"
Offered
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How Does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN'S AGE HIGH INCOME FUND
OCTOBER 1, 1998
INVESTMENT STRATEGY: INCOME
FRANKLIN HIGH INCOME TRUST
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Class I and Class II shares. The fund
currently offers another share class with a different sales charge and
expense structure, which affects performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated October 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share class,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK
BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED
SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN'S AGE HIGH INCOME FUND
October 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings...................................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of each class for the fiscal
year ended May 31, 1998. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+ CLASS I CLASS II
------- -------
Maximum Sales Charge (as a percentage of
Offering Price) 4.25% 1.99%
Paid at time of purchase 4.25%++ 1.00%+++
Paid at redemption++++ None 0.99%
Exchange Fee (per transaction) $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.46% 0.46%
Rule 12b-1 Fees 0.12%** 0.65%**
Other Expenses 0.12% 0.12%
----- -----
Total Fund Operating Expenses 0.70% 1.23%
===== =====
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------
CLASS I $49*** $64 $80 $126
CLASS II $32 $49 $77 $157
For the same Class II investment, you would pay projected expenses of $22
if you did not sell your shares at the end of the first year. Your
projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
shown. The fund pays its operating expenses. The effects of these
expenses are reflected in the Net Asset Value or dividends of each class
and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**These fees may not exceed 0.15% for Class I and 0.65% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
Trust's Annual Report to Shareholders for the fiscal year ended May 31, 1998.
The Annual Report to Shareholders also includes more information about the
fund's performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
CLASS I SHARES:
--------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of year $2.90 $2.79 $2.77 $2.70 $2.81 $2.72 $2.37 $2.53 $3.18 $3.37
--------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .26 .26 .25 .26 .27 .30 .31 .34 .41 .43
Net realized and unrealized
gains (losses) .08 .11 .03 .07 (.11) .05 .34 (.12) (.64) (.19)
--------------------------------------------------------------------------------------------------
Total from investment
operations .34 .37 .28 .33 .16 .35 .65 .22 (.23) .24
--------------------------------------------------------------------------------------------------
Less distributions from net
investment income (.26) (.26) (.26) (.26) (.27) (.26) (.30) (.36) (.42) (.43)
--------------------------------------------------------------------------------------------------
Net Asset Value,
end of year $2.98 $2.90 $2.79 $2.77 $2.70 $2.81 $2.72 $2.37 $2.53 $3.18
==================================================================================================
Total return** 12.32% 14.09% 10.75% 13.34% 5.19% 13.33% 28.48% 10.18% (8.13)% 6.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (in millions) $3,236 $2,639 $2,184 $1,909 $1,817 $1,936 $1,864 $1,588 $1,675 $2,243
Ratios to average net assets:
Expenses .70% .71% .70% .66% .59% .56% .58% .59% .56% .56%
Net investment income 9.04% 9.31% 9.07% 9.71% 9.61% 10.78% 12.18% 14.87% 14.47% 13.06%
Portfolio turnover rate 29.69% 20.01% 19.87% 28.56% 42.32% 38.33% 43.70% 28.55% 17.59% 28.82%
</TABLE>
<TABLE>
<CAPTION>
CLASS II SHARES:
----------------------------------------------------------------
YEAR ENDED MAY 31,
----------------------------------------------------------------
1998 1997 1996 19951
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $2.90 $2.79 $2.77 $2.76
----------------------------------------------------------------
Income from investment operations:
Net investment income .25 .25 .25 -
Net realized and unrealized gains .08 .11 .02 .01
----------------------------------------------------------------
Total from investment operations .33 .36 .27 .01
----------------------------------------------------------------
Less distributions from net investment income (.25) (.25) (.25) -
----------------------------------------------------------------
Net Asset Value, end of year $2.98 $2.90 $2.79 $2.77
================================================================
Total return* * 11.69% 13.41% 10.06% .36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $394,612 $151,073 $46,064 $713
Ratios to average net assets:
Expenses 1.23% 1.25% 1.25% 1.14%*
Net investment income 8.51% 8.75% 8.50% 6.91%*
Portfolio turnover rate 29.69% 20.01% 19.87% 28.56%
</TABLE>
*Annualized.
**Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
1For the period May 16, 1995 (effective date) to May 31, 1995.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to earn a high level of current income. As
a secondary goal, the fund seeks capital appreciation to the extent it is
possible and consistent with the fund's principal goal. These goals are
fundamental which means that they may not be changed without shareholder
approval.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
The fund will generally invest in high yield, high risk, lower rated debt
securities and in dividend-paying common or preferred stocks. High yield debt
securities are often issued by the following types of companies:
o Small companies lacking the financial strength or track record needed to
receive an "investment grade" rating;
o Companies that have been downgraded due to financial difficulties;
o Companies that have borrowed heavily to finance (or avoid) a takeover or
buyout; and
o Highly indebted ("leveraged") companies seeking to refinance their debt at
lower rates.
Lower rated securities generally pay higher yields than more highly rated
securities to compensate investors for the higher risk. The fund seeks to
invest in securities offering the highest yield and expected total return
without taking on an excessive amount of risk.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; convertible securities; commercial
paper; and bankers' acceptances. The fund may also invest in so-called "zero
coupon bonds" which are debt securities that typically pay interest only at
maturity rather than periodically during the life of the security and are
issued at a significant discount from their principal amount.
QUALITY AND RATINGS. The fund may buy both rated and unrated debt securities.
Independent rating organizations rate debt securities based upon their
assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Non-investment grade securities are those rated
lower than BBB by S&P or Baa by Moody's. The fund may buy debt securities
regardless of their rating and up to 100% of the portfolio may be invested in
non-investment grade securities. The fund may invest up to 10% of its total
assets in debt securities where the issuer is not currently making interest
payments (defaulted debt securities. It is the fund's intent not to buy
unrated securities that are comparable to securities rated below B by Moody's
or S&P. The ratings are described in the Appendix to this prospectus and the
SAI. As of May 31, 1998, approximately 92.72% of the fund's net assets were
invested in lower rated and comparable quality unrated debt securities.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, Advisers
does not rely principally on the ratings assigned by rating agencies, but
performs its own independent investment analysis of securities being
considered for the fund's portfolio. In its analysis, Advisers considers a
variety of factors, including:
o the experience and managerial strength of the issuer;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the issuer's changing financial condition and market recognition of the
change;
o and relative values based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
warrants or rights. The fund's equity investments will be limited to
dividend-paying common or preferred stocks.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest in securities
of issuers in any foreign country, developed or developing, and may buy
foreign securities that are traded in the U.S. or securities of U.S. issuers
that are denominated in a foreign currency. The fund may also invest in
American, European and Global Depositary Receipts. Depositary Receipts are
certificates typically issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic
corporation. The fund may invest up to 10% of its net assets in foreign
securities and Depositary Receipts.
SHORT-TERM INVESTMENTS. The fund may invest cash being held for liquidity
purposes in shares of Franklin Money Fund and other money market funds in the
Franklin Templeton Funds.
Please see the SAI for more details on the types of securities the fund
invests in.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the Fund in
each repurchase agreement.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 10% of the value of the fund's total
assets measured at the time of the most recent loan. For each loan the fund
must receive in return collateral with a value at least equal to 100% of the
current market value of the loaned securities.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment restrictions that govern its activities. Those which are
identified as "fundamental" may only be changed with shareholder approval.
The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, and their associated risks, please see "How
Does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of these guidelines.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK. There is no assurance that the fund's investment goals will be
met. The fund will seek to spread investment risk by diversifying its
investments but the possibility of losses remains. Generally, if the
securities owned by the fund increase in value, the value of the shares of
the fund which you own will increase. Similarly, if the securities owned by
the fund decrease in value, the value of your shares will also decline. In
this way, you participate in any change in the value of the securities owned
by the fund.
INTEREST RATE RISK is the risk that changes in interest rates will reduce the
value of a security. When interest rates rise, fixed-income security prices
fall. The opposite is also true: fixed-income security prices go up when
interest rates fall. Generally, interest rates rise when future inflation
rates are expected to increase. This often occurs during periods of strong
economic growth, but may also occur during periods of rising government
budget deficits or when the value of the U.S. dollar declines against other
currencies. Interest rates generally fall when future inflation rates are
expected to decline. This often occurs during periods of slower economic
growth. Securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders will decline when interest rates fall.
CREDIT RISK is the possibility that an issuer of a debt security will be
unable to make principal and interest payments in a timely manner and the
debt security will go into default. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more credit risk than higher-rated securities and an
investment in the fund will have greater price swings than an investment in a
fund emphasizing higher-rated debt securities. The principal risks of
investing in high yield debt securities include:
o SUBSTANTIAL CREDIT RISK. High yield debt securities are predominantly
speculative and carry a high degree of credit risk. Companies issuing high
yield debt securities are not as strong financially as those with higher
credit ratings and their ability to make interest payments or repay
principal is less certain. These companies are also more likely to
encounter financial difficulties and to be materially affected by these
difficulties when they encounter them. They are more vulnerable to changes
in the economy, such as a recession or a sustained period of rising
interest rates, that could prevent them from making interest and principal
payments in a timely manner.
o DEFAULTED DEBT SECURITIES RISK. In some cases, the fund may buy securities
where the issuer is not paying or stops paying interest and/or principal on
the securities. Interest and principal payments on these securities may
never resume. These securities may be worthless and the fund could lose its
entire investment, which may lower the fund's Net Asset Value. Defaulted
securities tend to lose much of their value before they default, in which
case the fund's Net Asset Value will be adversely affected before the
issuer stops making interest or principal payments.
o VOLATILITY RISK. The market prices of high yield securities fluctuate more
than higher-quality securities and may decline significantly in periods of
general or regional economic difficulty. Prices are especially sensitive to
developments affecting the company's business and business prospects and to
changes in the ratings assigned by ratings organizations such as S&P and
Moody's. The entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market
activity, large sustained sales by major investors, a high-profile default,
or other factors. Price swings in the high yield securities market can
adversely affect the prices of all high yield securities.
o REDUCED LIQUIDITY RISK. The high yield securities market is generally less
liquid than the market for higher-quality bonds and large purchases or
sales of these securities can cause sudden and substantial changes in their
market prices. Many of these securities do not trade frequently, and when
they do trade their prices may be significantly higher or lower than
expected. In less liquid markets such as this, it is generally more
difficult to sell securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific
economic events or to meet redemption requests.
The fund relies on Advisers' judgment, analysis and experience in evaluating
the credit and other risks of investing in high yield securities and the high
yield market as a whole. In order for the fund to achieve its investment
goal, Advisers must correctly predict general economic and market trends and
evaluate particular issuer's financial resources, sensitivity to economic
conditions and trends, operating history and quality of management, as well
as regulatory and other matters.
The fund may invest up to 100% of its assets in below investment grade
securities. The following table provides a summary of the credit quality of
the fund's portfolio. These figures are dollar-weighted averages of month-end
assets during the fiscal year ended May 31, 1998.
S&P RATING PERCENTAGE OF ASSETS
- --------------------------------
A+ .140%
BBB+ .481%
BBB 1.523%
BBB- 1.44%
BB+ 3.457%
BB 3.998%
BB- 8.050%
B+ 12.483%
B 25.104%
B- 19.956%
CCC+ 7.528%
CCC 1.954%
CCC- .351%
D .338%
As of May 31, 1998, .165% of securities in the fund's portfolio were unrated
by S&P and deemed by Advisers to be comparable to securities rated BB- by
S&P; .271% were unrated by S&P and deemed comparable to securities rated B+;
.825% were unrated and deemed to be comparable to securities rated B; 3.87%
were unrated and deemed to be comparable to securities rated B-; .011% were
unrated and deemed to be equivalent to securities rated CCC+; and .067% were
unrated and deemed to be comparable to securities rated CC.
As of May 31, 1998, the percentage of the fund's assets invested in equity
securities was 5.298%.
CALL RISK. Call risk is the risk that a security will be prepaid ("called")
before its stated maturity date. An issuer is more likely to call its
securities when interest rates are falling because the issuer can issue new
securities with lower interest payments. Issuers of high yield securities
often have the right to call their securities prior to maturity. If a
security is called, the fund may have to replace it with a lower-yielding
security.
ZERO COUPON BOND RISK. Zero coupon bonds are especially sensitive to changes
in interest rates and their prices generally are more volatile than debt
securities that pay interest periodically. Lower-quality zero coupon bonds
are generally subject to the same risks as high yield debt securities. The
fund typically will not receive any interest payments on these securities
until maturity. If the issuer defaults, the fund may lose its entire
investment, which may lower the fund's Net Asset Value.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the fund may invest are considered developing
or emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody.
MARKET AND CURRENCY RISK. Market risk is the risk that a security's value
will be reduced by market activity or the results of supply and demand. This
is a basic risk associated with all securities, both domestic and foreign.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to increase. In addition, the
fund's investments may be denominated in foreign currencies so that changes
in foreign currency exchange rates will affect the value of what the fund
owns and thus the price of its shares. Individual and worldwide securities
markets and currency valuations have both increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts and swap agreements are
considered derivative investments. To the extent the fund enters into these
transactions, their success will depend upon Advisers' ability to predict
pertinent market movements.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $236 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is: R. Martin Wiskemann since 1972 and Christopher Molumphy
since 1991.
R. Martin Wiskemann
Senior Vice President of Advisers
Mr. Wiskemann holds a degree in Business Administration from the
Handelsschule of the State of Zurich, Switzerland. He has been in the
securities business for more than 30 years, managing mutual fund equity and
fixed-income portfolios, and private investment accounts. He has been with
the Franklin Templeton Group since 1972. He is a member of several securities
industry-related associations.
