As Filed with the Securities and Exchange Commission on September 26, 1997
SECURITIES ACT FILE NO. 333-30131
INVESTMENT COMPANY ACT FILE NO. 811-08271
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / 1 /
Post-Effective Amendment No. / /
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. / /
FRANKLIN FLOATING RATE TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD. SAN MATEO, CA 94404
(Address of Principal Executive Office)
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)
With a copy to:
Merrill R. Steiner, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Approximate Date of Proposed Public Offering
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed
Title of Proposed Maximum
Securities Maximum Aggregate Amount of
Being Amount Being Offering Price Offering Registration
Registered Registered Per Unit(1) Price Fee
================================================================================
Common Stock, par
value $0.01 10,000,000 SHARES $10.00 $100,000,000 $30,303*
-----------------
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 8(a) OF THE SECURITIES ACT OF 1933
OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
*Previously paid
FRANKLIN FLOATING RATE TRUST
FORM N-2 CROSS REFERENCE SHEET
PART A - N-2
ITEM NUMBER CAPTION PROSPECTUS CAPTION
1. Outside Front Cover Outside Front Cover of Prospectus
2. Inside Front and Outside Not Applicable
Back Cover Page
3. Fee Table and Synopsis Expense Summary; Prospectus Summary
4. Financial Highlights Not Applicable
5. Plan of Distribution Outside Front Cover, Prospectus
Summary; How to Buy Common Shares of
the Fund; Valuation of Common
Shares; Description of Common Shares
6. Selling Shareholders Not Applicable
7. Use of Proceeds How Proceeds from Sales of Common
Shares Are Used; What Kinds of
Securities Does the Fund Purchase?;
Prospectus Summary
8. General Description Prospectus Summary; Information
of the Registrant About the Fund; What Kinds of
Securities Does the Fund Purchase?;
What Are the Investment Restrictions
on the Fund?; What are the Risks of
This Investment; Description of
Common Shares
9. Management Who Manages the Fund?; Trustees and
Officers; Description of Common
Shares
10. Capital Stock, Long-Term Dividends and Distributions to
Debit, and Other Securities Shareholders; Taxation of the Fund
and its Shareholders; Description of
Common Shares
11. Defaults and Arrears Not Applicable
on Senior Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of the Not Applicable
Statement of Additional
Information
FRANKLIN FLOATING RATE TRUST
FORM N-2 CROSS REFERENCE SHEET
PART B - N-2
ITEM NUMBER CAPTION PROSPECTUS CAPTION
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information and Not Applicable
History
17. Investment Objective and Prospectus Summary; What Kinds of
Policies Securities Does the Fund Purchase?;
What Are the Investment Restrictions
on the Fund?; Portfolio Transactions
by the Fund
18. Management Who Manages the Fund?
19. Control Persons and Principal Description of Common Shares
Holders of Securities
20. Investment Advisory and Other Who Manages the Fund?
Services
21. Brokerage Allocation and Portfolio Transactions by the Fund
Other Practices
22. Tax Status Taxation of the Fund and its
Shareholders
23. Financial Statements Financial Statements
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
SUBJECT TO COMPLETION - DATED SEPTEMBER 26, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
FRANKLIN FLOATING RATE TRUST
PROSPECTUS
_____________, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
INVESTMENT OBJECTIVE
Franklin Floating Rate Trust (the "Fund") is a closed-end investment company
whose goal is to provide as high a level of current income and preservation
of amounts invested in the Fund by shareholders ("capital") as is consistent
with investment primarily in floating rate or variable rate senior secured
corporate loans ("Corporate Loans")(including participation interests in
Corporate Loans or assignments of Corporate Loans as more fully described
below) or senior secured debt securities ("Corporate Debt Securities") that
are determined by Franklin Advisers, Inc. ("Advisers"), the Fund's investment
manager to be suitable investments for the Fund based on Advisers' credit
analysis. The Fund generally will invest in such loans, interests,
assignments or debt securities that are rated B or higher by a nationally
recognized statistical rating organization (an "NRSRO") or, if unrated,
determined to be of comparable quality by Advisers.
Corporate Loans, as more fully described below, are loans made to
corporations that (i) are secured by collateral that the corporation pledges
to the lenders to become the property of the lenders in case the corporation
defaults in paying interest or principal on the loan and (ii) will, in most
instances, hold the most senior position in the capitalization structure of
the corporation, meaning that the lenders as creditors of the corporation
will have priority over all other creditors in recovering the loan proceeds
from the assets of the corporation in case the corporation becomes
insolvent. Corporate Debt Securities, as more fully described below, are
obligations entered into by corporations granting the securityholders, in
exchange for their investments in the corporation, the right to receive
income from the corporation and the return of their investments in the
corporation. The securityholders rights (i) are secured by collateral that
the corporation pledges to the securityholders to become the property of the
securityholders in case the corporation defaults in paying interest on the
obligations or in repaying the amount of the investments to the
securityholders and (ii) will, in most instances, hold the most senior
position in the capitalization structure of the corporation, meaning that the
securityholders as creditors of the corporation will have priority over all
other creditors in recovering the loan proceeds from the assets of the
corporation in case the corporation becomes insolvent.
The U.S. Securities and Exchange Commission (the "SEC") is currently
considering a proposal that would require that any investment company whose
name implies that the investment company invests primarily in a given type of
securities, such as the Fund's investments in Corporate Loans or Corporate
Debt Securities, must invest, under normal market conditions, no less than
80% of its total assets in that type of securities, rather than no less than
65% as is currently required. If the SEC adopts this proposal, the Fund will
be required to invest, under normal market conditions, no less than 80% of
its total assets in Corporate Loans (including participation interests in
Corporate Loans or assignments of Corporate Loans) or Corporate Debt
Securities and the risks that the Fund may not be able to meet such a high
level of investment in such loans, interests or securities may increase as
described in "Special Consideration and Risk Factors - Limited Availability
of Corporate Loans, Participation Interests, Assignments and Corporate Debt
Securities" below.
Shares representing a beneficial interest in the Fund ("Common Shares") will
be offered initially, on the first day of the offering, expected to be
October XX, 1997 unless delayed, at $10 per share without a front-end sales
charge. At the conclusion of this first day, Common Shares will be paid for
and issued and the Fund will commence investment operations. After the
completion of the initial offering, the Fund expects to engage in a
continuous offering of Common Shares at a price equal to the next determined
net asset value per share without a front-end sales charge.
The Fund does not intend to list Common Shares on any national securities
exchange or arrange for quotation of the Common Shares on any
over-the-counter market and neither the Fund, Advisers nor Franklin/Templeton
Distributors, Inc. ("Distributors") intends to make a secondary market in
Common Shares at any time. Common Shares of the Fund have no history of
public trading, and there is not expected to be any secondary trading market
in Common Shares. Accordingly, an investment in Common Shares should be
considered illiquid, which means that you will not be able to readily sell
your Common Shares. See "Prospectus Summary - Special Considerations and
Risk Factors - Illiquidity" and