Christopher Molumphy
Senior Vice President of Advisers
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor
of Arts degree in Economics from Stanford University. He has been with the
Franklin Templeton Group since 1988. Mr. Molumphy is a member of several
securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended May 31, 1998, management fees
totaling 0.46% of the average monthly net assets of the fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 0.70% for
Class I and 1.23% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended May 31, 1998, administration fees totaling 0.10% of the
average daily net assets of the fund were paid to FT Services. These fees are
paid by Advisers. They are not a separate expense of the fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class I plan may not exceed 0.15% per year of
Class I's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plan, the fund may pay Distributors up to 0.50% per year
of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class II
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
-----------------------------------------
<S> <C>
TAXATION OF THE FUND'S INVESTMENTS. The HOW DOES THE FUND EARN INCOME AND GAINS?
fund invests your money in the bonds, The fund earns interest and dividends
stocks and other securities that are (the fund's "income") on its
described in the section "How Does the investments. When the fund sells a
Fund Invest Its Assets?" Special tax rules security for a price that is higher
may apply in determining the income and than it paid, it has a gain. When the
gains that the fund earns on its fund sells a security for a price that
investments. These rules may, in turn, is lower than it paid, it has a loss.
affect the amount of distributions that If the fund has held the security for
the fund pays to you. These special tax more than one year, the gain or loss
rules are discussed in the SAI. will be a long-term capital gain or
loss. If the fund has held the security
TAXATION OF THE FUND. As a regulated for one year or less, the gain or loss
investment company, the fund generally will be a short-term capital gain or
pays no federal income tax on the income loss. The fund's gains and losses are
and gains that it distributes to you. netted together, and, if the fund has a
net gain (the fund's "gains"), that
gain will generally be distributed to
you.
-----------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the fund's distributions to you.
TAXATION OF SHAREHOLDERS
-----------------------------------------
DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash or As a shareholder, you will receive your
in additional shares, are generally share of the fund's income and gains on
subject to income tax. The fund will send its investments in stocks, bonds and
you a statement in January of the current other securities. The fund's income and
year that reflects the amount of ordinary short term capital gains are paid to
dividends, capital gain distributions and you as ordinary dividends. The fund's
non-taxable distributions you received long-term capital gains are paid to you
from the fund in the prior year. This as capital gain distributions. If the
statement will include distributions fund pays you an amount in excess of
declared in December and paid to you in its income and gains, this excess will
January of the current year, but which are generally be treated as a non-taxable
taxable as if paid on December 31 of the distribution. These amounts, taken
prior year. The IRS requires you to together, are what we call the fund's
report these amounts on your income tax distributions to you.
return for the prior year. The fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain. The remainder of
the capital gain distribution represents
20% rate gain.
-----------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally tax-deferred;
this means that you are not required to report fund distributions on your income
tax return when paid to your plan, but, rather, when your plan makes payments to
you. Special rules apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the fund.
-----------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the fund of
in the fund for shares in another Franklin some or all of your shares in the fund. The
Templeton Fund, you will generally have a price per share you receive when you redeem
gain or loss that the IRS requires you to fund shares may be more or less than the
report on your income tax return. If you price at which you purchased those shares. An
exchange fund shares held for 90 days or exchange of shares in the fund for shares of
less and pay no sales charge, or a reduced another Franklin Templeton Fund is treated as
sales charge, for the new shares, all or a a redemption of fund shares and then a
portion of the sales charge you paid on purchase of shares of the other fund. When
the purchase of the shares you exchanged you redeem or exchange your shares, you will
is not included in their cost for purposes generally have a gain or loss, depending upon
of computing gain or loss on the exchange. whether the amount you receive for your
If you hold your shares for six months or shares is more or less than your cost or
less, any loss you have will be treated as other basis in the shares. Call Fund
a long-term capital loss to the extent of Information for a free shareholder Tax
any capital gain distributions received by Information Handbook if you need more
you from the fund. All or a portion of information in calculating the gain or loss
any loss on the redemption or exchange of on the redemption or exchange of your shares.
your shares will be disallowed by the IRS
if you purchase other shares in the fund
within 30 days before or after your
redemption or exchange.
-----------------------------------------------
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid from
interest earned on direct obligations of the U.S. Government, subject to certain
restrictions. The fund will provide you with information at the end of each calendar year
on the amount of such dividends that may qualify for exemption from reporting on your
individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares. Fund
shares held by the estate of a non-U.S. investor may be subject to U.S. estate tax. You
may wish to contact your tax advisor to determine the U.S. and non-U.S. tax consequences
of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from the
fund, and gains arising from redemptions or exchanges of your fund shares will generally
be subject to state and local income tax. The holding of fund shares may also be subject
to state and local intangibles taxes. You may wish to contact your tax advisor to
determine the state and local tax consequences of your investment in the fund.
-----------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when the fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding by
subject to backup withholding under IRS providing the fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
fund is required to withhold 31% of all to sign when you opened your account.
the distributions (including ordinary However, if the IRS instructs the fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the fund with your
fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the fund to do so. The fund fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem your
shares at the current net asset value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-----------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND
INFORMATION.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a diversified series of Franklin High Income Trust (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It
was incorporated in Colorado in January 1968 under the sponsorship of the
Assembly of Governmental Employees, reorganized as a Delaware business trust
in its present form on October 1, 1996, and is registered with the SEC. As of
January 2, 1997, the fund began offering a new class of shares designated AGE
High Income Fund - Advisor Class. All shares outstanding before the offering
of Advisor Class shares have been designated AGE High Income Fund - Class I
and AGE High Income Fund - Class II. Additional series and classes of shares
may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular, non-retirement account $1,000
o To open an IRA, IRA Rollover, Roth IRA,
or Education IRA $250*
o To open a custodial account for a minor
(an UGMA/UTMA account) $100
o To open an account with an automatic
investment plan $50**
o To add to an account $50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs,
or Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time
to time or to waive or lower these minimums for certain purchases. We
also reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
-----------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the SAME CLASS
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the SAME CLASS of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
5. Registered Securities Dealers and their affiliates, for their
investment accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
13. Members of the Assembly of Governmental Employees ("AGE"). If you are
a member, please complete the supplement to the shareholder application
included with this prospectus and return it to the fund.
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy Class I shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans, SIMPLEs or SEPs
must also meet the requirements described under "Group Purchases - Class I
Only" above to be able to buy Class I shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class II shares.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
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BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
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THROUGH YOUR DEALER Call your investment representative
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Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund, if the difference is more than
0.25%. If you have never paid a sales charge on your shares because, for
example, they have always been held in a money fund, you will pay the fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1/4 of 1% of the fund's net assets. Shares under common ownership or
control are combined for these limits. If you have exchanged shares as
described in this paragraph, you will be considered a Market Timer. Each
exchange by a Market Timer, if accepted, will be charged $5.00. Some of our
funds do not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Class Z" shares. Certain shareholders of Class
Z shares of Franklin Mutual Series Fund Inc. may exchange their Class Z
shares for Class I shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
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BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed
by phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
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THROUGH YOUR DEALER Call your investment representative
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We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be redeemed annually free of
charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them
on or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
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CORPORATION Corporate Resolution
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- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with
Distributors or we cannot process the transfer. Contact your Securities
Dealer to initiate the transfer. We will process the transfer after we
receive authorization in proper form from your delivering Securities Dealer.
Accounts may be transferred electronically through the NSCC. For accounts
registered in street or nominee name, we may take instructions directly from
the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than 250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
If you are an AGE member, you should complete the payroll deduction plan
section of the supplement to the shareholder application and submit it to
your employer. Investments may be in any amount, with a minimum of $12.50.
Payroll deduction plans will normally be identified by Social Security
number. Therefore, plans must be limited to one payroll deduction account per
member.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers -
Class I Only" below. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the fund or payments under a systematic withdrawal plan sent
directly to a checking account. If the checking account is with a bank that
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 105 for Class I and 205 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period for Class I begins on the
first day of the month in which you buy shares. Regardless of when during the
month you buy Class I shares, they will age one month on the last day of that
month and each following month. The holding period for Class II begins on the
day you buy your shares. For example, if you buy Class II shares on the 18th
of the month, they will age one month on the 18th day of the next month and
each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DEPOSITARY RECEIPTS - Certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
PROSPECTUS & APPLICATION
FRANKLIN'S AGE HIGH INCOME FUND - ADVISOR CLASS
OCTOBER 1, 1998
INVESTMENT STRATEGY: INCOME
FRANKLIN HIGH INCOME TRUST
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Advisor Class shares. The fund currently
offers other share classes with different sales charge and expense
structures, which affect performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated October 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share classes,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK
BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED
SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN'S AGE HIGH INCOME FUND - ADVISOR CLASS
October 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings...................................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of Advisor Class for the fiscal
year ended May 31, 1998. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.46%
Rule 12b-1 Fees None
Other Expenses 0.12%
-----
Total Fund Operating Expenses 0.58%
=====
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------
$6 $19 $32 $73
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditors. Their
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended May 31, 1998. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
YEAR ENDED MAY 31, 1998 19971
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $2.90 $2.90
---------------------------
Income from investment operations:
Net investment income .27 .12
Net realized and unrealized gains (losses) .08 (.01)
---------------------------
Total from investment operations .35 .11
---------------------------
Less distributions from net investment income (.27) (.11)
---------------------------
Net Asset Value, end of year $2.98 $2.90
===========================
Total return** 12.46% 3.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $28,026 $6,224
Ratios to average net assets:
Expenses .58% .61%*
Net investment income 9.17% 9.25%*
Portfolio turnover rate 29.69% 20.01%
*Annualized.
**Total return is not annualized.
1For the period January 2, 1997 (effective date) to May 31, 1997
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to earn a high level of current income. As
a secondary goal, the fund seeks capital appreciation to the extent it is
possible and consistent with the fund's principal goal. These goals are
fundamental which means that they may not be changed without shareholder
approval.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
The fund will generally invest in high yield, high risk, lower rated debt
securities and in dividend-paying common or preferred stocks. High yield debt
securities are often issued by the following types of companies:
o Small companies lacking the financial strength or track record needed to
receive an "investment grade" rating;
o Companies that have been downgraded due to financial difficulties;
o Companies that have borrowed heavily to finance (or avoid) a takeover or
buyout; and
o Highly indebted ("leveraged") companies seeking to refinance their debt at
lower rates.
Lower rated securities generally pay higher yields than more highly rated
securities to compensate investors for the higher risk. The fund seeks to
invest in securities offering the highest yield and expected total return
without taking on an excessive amount of risk.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; convertible securities; commercial
paper; and bankers' acceptances. The fund may also invest in so-called "zero
coupon bonds" which are debt securities that typically pay interest only at
maturity rather than periodically during the life of the security and are
issued at a significant discount from their principal amount.
QUALITY AND RATINGS. The fund may buy both rated and unrated debt securities.
Independent rating organizations rate debt securities based upon their
assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Non-investment grade securities are those rated
lower than BBB by S&P or Baa by Moody's. The fund may buy debt securities
regardless of their rating and up to 100% of the portfolio may be invested in
non-investment grade securities. The fund may invest up to 10% of its total
assets in debt securities where the issuer is not currently making interest
payments (defaulted debt securities. It is the fund's intent not to buy
unrated securities that are comparable to securities rated below B by Moody's
or S&P. The ratings are described in the Appendix to this prospectus and the
SAI. As of May 31, 1998, approximately 92.72% of the fund's net assets were
invested in lower rated and comparable quality unrated debt securities.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, Advisers
does not rely principally on the ratings assigned by rating agencies, but
performs its own independent investment analysis of securities being
considered for the fund's portfolio. In its analysis, Advisers considers a
variety of factors, including:
o the experience and managerial strength of the issuer;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the issuer's changing financial condition and market recognition of the
change;
o and relative values based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
warrants or rights. The fund's equity investments will be limited to
dividend-paying common or preferred stocks.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest in securities
of issuers in any foreign country, developed or developing, and may buy
foreign securities that are traded in the U.S. or securities of U.S. issuers
that are denominated in a foreign currency. The fund may also invest in
American, European and Global Depositary Receipts. Depositary Receipts are
certificates typically issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic
corporation. The fund may invest up to 10% of its net assets in foreign
securities and Depositary Receipts.
SHORT-TERM INVESTMENTS. The fund may invest cash being held for liquidity
purposes in shares of Franklin Money Fund and other money market funds in the
Franklin Templeton Funds.
Please see the SAI for more details on the types of securities the fund
invests in.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the Fund in
each repurchase agreement.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 10% of the value of the fund's total
assets measured at the time of the most recent loan. For each loan the fund
must receive in return collateral with a value at least equal to 100% of the
current market value of the loaned securities.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment restrictions that govern its activities. Those which are
identified as "fundamental" may only be changed with shareholder approval.
The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, and their associated risks, please see "How
Does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of these guidelines.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK. There is no assurance that the fund's investment goals will be
met. The fund will seek to spread investment risk by diversifying its
investments but the possibility of losses remains. Generally, if the
securities owned by the fund increase in value, the value of the shares of
the fund which you own will increase. Similarly, if the securities owned by
the fund decrease in value, the value of your shares will also decline. In
this way, you participate in any change in the value of the securities owned
by the fund.
INTEREST RATE RISK is the risk that changes in interest rates will reduce the
value of a security. When interest rates rise, fixed-income security prices
fall. The opposite is also true: fixed-income security prices go up when
interest rates fall. Generally, interest rates rise when future inflation
rates are expected to increase. This often occurs during periods of strong
economic growth, but may also occur during periods of rising government
budget deficits or when the value of the U.S. dollar declines against other
currencies. Interest rates generally fall when future inflation rates are
expected to decline. This often occurs during periods of slower economic
growth. Securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders will decline when interest rates fall.
CREDIT RISK is the possibility that an issuer of a debt security will be
unable to make principal and interest payments in a timely manner and the
debt security will go into default. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more credit risk than higher-rated securities and an
investment in the fund will have greater price swings than an investment in a
fund emphasizing higher-rated debt securities. The principal risks of
investing in high yield debt securities include:
o SUBSTANTIAL CREDIT RISK. High yield debt securities are predominantly
speculative and carry a high degree of credit risk. Companies issuing high
yield debt securities are not as strong financially as those with higher
credit ratings and their ability to make interest payments or repay
principal is less certain. These companies are also more likely to
encounter financial difficulties and to be materially affected by these
difficulties when they encounter them. They are more vulnerable to changes
in the economy, such as a recession or a sustained period of rising
interest rates, that could prevent them from making interest and principal
payments in a timely manner.
o DEFAULTED DEBT SECURITIES RISK. In some cases, the fund may buy securities
where the issuer is not paying or stops paying interest and/or principal on
the securities. Interest and principal payments on these securities may
never resume. These securities may be worthless and the fund could lose its
entire investment, which may lower the fund's Net Asset Value. Defaulted
securities tend to lose much of their value before they default, in which
case the fund's Net Asset Value will be adversely affected before the
issuer stops making interest or principal payments.
o VOLATILITY RISK. The market prices of high yield securities fluctuate more
than higher-quality securities and may decline significantly in periods of
general or regional economic difficulty. Prices are especially sensitive to
developments affecting the company's business and business prospects and to
changes in the ratings assigned by ratings organizations such as S&P and
Moody's. The entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market
activity, large sustained sales by major investors, a high-profile default,
or other factors. Price swings in the high yield securities market can
adversely affect the prices of all high yield securities.
o REDUCED LIQUIDITY RISK. The high yield securities market is generally less
liquid than the market for higher-quality bonds and large purchases or
sales of these securities can cause sudden and substantial changes in their
market prices. Many of these securities do not trade frequently, and when
they do trade their prices may be significantly higher or lower than
expected. In less liquid markets such as this, it is generally more
difficult to sell securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific
economic events or to meet redemption requests.
The fund relies on Advisers' judgment, analysis and experience in evaluating
the credit and other risks of investing in high yield securities and the high
yield market as a whole. In order for the fund to achieve its investment
goal, Advisers must correctly predict general economic and market trends and
evaluate particular issuer's financial resources, sensitivity to economic
conditions and trends, operating history and quality of management, as well
as regulatory and other matters.
The fund may invest up to 100% of its assets in below investment grade
securities. The following table provides a summary of the credit quality of
the fund's portfolio. These figures are dollar-weighted averages of month-end
assets during the fiscal year ended May 31, 1998.
S&P RATING PERCENTAGE OF ASSETS
- --------------------------------
A+ .140%
BBB+ .481%
BBB 1.523%
BBB- 1.44%
BB+ 3.457%
BB 3.998%
BB- 8.050%
B+ 12.483%
B 25.104%
B- 19.956%
CCC+ 7.528%
CCC 1.954%
CCC- .351%
D .338%
As of May 31, 1998, .165% of securities in the fund's portfolio were unrated
by S&P and deemed by Advisers to be comparable to securities rated BB- by
S&P; .271% were unrated by S&P and deemed comparable to securities rated B+;
.825% were unrated and deemed to be comparable to securities rated B; 3.87%
were unrated and deemed to be comparable to securities rated B-; .011% were
unrated and deemed to be equivalent to securities rated CCC+; and .067% were
unrated and deemed to be comparable to securities rated CC.
As of May 31, 1998, the percentage of the fund's assets invested in equity
securities was 5.298%.
CALL RISK. Call risk is the risk that a security will be prepaid ("called")
before its stated maturity date. An issuer is more likely to call its
securities when interest rates are falling because the issuer can issue new
securities with lower interest payments. Issuers of high yield securities
often have the right to call their securities prior to maturity. If a
security is called, the fund may have to replace it with a lower-yielding
security.
ZERO COUPON BOND RISK. Zero coupon bonds are especially sensitive to changes
in interest rates and their prices generally are more volatile than debt
securities that pay interest periodically. Lower-quality zero coupon bonds
are generally subject to the same risks as high yield debt securities. The
fund typically will not receive any interest payments on these securities
until maturity. If the issuer defaults, the fund may lose its entire
investment, which may lower the fund's Net Asset Value.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the fund may invest are considered developing
or emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody.
MARKET AND CURRENCY RISK. Market risk is the risk that a security's value
will be reduced by market activity or the results of supply and demand. This
is a basic risk associated with all securities, both domestic and foreign.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to increase. In addition, the
fund's investments may be denominated in foreign currencies so that changes
in foreign currency exchange rates will affect the value of what the fund
owns and thus the price of its shares. Individual and worldwide securities
markets and currency valuations have both increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts and swap agreements are
considered derivative investments. To the extent the fund enters into these
transactions, their success will depend upon Advisers' ability to predict
pertinent market movements.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $236 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is: R. Martin Wiskemann since 1972 and Christopher Molumphy
since 1991.
R. Martin Wiskemann
Senior Vice President of Advisers
Mr. Wiskemann holds a degree in Business Administration from the
Handelsschule of the State of Zurich, Switzerland. He has been in the
securities business for more than 30 years, managing mutual fund equity and
fixed-income portfolios, and private investment accounts. He has been with
the Franklin Templeton Group since 1972. He is a member of several securities
industry-related associations.
Christopher Molumphy
Senior Vice President of Advisers
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor
of Arts degree in Economics from Stanford University. He has been with the
Franklin Templeton Group since 1988. Mr. Molumphy is a member of several
securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended May 31, 1998, management fees
totaling 0.46% of the average monthly net assets of the fund were paid to
Advisers. Total expenses of the fund, including fees paid to Advisers, were
0.58%.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended May 31, 1998, administration fees totaling 0.10% of the
average daily net assets of the fund were paid to FT Services. These fees are
paid by Advisers. They are not a separate expense of the fund. Please see
"Investment Management and Other Services" in the SAI for more information.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
-----------------------------------------
<S> <C>
TAXATION OF THE FUND'S INVESTMENTS. The HOW DOES THE FUND EARN INCOME AND GAINS?
fund invests your money in the bonds, The fund earns interest and dividends
stocks and other securities that are (the fund's "income") on its
described in the section "How Does the investments. When the fund sells a
Fund Invest Its Assets?" Special tax rules security for a price that is higher
may apply in determining the income and than it paid, it has a gain. When the
gains that the fund earns on its fund sells a security for a price that
investments. These rules may, in turn, is lower than it paid, it has a loss.
affect the amount of distributions that If the fund has held the security for
the fund pays to you. These special tax more than one year, the gain or loss
rules are discussed in the SAI. will be a long-term capital gain or
loss. If the fund has held the security
TAXATION OF THE FUND. As a regulated for one year or less, the gain or loss
investment company, the fund generally will be a short-term capital gain or
pays no federal income tax on the income loss. The fund's gains and losses are
and gains that it distributes to you. netted together, and, if the fund has a
net gain (the fund's "gains"), that
gain will generally be distributed to
you.
-----------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the fund's distributions to you.
TAXATION OF SHAREHOLDERS
-----------------------------------------
DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash or As a shareholder, you will receive your
in additional shares, are generally share of the fund's income and gains on
subject to income tax. The fund will send its investments in stocks, bonds and
you a statement in January of the current other securities. The fund's income and
year that reflects the amount of ordinary short term capital gains are paid to
dividends, capital gain distributions and you as ordinary dividends. The fund's
non-taxable distributions you received long-term capital gains are paid to you
from the fund in the prior year. This as capital gain distributions. If the
statement will include distributions fund pays you an amount in excess of
declared in December and paid to you in its income and gains, this excess will
January of the current year, but which are generally be treated as a non-taxable
taxable as if paid on December 31 of the distribution. These amounts, taken
prior year. The IRS requires you to together, are what we call the fund's
report these amounts on your income tax distributions to you.
return for the prior year. The fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain. The remainder of
the capital gain distribution represents
20% rate gain.
-----------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally tax-deferred;
this means that you are not required to report fund distributions on your income
tax return when paid to your plan, but, rather, when your plan makes payments to
you. Special rules apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the fund.
------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the fund of
in the fund for shares in another Franklin some or all of your shares in the fund. The
Templeton Fund, you will generally have a price per share you receive when you redeem
gain or loss that the IRS requires you to fund shares may be more or less than the
report on your income tax return. If you price at which you purchased those shares. An
exchange fund shares held for 90 days or exchange of shares in the fund for shares of
less and pay no sales charge, or a reduced another Franklin Templeton Fund is treated as
sales charge, for the new shares, all or a a redemption of fund shares and then a
portion of the sales charge you paid on purchase of shares of the other fund. When
the purchase of the shares you exchanged you redeem or exchange your shares, you will
is not included in their cost for purposes generally have a gain or loss, depending upon
of computing gain or loss on the exchange. whether the amount you receive for your
If you hold your shares for six months or shares is more or less than your cost or
less, any loss you have will be treated as other basis in the shares. Call Fund
a long-term capital loss to the extent of Information for a free shareholder Tax
any capital gain distributions received by Information Handbook if you need more
you from the fund. All or a portion of information in calculating the gain or loss
any loss on the redemption or exchange of on the redemption or exchange of your shares.
your shares will be disallowed by the IRS
if you purchase other shares in the fund
within 30 days before or after your
redemption or exchange.
-----------------------------------------------
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid from
interest earned on direct obligations of the U.S. Government, subject to certain
restrictions. The fund will provide you with information at the end of each calendar year
on the amount of such dividends that may qualify for exemption from reporting on your
individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares. Fund
shares held by the estate of a non-U.S. investor may be subject to U.S. estate tax. You
may wish to contact your tax advisor to determine the U.S. and non-U.S. tax consequences
of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from the
fund, and gains arising from redemptions or exchanges of your fund shares will generally
be subject to state and local income tax. The holding of fund shares may also be subject
to state and local intangibles taxes. You may wish to contact your tax advisor to
determine the state and local tax consequences of your investment in the fund.
-----------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when the fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding by
subject to backup withholding under IRS providing the fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
fund is required to withhold 31% of all to sign when you opened your account.
the distributions (including ordinary However, if the IRS instructs the fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the fund with your
fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the fund to do so. The fund fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem your
shares at the current net asset value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-----------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND
INFORMATION.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a diversified series of Franklin High Income Trust (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It
was incorporated in Colorado in January 1968 under the sponsorship of the
Assembly of Governmental Employees, reorganized as a Delaware business trust
in its present form on October 1, 1996, and is registered with the SEC. As of
January 2, 1997, the fund began offering a new class of shares designated AGE
High Income Fund - Advisor Class. All shares outstanding before the offering
of Advisor Class shares have been designated AGE High Income Fund - Class I
and AGE High Income Fund - Class II. Additional series and classes of shares
may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the fund may be purchased without a sales charge. Please note that
as of January 1, 1998, shares of the fund are not available to retirement
plans through Franklin Templeton's ValuSelect(R) program. Retirement plans in
Franklin Templeton's ValuSelect program before January 1, 1998, however, may
continue to invest in the fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open your account: $5,000,000
o To add to your account: $25
We reserve the right to change the amount of these minimums from time
to time or to waive or lower these minimums for certain purchases.
Please see "Minimum Investments" below. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in
Advisor Class or Class Z shares of any of the Franklin Templeton Funds.
The fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to
purchases by:
1. Qualified registered investment advisors or certified financial
planners who have clients invested in the Franklin Mutual Series Fund
Inc. on October 31, 1996, or who buy through a broker-dealer or service
agent who has entered into an agreement with Distributors, subject to a
$1,000 minimum initial and $50 minimum subsequent investment requirement
2. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs, subject to a
$250,000 minimum initial investment requirement or a $100,000 minimum
initial investment requirement for an individual client
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate
family members, subject to a $100 minimum initial investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to
a $1,000 minimum initial and subsequent investment requirement
5. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject
to a $1 million initial investment in Advisor Class or Class Z shares
of any of the Franklin Templeton Funds
No minimum initial investment requirement applies to purchases by:
1. Accounts managed by the Franklin Templeton Group
2. The Franklin Templeton Profit Sharing 401(k) Plan
3. Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
Section 401 of the Code, including salary reduction plans qualified
under Section 401(k) of the Code, and that (i) are sponsored by an
employer with at least 10,000 employees, or (ii) have plan assets of
$100 million or more
4. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion
5. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if
the group as a whole meets the $5 million minimum investment
requirement. A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission
of investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve
cost savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors
or one of its affiliates and not by the fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer
Advisor Class shares.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1/4 of 1% of the fund's net assets. Shares under common ownership or
control are combined for these limits. If you have exchanged shares as
described in this paragraph, you will be considered a Market Timer. Each
exchange by a Market Timer, if accepted, will be charged $5.00. Some of our
funds do not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton
Growth Fund, you may exchange the Advisor Class shares you own for Class I
shares of those funds or of Templeton Institutional Funds, Inc. at Net Asset
Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. You may also exchange your Advisor Class
shares for Class Z shares of Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed
by phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them
on or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class of the fund by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The
Net Asset Value we use when you buy or sell shares is the one next calculated
after we receive your transaction request in proper form. If you buy or sell
shares through your Securities Dealer, however, we will use the Net Asset
Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. To calculate
Net Asset Value per share of each class, the assets of each class are valued
and totaled, liabilities are subtracted, and the balance, called net assets,
is divided by the number of shares of the class outstanding. The fund's
assets are valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
- --------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than 250, or less than $50
for employee accounts. We will only do this if the value of your account fell
below this amount because you voluntarily sold your shares and your account
has been inactive (except for the reinvestment of distributions) for at least
six months. Before we close your account, we will notify you and give you 30
days to increase the value of your account to $1,000, or $100 for employee
accounts. These minimums do not apply to IRAs, accounts managed by the
Franklin Templeton Group, the Franklin Templeton Profit Sharing 401(k) Plan,
the series of Franklin Templeton Fund Allocator Series, or certain defined
contribution plans that qualify to buy shares with no minimum initial
investment requirement.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the shareholder application
included with this prospectus or contact your investment representative. The
market value of the fund's shares may fluctuate and a systematic investment
plan such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. Once your plan is
established, any distributions paid by the fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price information about any Franklin Templeton Fund; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). The fund's code
number is 605.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DEPOSITARY RECEIPTS - Certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN'S
AGE HIGH
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
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TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings......................................
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The AGE High Income Fund is a diversified series of Franklin High Income
Trust (the "Trust"), an open-end management investment company. The
Prospectus, dated October 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund.
For a free copy, call 1-800/DIAL BEN.
This SAI describes the fund's Class I and Class II shares. The fund currently
offers another share class with a different sales charge and expense
structure, which affects performance. To receive more information about the
fund's other share class, contact your investment representative or call
1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The
owner of an equity security may participate in a company's success through
the receipt of dividends which are distributions of earnings by the company
to its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred
stock. Preferred stockholders typically receive greater dividends but may
receive less appreciation than common stockholders and may have greater
voting rights as well. Equity securities may also include warrants or
rights. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. Debt securities represent an obligation of the issuer to
repay a loan of money to it, and generally, provide for the payment of
interest. These include bonds, notes and debentures; commercial paper;
convertible securities; and bankers' acceptances. A company typically meets
its payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity
securities. Bonds, notes, debentures and commercial paper differ in the
length of the issuer's payment schedule, with bonds carrying the longest
repayment schedule and commercial paper the shortest.
The fund may buy certain bonds issued at a discount which defer payment of
interest or pay no interest until maturity, known as zero-coupon bonds, or
which pay the interest through the issuance of additional bonds, known as
pay-in-kind bonds. For federal tax purposes, holders of these bonds, such as
the fund, are deemed to receive interest over the life of the bonds and are
taxed as if interest were paid on a current basis although the holder does
not receive cash interest payments until the bonds mature.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates
higher risk. The fund may buy debt securities regardless of their rating and
up to 100% of the portfolio may be invested in non-investment grade
securities (rated lower than BBB by S&P or Baa by Moody's).
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisers may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993, depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on Advisers' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Pay-in-kind securities pay interest by issuing more bonds. The fund is deemed
to receive interest over the life of these bonds and is treated as if the
interest were paid on a current basis for federal income tax purposes,
although the fund does not receive any cash interest payments until maturity
or the cash payment date. Accordingly, during times when the fund does not
receive any cash interest payments on its zero-coupon, deferred interest or
pay-in-kind securities, it may have to sell portfolio securities to meet
distribution requirements and these sales may be subject to the risk factors
discussed above. The fund is not limited in the amount of its assets that may
be invested in these types of securities.
TRADE CLAIMS. The fund may invest a portion of its assets in trade claims
purchased from creditors of companies in financial difficulty. For purchasers
such as the fund, trade claims offer the potential for profits since they are
often purchased at a significantly discounted value and, consequently, may
generate capital appreciation in the event that the value of the claim
increases as the debtor's financial position improves. If the debtor is able
to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade
claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding. Because of the nature and risk of trade
claims, the fund will limit its investment in these instruments to 5% of its
net assets at the time of purchase.
LOAN PARTICIPATIONS. The fund may acquire loan participations and other
related direct or indirect bank debt obligations ("Loan Participations"), in
which the fund will buy from a lender a portion of a larger loan that the
lender has made to a borrower. Generally, Loan Participations are sold
without guarantee or recourse to the lending institution and are subject to
the credit risks of both the borrower and the lending institution. Loan
Participations, however, may enable the fund to acquire an interest in a loan
from a financially strong borrower which it could not do directly. While Loan
Participations generally trade at par value, the fund will be permitted to
buy Loan Participations that sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved,
Loan Participations may appreciate in value.
The fund's investment in Loan Participations, all of which may have
speculative characteristics and some of which may be in default, and other
defaulted securities may not exceed 15% of the fund's net assets at the time
of investment.
RESTRICTED SECURITIES. A restricted security is one that has been purchased
through a private offering and cannot be sold without prior registration
under the Securities Act of 1933, as amended (the "1933 Act") unless the sale
is pursuant to an exemption under the 1933 Act. In recent years, the fund's
portfolio has included several issues of restricted securities.
Notwithstanding the restriction on the sale of restricted securities, a
secondary market exists for many of these securities. As with other
securities in the fund's portfolio, if there are readily available market
quotations for a restricted security, it will be valued, for purposes of
determining the fund's Net Asset Value, within the range of the bid and ask
prices. If no quotations are available, the security will be valued at fair
value in accordance with procedures adopted by the Board. The fund may
receive commitment fees when it buys restricted securities. For example, the
transaction may involve an individually negotiated purchase of short-term
increasing rate notes. Maturities for this type of security typically range
from one to five years. These notes are usually issued as temporary or
"bridge" financing to be replaced ultimately with permanent financing for the
project or transaction which the issuer seeks to finance. Typically, at the
time of commitment, the fund receives the security and sometimes a cash
commitment fee. Because the transaction could possibly involve a delay
between the time the fund commits to buy the security and the fund's payment
for and receipt of that security, the fund will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities
with an aggregate value equal to the amount of its commitments until payment
is made. The fund will not buy restricted securities to generate commitment
fees, although the receipt of fees will help the fund achieve its principal
objective of earning a high level of current income.
The fund may receive consent fees in a variety of situations. For example,
the fund may receive consent fees if an issuer seeks to "call" a bond it has
issued which does not contain a provision permitting the issuer to call the
bond, or if the fund's consent is required to facilitate a merger or other
business combination transaction. Consent fees are received only
occasionally, are privately negotiated, and may be in any amount. As is the
case with commitment fees, the fund will not buy securities with a view to
generating consent fees, although the receipt of such fees is consistent with
the fund's principal investment objective.
ILLIQUID SECURITIES. It is the policy of the fund that illiquid securities
(including illiquid equity securities, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days
duration, and other securities that are not readily marketable) may not
constitute more than 10% of the value of the fund's net assets. Generally, an
"illiquid security" is any security that cannot be disposed of promptly and
in the ordinary course of business at approximately the amount at which the
fund has valued the instrument. Subject to this limitation, the Board has
authorized the fund to invest in restricted securities to the extent
consistent with the fund's investment objectives and has authorized the fund
to treat restricted securities as liquid if Advisers determines on a daily
basis that there is a liquid institutional or other market for the
securities. For example, the fund may treat as liquid restricted securities
that may be freely transferred among qualified institutional buyers pursuant
to Rule 144A under the 1933 Act and for which a liquid institutional market
has developed. The Board will review on an on-going basis any determination
by Advisers to treat a restricted security as liquid, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, Advisers and the Board will take into account
the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and
the number of other potential buyers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the fund invests in restricted securities that are deemed liquid, the general
level of illiquidity may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy debt
securities on a "when-issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities with payment and
delivery scheduled for a future time. Purchases of debt securities on a
when-issued or delayed delivery basis are subject to market fluctuation and
to the risk that the value or yields at delivery may be more or less than the
purchase price or the yields available when the transaction was entered into.
Although the fund will generally buy debt securities on a when-issued basis
with the intention of acquiring such securities, it may sell them before the
settlement date if it deems the sale to be advisable. The fund will not enter
into these transactions for investment leverage. When the fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until payment is made.
In when-issued and delayed delivery transactions, the fund relies on the
seller to complete the transaction. The other party's failure may cause the
fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The fund is not subject to any
percentage limit on the amount of its assets which may be invested in
when-issued debt securities.
OPTIONS ON SECURITIES. Although it does not currently anticipate that it will
do so, the fund may write covered call options that are listed for trading on
a national securities exchange. This means that the fund will only write
options on securities that the fund actually owns. A call option gives the
buyer the right to buy the security on which the option is written for a
specified period of time at a price agreed to at the time the option is sold,
even though that price may be less than the value of the security at the time
the option is exercised. When the fund sells covered call options, the fund
receives a cash premium which can be used in whatever way the fund deems to
be most beneficial. In writing covered call options, the fund is subject to
the risk that in the event of a price increase on the underlying security
which would likely trigger the exercise of the call option, the fund will not
participate in the increase in price beyond the exercise price. If the fund
determines that it does not wish to deliver the underlying securities from
its portfolio, it may have to enter into a "closing purchase transaction" and
pay a premium which may be higher or lower than the premium it received for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
with other kinds of options, however, the writing of an option on foreign
currency will be only a partial hedge, up to the amount of the premium
received, and the fund could be required to buy or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may be an effective hedge against fluctuations
in exchange rates although, in the event of rate movements adverse to the
fund's position, the fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts ("Forward Contracts") to attempt to minimize the risk to
the fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is individually
negotiated and is privately traded by currency traders and their customers.
The fund will either cover its position in such a transaction or maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of any such
commitment until payment is made.
INTEREST RATE SWAPS. The fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest
rate obligations. One obligation has an interest rate fixed to maturity while
the other has an interest rate that changes with changes in a designated
benchmark, such as the London Interbank Offered Rate ("LIBOR"), prime,
commercial paper, or other benchmarks. The obligations to make repayment of
principal on the underlying securities are not transferred. These
transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed rate obligation will transfer
the obligation to the intermediary, and the entity will then be obligated to
pay to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate
obligation which substantially mirrors the obligation desired by the first
entity. In return for assuming a fixed obligation, the second entity will pay
the intermediary all sums that the intermediary pays on behalf of the first
entity, plus an arrangement fee and other agreed upon fees.
The fund intends to participate in interest rate swaps with regard to
obligations held in the fund's portfolio. To the extent, however, the fund
does not own the underlying obligation, the fund will maintain, in a
segregated account with its custodian bank, cash or liquid debt securities
with an aggregate value equal to the amount of the fund's outstanding swap
obligation.
Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly
available in the credit market, while permitting the party desiring a fixed
rate obligation the opportunity to acquire a fixed rate obligation, also
frequently at a price lower than is available in the capital markets. The
success of the transaction depends in large part on the availability of fixed
rate obligations at a low enough coupon rate to cover the cost involved.
FOREIGN SECURITIES. The fund will not invest in any equity securities issued
without stock certificates or debt securities that are not issues and
transferable in fully registered form. The fund does not consider securities
it acquires outside the U.S. that are publicly traded in the U.S., on a
foreign securities exchange, or in a foreign securities market to be illiquid
so long as the fund acquires and holds the security with the intention of
reselling the security in the foreign trading market, the fund reasonably
believes it can readily dispose of the security for cash in the U.S. or
foreign market, and current market quotations are readily available.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
UNSEASONED ISSUERS. It is the present policy of the fund (which may be
changed without shareholder approval) not to invest more than 5% of its total
assets in companies that have a record of less than three years continuous
operation, including predecessors.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. Advisers will
monitor the value of such securities daily to determine that the value equals
or exceeds the repurchase price. Repurchase agreements may involve risks in
the event of default or insolvency of the seller, including possible delays
or restrictions upon the fund's ability to dispose of the underlying
securities. The fund will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the fund's Board, I.E., banks
or broker-dealers which have been determined by Advisers to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% of its total
assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail. The fund may pay reasonable finders', borrowers', administrative, and
custodial fees in connection with a loan of its securities.
BORROWING. As a fundamental policy, the fund does not borrow money or
mortgage or pledge any of its assets, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 5% of its total
assets.
SECURITIES TRANSACTIONS OF THE FUND
Normally, the fund will buy securities with the intention of holding them for
the long term. It may on occasion, however, buy securities with the
expectation of selling them within a short period of time. The fund may make
changes in particular portfolio holdings whenever it determines that a
security is no longer suitable for the fund's portfolio or that another
security appears to offer a relatively greater opportunity, and will make
such changes without regard to the length of time a security has been held.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Invest more than 25% of the value of the fund's total assets in one
particular industry.
2. Purchase securities, if the purchase would cause the fund at that time to
have more than 5% of the value of its total assets invested in the securities
of any one company or to own more than 10% of the voting securities of any
one company (except obligations issued or guaranteed by the U.S. government).
3. Underwrite or engage in the agency distributions of securities of other
issuers, except insofar as the fund may be technically deemed an underwriter
in connection with the disposition of securities in its portfolio.
4. Make loans to other persons except on a temporary basis in connection
with the delivery or receipt of portfolio securities which have been bought
or sold, or by the purchase of bonds, debentures or similar obligations which
have been publicly distributed or of a character usually acquired by
institutional investors or through loans of the fund's portfolio securities,
or to the extent the entry into a repurchase agreement may be deemed a loan.
5. Borrow money in excess of 5% of the value of the fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes.
6. Sell securities short or buy on margin nor pledge or hypothecate any of
the fund's assets.
7. Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts.
8. Invest in the securities of another investment company, except securities
acquired in connection with a merger, consolidation or reorganization; except
to the extent the fund invests its uninvested daily cash balances in shares
of the Franklin Money Fund and other money market funds in the Franklin
Templeton Group of Funds provided (i) its purchases and redemptions of such
money market fund shares may not be subject to any purchase or redemption
fees, (ii) its investments may not be subject to duplication of management
fees, nor to any charge related to the expense of distributing the fund's
shares (as determined under Rule 12b-1, as amended under the federal
securities laws), and (iii) provided aggregate investments by the fund in any
such money market fund do not exceed (a) the greater of (i) 5% of the fund's
total net assets or (ii) $2.5 million, or (b) more than 3% of the outstanding
shares of any such money market fund.
9. Invest in any company for the purpose of exercising control or management.
10. Purchase the securities of any company in which any officer, trustee, or
director of the fund or its investment manager owns more than 1/2 of 1% of
the outstanding securities and in which all of the officers, trustees, and
directors of the fund and its investment manager as a group, own more than 5%
of such securities.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (70)
2120 Lambeth Way
Carmichael, CA 95608
Trustee
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; and director or trustee, as the case may be, of
nine of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
*R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $850 per month plus $810 per meeting attended. As shown above,
the nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the
Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE TRUST*** GROUP OF FUNDS**** EACH SERVES*****
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III $17,000 $165,937 27
Robert F. Carlson $17,000 $17,680 9
S. Joseph Fortunato $16,320 $361,562 51
Roy V. Fox* $ 8,160 $13,600 n/a
Frank W.T. LaHaye** $ 4,080 $141,433 27
</TABLE>
*Resigned, February 26, 1998.
**Appointed, February 26, 1998.
***For the fiscal year ended May 31, 1998, during which time fees at the rate
of $680 per month plus $680 per meeting attended were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of July 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately
179,784 Class I shares and 536,046 Advisor Class shares, or 0.02% and 5.97%,
respectively, of the total outstanding Class I and Advisor Class shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the fund to buy, hold or
sell and the selection of brokers through whom the fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the fund.
Similarly, with respect to the fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100,000,000; 1/24 of 1% of the value of net
assets over $100,000,000 and not over $250,000,000; and 9/240 of 1% of the
value of net assets in excess of $250,000,000. The fee is computed at the
close of business on the last business day of each month. Each class pays its
proportionate share of the management fee.
For the fiscal years ended May 31, 1998, 1997 and 1996, management fees
totaling $15,055,199, $11,610,513 and $9,614,852, respectively, were paid to
Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal years ended May 31, 1998 and 1997, administration
fees totaling $3,236,064 and $1,679,927, respectively, were paid to FT
Services. The fee is paid by Advisers. It is not a separate expense of the
fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the fund's independent auditors. During the fiscal year
ended May 31, 1998, their auditing services consisted of rendering an opinion
on the financial statements of the Trust included in the Trust's Annual
Report to Shareholders for the fiscal year ended May 31, 1998.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
fund is negotiated between Advisers and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. Advisers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of Advisers, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the fund's officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the fund, any portfolio securities tendered by the fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended May 31, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $0, $18,993 and $29,739, respectively.
As of May 31, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Securities laws of states where the fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the fund
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction
fee in the percentages indicated in the table under "How Do I Buy Shares? -
Purchase Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- --------------------------------------------------------
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75%
on sales of $1 million to $2 million, plus 0.60% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases of Class I shares by certain retirement plans
without a front-end sales charge, as discussed in the Prospectus: 1% on sales
of $500,000 to $2 million, plus 0.80% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the Securities Dealer or set off
against other payments due to the dealer if shares are sold within 12 months
of the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the fund a signed shareholder application with the
Letter of Intent section completed. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed, will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered
in your name until you fulfill the Letter. This policy of reserving shares
does not apply to certain retirement plans. If the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds the amount specified under the Letter and is an amount
that would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable
to a single purchase or the dollar amount of the total purchases. If the
amount of your total purchases, less redemptions, is less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
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 NYSE, if that is earlier. The 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 foreign security is valued within the range of
the most recent quoted bid and ask prices. Occasionally events that 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 Net Asset Value
of each class. If events materially affecting the values of these foreign
securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times.
Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the close of the NYSE that
will not be reflected in the computation of the Net Asset Value. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith
by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally
in the form of interest, dividends, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the
fund from such income will be taxable to you as ordinary income, whether you
take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
The fund is required to report the capital gain distributions paid to you
from gains realized on the sale of portfolio securities using the following
categories:
"28% RATE GAINS": gains from securities sold by the fund that were held for
more than one year but not more than 18 months will be taxable to individual
investors at a maximum rate of 28%.
"20% RATE GAINS": gains from securities sold by the fund that were held for
more than 18 months will be taxable to individual investors at a maximum rate
of 20% for individual investors in the 28% or higher federal income tax
brackets; at a maximum rate of 10% for investors in the 15% federal income
tax bracket.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets; 8% for
individuals in the 15% federal income tax bracket. For individuals in the
15% bracket, qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
The fund will advise you after the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. Please call Fund Information to
request a copy. Questions concerning each investor's personal tax reporting
should be addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by
the fund. Similarly, foreign exchange losses realized by the fund on the
sale of debt instruments are generally treated as ordinary losses by the
fund. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce the fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce
the fund's ordinary income distributions to you, and may cause some or all of
the fund's previously distributed income to be classified as a return of
capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the total assets of the fund
at the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund. If this election is made, you will be (i)
required to include in your gross income your pro rata share of foreign
source income (including any foreign taxes paid by the fund), and, (ii)
entitled to either deduct your share of such foreign taxes in computing your
taxable income or to claim a credit for such taxes against your U.S. income
tax, subject to certain limitations under the Code. You will be informed by
the fund at the end of each calendar year regarding the availability of any
such foreign tax credits and the amount of foreign source income (including
any foreign taxes paid by the fund). If the fund elects to pass-through to
you the foreign income taxes that it has paid, you will be informed at the
end of the calendar year of the amount of foreign taxes paid and foreign
source income that must be included on your federal income tax return. If
the fund invests 50% or less of its total assets in securities of foreign
corporations, it will not be entitled to pass-through to you your pro rata
share of the foreign taxes paid by the fund. In this case, these taxes will
be taken as a deduction by the fund, and the income reported to you will be
the net amount after these deductions.
The procedures by which investors in funds that invest in foreign securities
can claim tax credits on their individual income tax returns for the foreign
taxes paid by the fund have been simplified for tax years beginning in 1998.
These provisions allow investors who claim a credit for foreign taxes paid of
$300 or less on a single return or $600 or less on a joint return during any
year (all of which must be reported on IRS Form 1099-DIV from the fund to the
investor) to bypass the burdensome and detailed reporting requirements on the
supporting foreign tax credit schedule (Form 1116) and report foreign taxes
paid directly on page 2 of Form 1040.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
Any long-term capital gains you realize may be taxable at different rates
depending on the length of time you held your fund shares. Any loss incurred
on the redemption or exchange of shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the fund on those shares
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you purchase other shares
in the fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax
advisor to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that only a small percentage of the dividends paid by the
fund for the most recent fiscal year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. Dividends so designated by the fund must be attributable
to dividends earned by the fund from U.S. corporations that were not
debt-financed.
The amount that the fund may designate as eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
were earned by the fund were debt-financed or held by the fund for less than
a 46 day period during a 90 day period beginning 45 days before the
ex-dividend date of the corporate stock. Similarly, if your fund shares are
debt-financed or held by you for less than this same 46 day period, then the
dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise,
lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options, futures and forward contracts entered into
by the fund are generally governed by section 1256 of the Code. These
"section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held
by the fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Under proposed legislation, the 60%
long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors
in the 28% or higher federal income tax brackets, or at a maximum rate of 10%
for investors in the 15% federal income tax bracket. Even though
marked-to-market, gains and losses realized on foreign currency and foreign
security investments will generally be treated as ordinary income. The
effect of section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the fund. The acceleration of income on section 1256 positions
may require the fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash
flows from other sources such as the sale of fund shares. In these ways, any
or all of these rules may affect the amount, character and timing of income
distributed to you by the fund.
When the fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. The fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. The fund will generally be treated as making a constructive
sale when it: 1) enters into a short sale on the same property, 2) enters
into an offsetting notional principal contract, or 3) enters into a futures
or forward contract to deliver the same or substantially similar property.
Other transactions (including certain financial instruments called collars)
will be treated as constructive sales as provided in Treasury regulations to
be published. There are also certain exceptions that apply for transactions
that are closed before the end of the 30th day after the close of the taxable
year.
Distributions paid to you by the fund of ordinary income and short-term
capital gains arising from the fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the fund's net investment company taxable
income, which, in turn, will affect the amount of income to be distributed to
you by the fund.
If the fund's section 988 losses exceed the fund's other net investment
company taxable income during a taxable year, the fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your fund shares will be treated as
capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The fund may
invest in shares of foreign corporation which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income
is investment-type income.
If the fund receives an "excess distribution" with respect to PFIC stock, the
fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the fund
held the PFIC shares. The fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
fund. Certain distributions from a PFIC as well as gain from the sale of
PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
The fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, under
another election that involves marking-to-market the fund's PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), unrealized gains would be treated as though they were realized. The
fund would also be allowed an ordinary deduction for the excess, if any, of
the adjusted basis of its investment in the PFIC stock over its fair market
value at the end of the taxable year. This deduction would be limited to the
amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the fund were to make this second PFIC
election, tax at the fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the fund (if any), the amounts distributable to you by the
fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the fund acquires shares in that corporation. While
the fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the fund's expected return is
attributable to the time value of the fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
Section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped
preferred stock is defined as certain preferred stock issues where ownership
of the stock has been separated from the right to receive dividends that have
not yet become payable. The stock must have a fixed redemption price, must
not participate substantially in the growth of the issuer, and must be
limited and preferred as to dividends. The difference between the redemption
price and purchase price is taken into fund income over the term of the
instrument as if it were original issue discount. The amount that must be
included in each period generally depends on the original yield to maturity,
adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
The fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on
defaulted obligations and to distribute such income to you even though it is
not currently receiving interest or principal payments on such obligations.
In order to generate cash to satisfy these distribution requirements, the
fund may be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as
the sale of fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended May 31, 1998, 1997 and 1996, were
$19,440,869, $12,822,146 and $10,228,931, respectively. After allowances to
dealers, Distributors retained $974,528, $786,932 and $519,430 in net
underwriting discounts and commissions and received $62,723, $68,186 and
$14,004, in connection with redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under the
Rule 12b-1 plan for each class, as discussed below. Except as noted,
Distributors received no other compensation from the fund for acting as
underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.15% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.15% by the average daily net assets represented by
Class I shares of the fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
Class I shares of the fund that were acquired before May 1, 1994 ("Old
Assets"). These fees will be paid to the current Securities Dealer of record
on the account. In addition, until such time as the maximum payment of 0.15%
is reached on a yearly basis, up to an additional 0.02% will be paid to
Distributors under the plan. The payments made to Distributors will be used
by Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%)
of the average daily net assets of Class I and, as Class I shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
plan will also increase (but will not exceed 0.15% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class I plan, the plan permits the Board to allow the fund to pay a
full 0.15% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class
I plan.
The Class I plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
fund.
Under the Class II plan, the fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the fund, Advisers or Distributors or other parties on behalf of
the fund, Advisers or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of each plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the Board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the Board with such other
information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended May 31, 1998, Distributors had eligible
expenditures of $3,950,335 and $3,373,031 for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class I and Class
II plans, respectively, of which the fund paid Distributors $3,597,562 and
$1,578,594 under the Class I and Class II plans.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended May 31, 1998, was 7.50%, 10.24% and 10.16%, respectively. The
average annual total return for Class II for the one-year period ended May
31, 1998, and for the period from inception (May 16, 1995) through May 31,
1998, was 9.56% and 11.28%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ER = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-, five- and ten-year periods ended May 31, 1998, was 7.50%, 62.84%
and 163.16%, respectively. The cumulative total return for Class II for the
one-year period ended May 31, 1998, and for the period from inception (May
16, 1995) through May 31, 1998, was 9.56% and 38.42%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by the fund. It is calculated by dividing the net investment income per share
of each class earned during a 30-day base period by the applicable maximum
Offering Price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the class during the base period. The yield for each class
for the 30-day period ended May 31, 1998, was 7.99% for Class I and 7.72% for
Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is usually computed
by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum Offering Price. The
current distribution rate differs from the current yield computation because
it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing and
short-term capital gains and is calculated over a different period of time.
The current distribution rate for each class for the 30-day period ended May
31, 1998, was 8.49% for Class I and 8.21% for Class II.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock
Index is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
o) Salomon Brothers Combined Corporate Index - an unmanaged composite of the
Salomon High Yield Market Index and the corporate component of the Salomon
Broad Investment Grade Index. The index includes corporate issues rated AAA
to CCC. Comparisons of performance assume reinvestment of dividends.
p) CS First Boston High Yield Index - an unmanaged index constructed to
mirror the public high yield debt market. The index represents a total of 250
sectors and contains issues rated BBB and below. Comparisons of performance
assume reinvestment of dividends.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.
As of July 2, 1998, the principal shareholders of the fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
- ---------------------------------------------------------------------------
ADVISOR CLASS
F/T Fund Allocator 758,752 8.44%
Conservative Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
F/T Fund Allocator 909,529 10.12%
Moderate Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
F/T Fund Allocator 613,226 6.82%
Growth Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
FTTC Trust Operations 534,247 5.95%
Martin Wiskeman IRA
P.O. Box 7519
San Mateo, CA 94403-7519
FTTC TTEE For ValuSelect 946,983 10.54%
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Richard C. Stoker Ttee 1,040,214 11.58%
Richard C. Stoker Living Trust
10205 Collins Ave., Apt. #109
Bal Harbour, FL 33154-1426
Andrew R. Johnson
P.O. Box 370100
Las Vegas, NV 89137-0100 460,707 5.13%
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended May 31, 1998, including
the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund's Class I and Class II shares dated
October 1, 1998, which we may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings [, which are also applicable to municipal
paper investments permitted to be made by the fund,] are opinions of the
ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
FRANKLIN'S
AGE HIGH
INCOME FUND -
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings......................................
- --------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The AGE High Income Fund is a diversified series of Franklin High Income
Trust (the "Trust"), an open-end management investment company.
The Prospectus, dated October 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund.
For a free copy, call 1-800/DIAL BEN.
This SAI describes the fund's Advisor Class shares. The fund currently offers
other share classes with different sales charge and expense structures, which
affect performance. To receive more information about the fund's other share
classes, contact your investment representative or call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The
owner of an equity security may participate in a company's success through
the receipt of dividends which are distributions of earnings by the company
to its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred
stock. Preferred stockholders typically receive greater dividends but may
receive less appreciation than common stockholders and may have greater
voting rights as well. Equity securities may also include warrants or
rights. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. Debt securities represent an obligation of the issuer to
repay a loan of money to it, and generally, provide for the payment of
interest. These include bonds, notes and debentures; commercial paper;
convertible securities; and bankers' acceptances. A company typically meets
its payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity
securities. Bonds, notes, debentures and commercial paper differ in the
length of the issuer's payment schedule, with bonds carrying the longest
repayment schedule and commercial paper the shortest.
The fund may buy certain bonds issued at a discount which defer payment of
interest or pay no interest until maturity, known as zero-coupon bonds, or
which pay the interest through the issuance of additional bonds, known as
pay-in-kind bonds. For federal tax purposes, holders of these bonds, such as
the fund, are deemed to receive interest over the life of the bonds and are
taxed as if interest were paid on a current basis although the holder does
not receive cash interest payments until the bonds mature.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates
higher risk. The fund may buy debt securities regardless of their rating and
up to 100% of the portfolio may be invested in non-investment grade
securities (rated lower than BBB by S&P or Baa by Moody's).
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisers may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993, depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on Advisers' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors above also apply to lower-quality zero-coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, the fund will not receive any cash until
the cash payment date. If the issuer defaults, the fund may not obtain any
return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Pay-in-kind securities pay interest by issuing more bonds. The fund is deemed
to receive interest over the life of these bonds and is treated as if the
interest were paid on a current basis for federal income tax purposes,
although the fund does not receive any cash interest payments until maturity
or the cash payment date. Accordingly, during times when the fund does not
receive any cash interest payments on its zero-coupon, deferred interest or
pay-in-kind securities, it may have to sell portfolio securities to meet
distribution requirements and these sales may be subject to the risk factors
discussed above. The fund is not limited in the amount of its assets that may
be invested in these types of securities.
TRADE CLAIMS. The fund may invest a portion of its assets in trade claims
purchased from creditors of companies in financial difficulty. For purchasers
such as the fund, trade claims offer the potential for profits since they are
often purchased at a significantly discounted value and, consequently, may
generate capital appreciation in the event that the value of the claim
increases as the debtor's financial position improves. If the debtor is able
to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade
claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding. Because of the nature and risk of trade
claims, the fund will limit its investment in these instruments to 5% of its
net assets at the time of purchase.
LOAN PARTICIPATIONS. The fund may acquire loan participations and other
related direct or indirect bank debt obligations ("Loan Participations"), in
which the fund will buy from a lender a portion of a larger loan that the
lender has made to a borrower. Generally, Loan Participations are sold
without guarantee or recourse to the lending institution and are subject to
the credit risks of both the borrower and the lending institution. Loan
Participations, however, may enable the fund to acquire an interest in a loan
from a financially strong borrower which it could not do directly. While Loan
Participations generally trade at par value, the fund will be permitted to
buy Loan Participations that sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved,
Loan Participations may appreciate in value.
The fund's investment in Loan Participations, all of which may have
speculative characteristics and some of which may be in default, and other
defaulted securities may not exceed 15% of the fund's net assets at the time
of investment.
RESTRICTED SECURITIES. A restricted security is one that has been purchased
through a private offering and cannot be sold without prior registration
under the Securities Act of 1933, as amended (the "1933 Act") unless the sale
is pursuant to an exemption under the 1933 Act. In recent years, the fund's
portfolio has included several issues of restricted securities.
Notwithstanding the restriction on the sale of restricted securities, a
secondary market exists for many of these securities. As with other
securities in the fund's portfolio, if there are readily available market
quotations for a restricted security, it will be valued, for purposes of
determining the fund's Net Asset Value, within the range of the bid and ask
prices. If no quotations are available, the security will be valued at fair
value in accordance with procedures adopted by the Board. The fund may
receive commitment fees when it buys restricted securities. For example, the
transaction may involve an individually negotiated purchase of short-term
increasing rate notes. Maturities for this type of security typically range
from one to five years. These notes are usually issued as temporary or
"bridge" financing to be replaced ultimately with permanent financing for the
project or transaction which the issuer seeks to finance. Typically, at the
time of commitment, the fund receives the security and sometimes a cash
commitment fee. Because the transaction could possibly involve a delay
between the time the fund commits to buy the security and the fund's payment
for and receipt of that security, the fund will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities
with an aggregate value equal to the amount of its commitments until payment
is made. The fund will not buy restricted securities to generate commitment
fees, although the receipt of fees will help the fund achieve its principal
objective of earning a high level of current income.
The fund may receive consent fees in a variety of situations. For example,
the fund may receive consent fees if an issuer seeks to "call" a bond it has
issued which does not contain a provision permitting the issuer to call the
bond, or if the fund's consent is required to facilitate a merger or other
business combination transaction. Consent fees are received only
occasionally, are privately negotiated, and may be in any amount. As is the
case with commitment fees, the fund will not buy securities with a view to
generating consent fees, although the receipt of such fees is consistent with
the fund's principal investment objective.
ILLIQUID SECURITIES. It is the policy of the fund that illiquid securities
(including illiquid equity securities, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days
duration, and other securities that are not readily marketable) may not
constitute more than 10% of the value of the fund's net assets. Generally, an
"illiquid security" is any security that cannot be disposed of promptly and
in the ordinary course of business at approximately the amount at which the
fund has valued the instrument. Subject to this limitation, the Board has
authorized the fund to invest in restricted securities to the extent
consistent with the fund's investment objectives and has authorized the fund
to treat restricted securities as liquid if Advisers determines on a daily
basis that there is a liquid institutional or other market for the
securities. For example, the fund may treat as liquid restricted securities
that may be freely transferred among qualified institutional buyers pursuant
to Rule 144A under the 1933 Act and for which a liquid institutional market
has developed. The Board will review on an on-going basis any determination
by Advisers to treat a restricted security as liquid, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, Advisers and the Board will take into account
the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and
the number of other potential buyers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the fund invests in restricted securities that are deemed liquid, the general
level of illiquidity may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy debt
securities on a "when-issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities with payment and
delivery scheduled for a future time. Purchases of debt securities on a
when-issued or delayed delivery basis are subject to market fluctuation and
to the risk that the value or yields at delivery may be more or less than the
purchase price or the yields available when the transaction was entered into.
Although the fund will generally buy debt securities on a when-issued basis
with the intention of acquiring such securities, it may sell them before the
settlement date if it deems the sale to be advisable. The fund will not enter
into these transactions for investment leverage. When the fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until payment is made.
In when-issued and delayed delivery transactions, the fund relies on the
seller to complete the transaction. The other party's failure may cause the
fund to miss a price or yield considered advantageous. Securities purchased
on a when-issued or delayed delivery basis do not generally earn interest
until their scheduled delivery date. The fund is not subject to any
percentage limit on the amount of its assets which may be invested in
when-issued debt securities.
OPTIONS ON SECURITIES. Although it does not currently anticipate that it will
do so, the fund may write covered call options that are listed for trading on
a national securities exchange. This means that the fund will only write
options on securities that the fund actually owns. A call option gives the
buyer the right to buy the security on which the option is written for a
specified period of time at a price agreed to at the time the option is sold,
even though that price may be less than the value of the security at the time
the option is exercised. When the fund sells covered call options, the fund
receives a cash premium which can be used in whatever way the fund deems to
be most beneficial. In writing covered call options, the fund is subject to
the risk that in the event of a price increase on the underlying security
which would likely trigger the exercise of the call option, the fund will not
participate in the increase in price beyond the exercise price. If the fund
determines that it does not wish to deliver the underlying securities from
its portfolio, it may have to enter into a "closing purchase transaction" and
pay a premium which may be higher or lower than the premium it received for
writing the option. There is no assurance that a closing purchase transaction
will be available in every instance.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
with other kinds of options, however, the writing of an option on foreign
currency will be only a partial hedge, up to the amount of the premium
received, and the fund could be required to buy or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may be an effective hedge against fluctuations
in exchange rates although, in the event of rate movements adverse to the
fund's position, the fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts ("Forward Contracts") to attempt to minimize the risk to
the fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is individually
negotiated and is privately traded by currency traders and their customers.
The fund will either cover its position in such a transaction or maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of any such
commitment until payment is made.
INTEREST RATE SWAPS. The fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest
rate obligations. One obligation has an interest rate fixed to maturity while
the other has an interest rate that changes with changes in a designated
benchmark, such as the London Interbank Offered Rate ("LIBOR"), prime,
commercial paper, or other benchmarks. The obligations to make repayment of
principal on the underlying securities are not transferred. These
transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed rate obligation will transfer
the obligation to the intermediary, and the entity will then be obligated to
pay to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate
obligation which substantially mirrors the obligation desired by the first
entity. In return for assuming a fixed obligation, the second entity will pay
the intermediary all sums that the intermediary pays on behalf of the first
entity, plus an arrangement fee and other agreed upon fees.
The fund intends to participate in interest rate swaps with regard to
obligations held in the fund's portfolio. To the extent, however, the fund
does not own the underlying obligation, the fund will maintain, in a
segregated account with its custodian bank, cash or liquid debt securities
with an aggregate value equal to the amount of the fund's outstanding swap
obligation.
Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly
available in the credit market, while permitting the party desiring a fixed
rate obligation the opportunity to acquire a fixed rate obligation, also
frequently at a price lower than is available in the capital markets. The
success of the transaction depends in large part on the availability of fixed
rate obligations at a low enough coupon rate to cover the cost involved.
FOREIGN SECURITIES. The fund will not invest in any equity securities issued
without stock certificates or debt securities that are not issues and
transferable in fully registered form. The fund does not consider securities
it acquires outside the U.S. that are publicly traded in the U.S., on a
foreign securities exchange, or in a foreign securities market to be illiquid
so long as the fund acquires and holds the security with the intention of
reselling the security in the foreign trading market, the fund reasonably
believes it can readily dispose of the security for cash in the U.S. or
foreign market, and current market quotations are readily available.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
UNSEASONED ISSUERS. It is the present policy of the fund (which may be
changed without shareholder approval) not to invest more than 5% of its total
assets in companies that have a record of less than three years continuous
operation, including predecessors.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. Advisers will
monitor the value of such securities daily to determine that the value equals
or exceeds the repurchase price. Repurchase agreements may involve risks in
the event of default or insolvency of the seller, including possible delays
or restrictions upon the fund's ability to dispose of the underlying
securities. The fund will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the fund's Board, I.E., banks
or broker-dealers which have been determined by Advisers to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% of its total
assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail. The fund may pay reasonable finders', borrowers', administrative, and
custodial fees in connection with a loan of its securities.
BORROWING. As a fundamental policy, the fund does not borrow money or
mortgage or pledge any of its assets, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 5% of its total
assets.
SECURITIES TRANSACTIONS OF THE FUND
Normally, the fund will buy securities with the intention of holding them for
the long term. It may on occasion, however, buy securities with the
expectation of selling them within a short period of time. The fund may make
changes in particular portfolio holdings whenever it determines that a
security is no longer suitable for the fund's portfolio or that another
security appears to offer a relatively greater opportunity, and will make
such changes without regard to the length of time a security has been held.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Invest more than 25% of the value of the fund's total assets in one
particular industry.
2. Purchase securities, if the purchase would cause the fund at that time to
have more than 5% of the value of its total assets invested in the securities
of any one company or to own more than 10% of the voting securities of any
one company (except obligations issued or guaranteed by the U.S. government).
3. Underwrite or engage in the agency distributions of securities of other
issuers, except insofar as the fund may be technically deemed an underwriter
in connection with the disposition of securities in its portfolio.
4. Make loans to other persons except on a temporary basis in connection
with the delivery or receipt of portfolio securities which have been bought
or sold, or by the purchase of bonds, debentures or similar obligations which
have been publicly distributed or of a character usually acquired by
institutional investors or through loans of the fund's portfolio securities,
or to the extent the entry into a repurchase agreement may be deemed a loan.
5. Borrow money in excess of 5% of the value of the fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes.
6. Sell securities short or buy on margin nor pledge or hypothecate any of
the fund's assets.
7. Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts.
8. Invest in the securities of another investment company, except securities
acquired in connection with a merger, consolidation or reorganization; except
to the extent the fund invests its uninvested daily cash balances in shares
of the Franklin Money Fund and other money market funds in the Franklin
Templeton Group of Funds provided (i) its purchases and redemptions of such
money market fund shares may not be subject to any purchase or redemption
fees, (ii) its investments may not be subject to duplication of management
fees, nor to any charge related to the expense of distributing the fund's
shares (as determined under Rule 12b-1, as amended under the federal
securities laws), and (iii) provided aggregate investments by the fund in any
such money market fund do not exceed (a) the greater of (i) 5% of the fund's
total net assets or (ii) $2.5 million, or (b) more than 3% of the outstanding
shares of any such money market fund.
9. Invest in any company for the purpose of exercising control or management.
10. Purchase the securities of any company in which any officer, trustee, or
director of the fund or its investment manager owns more than 1/2 of 1% of
the outstanding securities and in which all of the officers, trustees, and
directors of the fund and its investment manager as a group, own more than 5%
of such securities.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (70)
2120 Lambeth Way
Carmichael, CA 95608
Trustee
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; and director or trustee, as the case may be, of
nine of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
*R. Martin Wiskemann (71)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $850 per month plus $810 per meeting attended. As shown above,
the nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the
Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE TRUST*** GROUP OF FUNDS**** EACH SERVES*****
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III $17,000 $165,937 27
Robert F. Carlson $17,000 $17,680 9
S. Joseph Fortunato $16,320 $361,562 51
Roy V. Fox* $ 8,160 $13,600 n/a
Frank W.T. LaHaye** $ 4,080 $141,433 27
</TABLE>
*Resigned, February 26, 1998.
**Appointed, February 26, 1998.
***For the fiscal year ended May 31, 1998, during which time fees at the rate
of $680 per month plus $680 per meeting attended were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of July 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately
179,784 Class I shares and 536,046 Advisor Class shares, or 0.02% and 5.97%,
respectively, of the total outstanding Class I and Advisor Class shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the fund to buy, hold or
sell and the selection of brokers through whom the fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the fund.
Similarly, with respect to the fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100,000,000; 1/24 of 1% of the value of net
assets over $100,000,000 and not over $250,000,000; and 9/240 of 1% of the
value of net assets in excess of $250,000,000. The fee is computed at the
close of business on the last business day of each month. Each class of the
fund's shares pays its proportionate share of the management fee.
For the fiscal years ended May 31, 1998, 1997 and 1996, management fees
totaling $15,055,199, $11,610,513 and $9,614,852, respectively, were paid to
Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal years ended May 31, 1998 and 1997, administration
fees totaling $3,236,064 and $1,679,927, respectively, were paid to FT
Services. The fee is paid by Advisers. It is not a separate expense of the
fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the fund's independent auditors. During the fiscal year
ended May 31, 1998, their auditing services consisted of rendering an opinion
on the financial statements of the Trust included in the Trust's Annual
Report to Shareholders for the fiscal year ended May 31, 1998.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
fund is negotiated between Advisers and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. Advisers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of Advisers, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the fund's officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the fund, any portfolio securities tendered by the fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended May 31, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $0, $18,993 and $29,739, respectively.
As of May 31, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities laws of states where the fund
offers its shares may differ from federal law. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates
provide financial support to various Securities Dealers that sell shares of
the Franklin Templeton Group of Funds. This support is based primarily on the
amount of sales of fund shares. The amount of support may be affected by:
total sales; net sales; levels of redemptions; the proportion of a Securities
Dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a Securities Dealer's support of, and participation in, Distributors'
marketing programs; a Securities Dealer's compensation programs for its
registered representatives; and the extent of a Securities Dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to Securities Dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain Securities Dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
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 NYSE, if that is earlier. The 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 foreign security is valued within the range of
the most recent quoted bid and ask prices. Occasionally events that 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 Net Asset Value.
If events materially affecting the values of these foreign securities occur
during this period, the securities will be valued in accordance with
procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in
the computation of the Net Asset Value. If events materially affecting the
values of these securities occur during this period, the securities will be
valued at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally
in the form of interest, dividends, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the
fund from such income will be taxable to you as ordinary income, whether you
take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
The fund is required to report the capital gain distributions paid to you
from gains realized on the sale of portfolio securities using the following
categories:
"28% RATE GAINS": gains from securities sold by the fund that were held for
more than one year but not more than 18 months will be taxable to individual
investors at a maximum rate of 28%.
"20% RATE GAINS": gains from securities sold by the fund that were held for
more than 18 months will be taxable to individual investors at a maximum rate
of 20% for individual investors in the 28% or higher federal income tax
brackets; at a maximum rate of 10% for investors in the 15% federal income
tax bracket.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets; 8% for
individuals in the 15% federal income tax bracket. For individuals in the
15% bracket, qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
The fund will advise you after the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. Please call Fund Information to
request a copy. Questions concerning each investor's personal tax reporting
should be addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by
the fund. Similarly, foreign exchange losses realized by the fund on the
sale of debt instruments are generally treated as ordinary losses by the
fund. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce the fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce
the fund's ordinary income distributions to you, and may cause some or all of
the fund's previously distributed income to be classified as a return of
capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the total assets of the fund
at the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund. If this election is made, you will be (i)
required to include in your gross income your pro rata share of foreign
source income (including any foreign taxes paid by the fund), and, (ii)
entitled to either deduct your share of such foreign taxes in computing your
taxable income or to claim a credit for such taxes against your U.S. income
tax, subject to certain limitations under the Code. You will be informed by
the fund at the end of each calendar year regarding the availability of any
such foreign tax credits and the amount of foreign source income (including
any foreign taxes paid by the fund). If the fund elects to pass-through to
you the foreign income taxes that it has paid, you will be informed at the
end of the calendar year of the amount of foreign taxes paid and foreign
source income that must be included on your federal income tax return. If
the fund invests 50% or less of its total assets in securities of foreign
corporations, it will not be entitled to pass-through to you your pro rata
share of the foreign taxes paid by the fund. In this case, these taxes will
be taken as a deduction by the fund, and the income reported to you will be
the net amount after these deductions.
The procedures by which investors in funds that invest in foreign securities
can claim tax credits on their individual income tax returns for the foreign
taxes paid by the fund have been simplified for tax years beginning in 1998.
These provisions allow investors who claim a credit for foreign taxes paid of
$300 or less on a single return or $600 or less on a joint return during any
year (all of which must be reported on IRS Form 1099-DIV from the fund to the
investor) to bypass the burdensome and detailed reporting requirements on the
supporting foreign tax credit schedule (Form 1116) and report foreign taxes
paid directly on page 2 of Form 1040.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
Any long-term capital gains you realize may be taxable at different rates
depending on the length of time you held your fund shares. Any loss incurred
on the redemption or exchange of shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the fund on those shares
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you purchase other shares
in the fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax
advisor to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that only a small percentage of the dividends paid by the
fund for the most recent fiscal year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. Dividends so designated by the fund must be attributable
to dividends earned by the fund from U.S. corporations that were not
debt-financed.
The amount that the fund may designate as eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
were earned by the fund were debt-financed or held by the fund for less than
a 46 day period during a 90 day period beginning 45 days before the
ex-dividend date of the corporate stock. Similarly, if your fund shares are
debt-financed or held by you for less than this same 46 day period, then the
dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise,
lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options, futures and forward contracts entered into
by the fund are generally governed by section 1256 of the Code. These
"section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held
by the fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Under proposed legislation, the 60%
long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors
in the 28% or higher federal income tax brackets, or at a maximum rate of 10%
for investors in the 15% federal income tax bracket. Even though
marked-to-market, gains and losses realized on foreign currency and foreign
security investments will generally be treated as ordinary income. The
effect of section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the fund. The acceleration of income on section 1256 positions
may require the fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash
flows from other sources such as the sale of fund shares. In these ways, any
or all of these rules may affect the amount, character and timing of income
distributed to you by the fund.
When the fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. The fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. The fund will generally be treated as making a constructive
sale when it: 1) enters into a short sale on the same property, 2) enters
into an offsetting notional principal contract, or 3) enters into a futures
or forward contract to deliver the same or substantially similar property.
Other transactions (including certain financial instruments called collars)
will be treated as constructive sales as provided in Treasury regulations to
be published. There are also certain exceptions that apply for transactions
that are closed before the end of the 30th day after the close of the taxable
year.
Distributions paid to you by the fund of ordinary income and short-term
capital gains arising from the fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the fund's net investment company taxable
income, which, in turn, will affect the amount of income to be distributed to
you by the fund.
If the fund's section 988 losses exceed the fund's other net investment
company taxable income during a taxable year, the fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your fund shares will be treated as
capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The fund may
invest in shares of foreign corporation which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income
is investment-type income.
If the fund receives an "excess distribution" with respect to PFIC stock, the
fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the fund
held the PFIC shares. The fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
fund. Certain distributions from a PFIC as well as gain from the sale of
PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
The fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, under
another election that involves marking-to-market the fund's PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), unrealized gains would be treated as though they were realized. The
fund would also be allowed an ordinary deduction for the excess, if any, of
the adjusted basis of its investment in the PFIC stock over its fair market
value at the end of the taxable year. This deduction would be limited to the
amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the fund were to make this second PFIC
election, tax at the fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the fund (if any), the amounts distributable to you by the
fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the fund acquires shares in that corporation. While
the fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the fund's expected return is
attributable to the time value of the fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
Section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped
preferred stock is defined as certain preferred stock issues where ownership
of the stock has been separated from the right to receive dividends that have
not yet become payable. The stock must have a fixed redemption price, must
not participate substantially in the growth of the issuer, and must be
limited and preferred as to dividends. The difference between the redemption
price and purchase price is taken into fund income over the term of the
instrument as if it were original issue discount. The amount that must be
included in each period generally depends on the original yield to maturity,
adjusted for any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
The fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on
defaulted obligations and to distribute such income to you even though it is
not currently receiving interest or principal payments on such obligations.
In order to generate cash to satisfy these distribution requirements, the
fund may be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as
the sale of fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation.
For periods before January 2, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the fund. For periods after January 2, 1997, standardized
performance quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
The average annual total return for Advisor Class for the one-, five- and
ten-year periods ended May 31, 1998, was 12.46%, 11.20% and 10.66%,
respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at Net Asset Value. Cumulative total return, however, will be based on the
actual return for a specified period rather than on the average return over
the periods indicated above. The cumulative total return for Advisor Class
for the one-, five- and ten-year periods ended May 31, 1998, was 12.46%,
70.07% and 175.31%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the Net Asset Value per share on the last day
of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders during the base period. The
yield for Advisor Class for the 30-day period ended May 31, 1998, was 8.44%.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders of the fund. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share during a certain period
and dividing that amount by the current Net Asset Value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rate for Advisor Class for the 30-day period ended May 31, 1998,
was 8.98%.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) IndustriaL
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanageD
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock
Index is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
o) Salomon Brothers Combined Corporate Index - an unmanaged composite of the
Salomon High Yield Market Index and the corporate component of the Salomon
Broad Investment Grade Index. The index includes corporate issues rated AAA
to CCC. Comparisons of performance assume reinvestment of dividends.
p) CS First Boston High Yield Index - an unmanaged index constructed to
mirror the public high yield debt market. The index represents a total of 250
sectors and contains issues rated BBB and below. Comparisons of performance
assume reinvestment of dividends.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
As of July 2, 1998, the principal shareholders of the fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
- -------------------------------------------------------------------------
ADVISOR CLASS
F/T Fund Allocator 758,752 8.44%
Conservative Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
F/T Fund Allocator 909,529 10.12%
Moderate Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
F/T Fund Allocator 613,226 6.82%
Growth Target Fund
c/o Fund Accounting Department
1810 Gateway, 3rd Floor
San Mateo, CA 94404-2470
FTTC Trust Operations 534,247 5.95%
Martin Wiskeman IRA
P.O. Box 7519
San Mateo, CA 94403-7519
FTTC TTEE For ValuSelect 946,983 10.54%
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Richard C. Stoker Ttee 1,040,214 11.58%
Richard C. Stoker Living Trust
10205 Collins Ave., Apt. #109
Bal Harbour, FL 33154-1426
Andrew R. Johnson
P.O. Box 370100
Las Vegas, NV 89137-0100 460,707 5.13%
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended May 31, 1998, including
the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the fund dated
October 1, 1998, which we may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings [, which are also applicable to municipal
paper investments permitted to be made by the fund,] are opinions of the
ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
FRANKLIN HIGH INCOME TRUST
FILE NOS. 2-30203
811-1608
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
(1) Audited Financial Statements incorporated herein by reference to
the Registrant's Annual Report to shareholders dated May 31, 1998
as filed with the SEC electronically on Form Type N-30D on July
17, 1998
(i) Statement of Investments - May 31, 1998
(ii) Statement of Assets and Liabilities - May 31, 1998
(iii) Statement of Operations - for the year ended May 31, 1998
(iv) Statements of Changes in Net Assets - for the years ended
May 31, 1998 and 1997
(v) Notes to Financial Statements
(vi) Report of Independent Auditors
b) Exhibits:
The following exhibits are incorporated by reference except exhibits
8(iii), 8(iv), 9(i), 10(i), 11(i), 17(i), 17(ii), 27(i), 27(ii), and
27(iii) which are attached herewith
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated May 14, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(ii) Certificate of Amendment of Agreement and Declaration of
Trust of Age High Income Fund dated July 15, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(iii) Certificate of Trust of Age High Income Fund dated May 14,
1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(iv) Certificate of Amendment to the Certificate of Trust of Age
High Income Fund dated July 15, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 36 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 2, 1996
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated September 13, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc. dated
September 13, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(iii) Amendment dated May 7, 1997, to the Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
(iv) Amendment dated February 27, 1998, to Exhibit A of the
Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services Inc.
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
(i) Opinion and Consent of Counsel dated July 14, 1998
(11) copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
registration statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated July 17, 1998
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
Not Applicable
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Class I Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
September 13, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(ii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
September 13, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(16) schedule for computation of each performance quotation provided
in the registration statement in response to Item 22 (which need
not be audited)
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated March 19, 1998
(ii) Certificate of Secretary dated March 19, 1998
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Multiple Class Plan dated September 27, 1996
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: September 30, 1997
(27) Financial Data Schedule
(i) Age High Income Fund - Class I
(ii) Age High Income Fund - Class II
(iii) Age High Income Fund - Advisor Class
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1998, the number of record holders of the only classes of
securities of the Registrant was as follows:
Number of Record Holders
-----------------------------------------------
Title of Class CLASS I CLASS II ADVISOR CLASS
Capital Stock 133,405 20,109 363
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group of
Funds. In addition, Mr. Charles B. Johnson was formerly a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors of
the Investment Manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Trust or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
21st day of July, 1998
FRANKLIN HIGH INCOME TRUST
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated
Rupert H. Johnson, Jr.* Trustee and Principal
Rupert H. Johnson Executive Officer
Dated: July 21, 1998
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: July 21, 1998
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: July 21, 1998
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: July 21, 1998
Harmon E. Burns* Trustee
Harmon E. Burns Dated: July 21, 1998
Robert F. Carlson* Trustee
Robert F. Carlson Dated: July 21, 1998
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: July 21, 1998
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: July 21, 1998
R. Martin Wiskemann* Trustee
R. Martin Wiskemann Dated: July 21, 1998
*By: /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN HIGH INCOME TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
EXHIBIT NO. DESCRIPTION
EX-99.B1(i) Agreement and Declaration of Trust *
dated May 14, 1996
EX-99.B1(ii) Certificate of Amendment of *
Agreement and Declaration of Trust
of Age High Income Fund dated July
15, 1996
EX-99.B1(iii) Certificate of Trust of Age High *
Income Fund dated May 14, 1996
EX-99.B1(iv) Certificate of Amendment to the *
Certificate of Trust of Age High
Income Fund dated July 15, 1996
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated September 13, 1996
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc. dated September 13, 1996
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors,
Inc. and securities dealers
EX-99.B8(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(iii) Amendment dated May 7, 1997, to Attached
the Master Custody Agreement
between Registrant and Bank of New
York dated February 16, 1996
EX-99.B8(iv) Amendment dated February 27, 1998, Attached
to Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February
16, 1996
EX-99.B9(i) Subcontract for Fund Attached
Administrative Services dated
October 1, 1996 and Amendment
thereto dated April 30, 1998
between Franklin Advisers, Inc.
and Franklin Templeton Services
Inc.
EX-99.B10(i) Opinion and Consent of Counsel Attached
dated July 14, 1998
EX-99.B11(i) Consent of Independent Auditors Attached
dated July 17, 1998
EX-99.B15(i) Class I Distribution Plan pursuant *
to Rule 12b-1 between Registrant
and Franklin/Templeton
Distributors, Inc. dated September
13, 1996
EX-99.B15(ii) Class II Distribution Plan *
pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton
Distributors, Inc. dated September
13, 1996
EX-99.B17(i) Power of Attorney dated March 19, Attached
1998
EX-99.B17(ii) Certificate of Secretary dated Attached
March 19, 1998
EX-99.B18(i) Multiple Class Plan dated *
September 27, 1996
EX-27.B-1 Age High Income Fund - Class I Attached
EX-27.B-2 Age High Income Fund - Class II Attached
EX-27.B-3 Age High Income Fund - Advisor Attached
Class
* Incorporated by Reference
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon [2] business days prior notice from a Fund that it will
invest in any security issued by a Russian issuer ("Russian Security"), the
Custodian shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular share confirmations
on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow the
independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's responsibilities
with regard to corporate actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable to the Russian share
registration -system and (iii) the procedures for making a claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery of
Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Name: Stephen E. Grunston
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /S/ DEBORAH R. GATZEK
Name: Deborah R. Gatzek
Title: Vice President
By: /S/ KAREN L. SKIDMORE
Name: Karen L. Skidmore
Title: Assistant Vice President
AMENDMENT TO MASTER CUSTODY AGREEMENT
Effective February 27, 1998, The Bank of New York and each of the Investment
Companies listed in the Attachment appended to this Amendment, for themselves
and each series listed in the Attachment, hereby amend the Master Custody
Agreement dated as of February 16, 1996 by:
1. Replacing Exhibit A with the attached; and
2. Only with respect to the Investment Companies and series thereof listed in
the Attachment, deleting paragraphs (a) and (b) of Subsection 3.5 and
replacing them with the following:
(a) Promptly after each purchase of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such purchase: (a) the Series to which such Securities are to be
specifically allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount purchased and
accrued interest, if any; (d) the date of purchase and settlement; (e) the
purchase price per unit; (f) the total amount payable upon such purchase;
(g) the name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian shall, upon
receipt of Securities purchased by or for the Fund, pay to the broker
specified in the Proper Instructions out of the money held for the account
of such Series the total amount payable upon such purchase, provided that
the same conforms to the total amount payable as set forth in such Proper
Instructions.
(b) Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such sale: (a) the Series to which such Securities were specifically
allocated; (b) the name of the issuer and the title of the Security; (c)
the number of shares or the principal amount sold, and accrued interest, if
any; (d) the date of sale; (e) the sale price per unit; (f) the total
amount payable to the Fund upon such sale; (g) the name of the broker
through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Proper
Instructions against payment of the total amount payable to the Fund upon
such sale, provided that the same conforms to the total amount payable as
set forth in such Proper Instructions.
Investment Companies The Bank of New York
By: /s/ Elizabeth N. Cohernour By: /s/ Stephen E. Grunston
-------------------------- -----------------------
Name: Elizabeth N. Cohernour Name: Stephen E. Grunston
Title: Authorized Officer Title: Vice President
Attachment
INVESTMENT COMPANY SERIES
Franklin Mutual Series Fund Inc. Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin Valuemark Funds Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master
Custody Agreement dated as of February 16, 1996.
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Valuemark Funds (cont.) Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Growth Investments Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
INTERVAL FUND
Franklin Floating Rate Trust Delaware Business Trust
- ------------------------------------------- -------------------------------- -------------------------------------------------------
</TABLE>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract") is
made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a California
corporation, hereinafter called the "Investment Manager," and FRANKLIN TEMPLETON
SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to provide
the following services to each Fund:
(a) providing office space, telephone, office equipment and supplies
for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf
of the Fund;
(d) supervising preparation of periodic reports to shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio,
including collecting quotations from pricing services engaged by the Fund;
providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements
under the federal securities laws, including the 1940 Act and the rules and
regulations thereunder, and under other applicable state and federal laws; and
maintaining books and records for the Fund (other than those maintained by the
custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal
securities laws, and rules and regulations thereunder; state and foreign laws
and regulations applicable to the operation of investment companies; the Fund's
investment objectives, policies and restrictions; and the Code of Ethics and
other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel needed to
carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Subcontract shall become effective on the date written above and
shall continue in effect as to each Investment Company and each Fund so long as
(1) the Agreement applicable to the Investment Company or Fund is in effect and
(2) this Subcontract is not terminated. This Subcontract will terminate as to
any Investment Company or Fund immediately upon the termination of the Agreement
applicable to the Investment Company or Fund, and may in addition be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to be
executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
- ------------------------
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree that
the Subcontracts for Administrative Services between them dated: (1) August 28,
1996 for the Franklin Templeton Global Trust on behalf of all series of the
Trust; (2) July 24, 1995 for the Franklin Templeton International Trust on
behalf of its series Templeton Foreign Smaller Companies Fund (formerly known as
Franklin International Equity Fund); (3) July 18, 1995 for the Franklin
Templeton International Trust on behalf of its series Templeton Pacific Growth
Fund; and (4) July 14, 1995 for the Franklin Investors Securities Trust on
behalf of its series Franklin Global Government Income Fund are terminated
effective as of the date of the Subcontract for Fund Administrative Services
above.
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
----------------------
Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
President, CEO
AMENDMENT TO SUBCONTRACT FOR
FUND ADMINISTRATIVE SERVICES
The Subcontract for Fund Administrative Services dated October 1, 1996
between FRANKLIN ADVISERS, INC. and FRANKLIN TEMPLETON SERVICES, INC. is hereby
amended, to replace Exhibit A with the attached Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Executive Vice President
Date: April 30, 1998
<TABLE>
<CAPTION>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin High Income Trust AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income
Fund, Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund
Franklin Federal Tax- Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund*
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio**
Franklin Strategic Series Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Templeton International Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
- ----------------------------------------------------- ---------------------------------------------------------------------
- -----------------------------------
* Effective as of March 19, 1998
**Effective as of February 26, 1998
</TABLE>
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
July 14, 1998
Franklin High Income Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as amended
(the "Declaration of Trust") of the Franklin High Income Trust (the "Trust"), a
business trust organized under the laws of the State of Delaware on May 14,
1996, and the various pertinent proceedings we deem material. We have also
examined the Notification of Registration and the Registration Statements filed
under the Investment Company Act of 1940 (the "Investment Company Act") and the
Securities Act of 1933 (the "Securities Act"), all as amended to date, as well
as other items we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value of $ .01 per
share. The Trust issues three classes of shares of a single series designated
the Age High Income Fund. The Declaration of Trust designates, or authorizes the
Trustees to designate, one or more series or classes of shares of the Trust, and
allocates, or authorizes the Trustees to allocate, shares of beneficial interest
to each such series or class. The Declaration of Trust also empowers the
Trustees to designate any additional series or classes and allocate shares to
such series or classes.
The Trust has filed with the U.S. Securities and Exchange Commission
(the "Commission"), a Registration Statement under the Securities Act, which
Registration Statement is deemed to register an indefinite number of shares of
the Trust pursuant to the provisions of Rule 24f-2 under the Investment Company
Act. You have further advised us that the Trust has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 perfecting the
registration of the shares sold by the Trust during each fiscal year during
which such registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Trust have been, and
will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made available
for delivery to offerees and purchasers of such shares in accordance with
Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as the
Trust remains a valid and subsisting trust under the laws of the State of
Delaware, and the registration of an indefinite number of shares of the Trust
remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of Trust,
and subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will have
all the rights provided for with respect to such holding by the Declaration of
Trust and the laws of the State of Delaware.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Trust are offered, and we further consent to reference in the
registration statement of the Trust to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ BRUCE G. LETO
-----------------
Bruce G. Leto
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
39 to the Registration Statement of Franklin High Income Trust on Form N-1A
File No. 2-30203 of our report dated June 30, 1998, on our audit of the
financial statements and financial highlights of Franklin High Income Trust,
which report is included in the Annual Report to Shareholders for the year
ended May 31, 1998, which is incorporated by reference in the Registration
Statement.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Francisco, California
July 17, 1998
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN HIGH INCOME TRUST (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute,
file or withdraw any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 19TH day of March, 1998.
/S/ RUPERT H. JOHNSON, JR. /S/ FRANK H. ABBOTT, III
Rupert H. Johnson, Jr., Principal Frank H. Abbott, III,
Executive Officer Trustee
and Trustee
/S/ HARMON E. BURNS /S/ ROBERT F. CARLSON
Harmon E. Burns, Robert F. Carlson,
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ FRANK W. T. LAHAYE
S. Joseph Fortunato, Frank W. T. LaHaye,
Trustee Trustee
/S/ R. MARTIN WISKEMANN /S/ MARTIN L. FLANAGAN
R. Martin Wiskemann, Martin L. Flanagan,
Trustee Principal Financial Officer
/S/ DIOMEDES LOO-TAM
Diomedes Loo-Tam,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN HIGH INCOME TRUST
(the "Trust").
As Secretary of the Trust, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held at
777 Mariners Island Boulevard, San Mateo, California, on March 19, 1998.
RESOLVED, that a Power of Attorney, substantially in the
form of the Power of Attorney presented to this Board,
appointing Mark H. Plafker, Harmon E. Burns, Deborah R.
Gatzek, Karen L. Skidmore and Larry L. Greene as
attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by a
majority of the Trustees and designated officers.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/ Deborah R. Gatzek
---------------------
Dated: March 19, 1998 Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
HIGH INCOME TRUST MAY 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> AGE HIGH INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 3,466,787,689
<INVESTMENTS-AT-VALUE> 3,557,918,525
<RECEIVABLES> 160,985,701
<ASSETS-OTHER> 1,804,608
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,720,708,834
<PAYABLE-FOR-SECURITIES> 21,574,948
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,361,329
<TOTAL-LIABILITIES> 61,936,277
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,835,980,958
<SHARES-COMMON-STOCK> 1,087,173,780
<SHARES-COMMON-PRIOR> 910,132,784
<ACCUMULATED-NII-CURRENT> 19,511,326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (287,807,415)
<ACCUM-APPREC-OR-DEPREC> 91,087,688
<NET-ASSETS> 3,658,772,557
<DIVIDEND-INCOME> 12,223,386
<INTEREST-INCOME> 304,720,732
<OTHER-INCOME> 0
<EXPENSES-NET> (24,276,703)
<NET-INVESTMENT-INCOME> 292,667,415
<REALIZED-GAINS-CURRENT> 34,259,350
<APPREC-INCREASE-CURRENT> 33,894,269
<NET-CHANGE-FROM-OPS> 360,821,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (261,354,140)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 398,847,574
<NUMBER-OF-SHARES-REDEEMED> (260,590,614)
<SHARES-REINVESTED> 38,784,036
<NET-CHANGE-IN-ASSETS> 862,560,844
<ACCUMULATED-NII-PRIOR> 11,174,159
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (371,236,218)
<GROSS-ADVISORY-FEES> (15,055,199)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (24,276,703)
<AVERAGE-NET-ASSETS> 3,253,948,038
<PER-SHARE-NAV-BEGIN> 2.900
<PER-SHARE-NII> .260
<PER-SHARE-GAIN-APPREC> .080
<PER-SHARE-DIVIDEND> (.260)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.980
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
HIGH INCOME TRUST MAY 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> AGE HIGH INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 3,466,787,689
<INVESTMENTS-AT-VALUE> 3,557,918,525
<RECEIVABLES> 160,985,701
<ASSETS-OTHER> 1,804,608
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,720,708,834
<PAYABLE-FOR-SECURITIES> 21,574,948
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,361,329
<TOTAL-LIABILITIES> 61,936,277
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,835,980,958
<SHARES-COMMON-STOCK> 132,303,347
<SHARES-COMMON-PRIOR> 52,025,707
<ACCUMULATED-NII-CURRENT> 19,511,326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (287,807,415)
<ACCUM-APPREC-OR-DEPREC> 91,087,688
<NET-ASSETS> 3,658,772,557
<DIVIDEND-INCOME> 12,223,386
<INTEREST-INCOME> 304,720,732
<OTHER-INCOME> 0
<EXPENSES-NET> (24,276,703)
<NET-INVESTMENT-INCOME> 292,667,415
<REALIZED-GAINS-CURRENT> 34,259,350
<APPREC-INCREASE-CURRENT> 33,894,269
<NET-CHANGE-FROM-OPS> 360,821,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21,055,677)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 95,362,735
<NUMBER-OF-SHARES-REDEEMED> (19,128,856)
<SHARES-REINVESTED> 4,043,761
<NET-CHANGE-IN-ASSETS> 862,560,844
<ACCUMULATED-NII-PRIOR> 11,174,159
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (371,236,218)
<GROSS-ADVISORY-FEES> (15,055,199)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (24,276,703)
<AVERAGE-NET-ASSETS> 3,253,948,038
<PER-SHARE-NAV-BEGIN> 2.900
<PER-SHARE-NII> .250
<PER-SHARE-GAIN-APPREC> .080
<PER-SHARE-DIVIDEND> (.250)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.980
<EXPENSE-RATIO> 1.230
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
HIGH INCOME TRUST MAY 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> AGE HIGH INCOME FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 3,466,787,689
<INVESTMENTS-AT-VALUE> 3,557,918,525
<RECEIVABLES> 160,985,701
<ASSETS-OTHER> 1,804,608
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,720,708,834
<PAYABLE-FOR-SECURITIES> 21,574,948
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40,361,329
<TOTAL-LIABILITIES> 61,936,277
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,835,980,958
<SHARES-COMMON-STOCK> 28,026,454
<SHARES-COMMON-PRIOR> 2,144,853
<ACCUMULATED-NII-CURRENT> 19,511,326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (287,807,415)
<ACCUM-APPREC-OR-DEPREC> 91,087,688
<NET-ASSETS> 3,658,772,557
<DIVIDEND-INCOME> 12,223,386
<INTEREST-INCOME> 304,720,732
<OTHER-INCOME> 0
<EXPENSES-NET> (24,276,703)
<NET-INVESTMENT-INCOME> 292,667,415
<REALIZED-GAINS-CURRENT> 34,259,350
<APPREC-INCREASE-CURRENT> 33,894,269
<NET-CHANGE-FROM-OPS> 360,821,034
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,879,720)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,161,829
<NUMBER-OF-SHARES-REDEEMED> (6,500,575)
<SHARES-REINVESTED> 606,914
<NET-CHANGE-IN-ASSETS> 862,560,844
<ACCUMULATED-NII-PRIOR> 11,174,159
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (371,236,218)
<GROSS-ADVISORY-FEES> (15,055,199)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (24,276,703)
<AVERAGE-NET-ASSETS> 3,253,948,038
<PER-SHARE-NAV-BEGIN> 2.900
<PER-SHARE-NII> .270
<PER-SHARE-GAIN-APPREC> .080
<PER-SHARE-DIVIDEND> (.270)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.980
<EXPENSE-RATIO> .580
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
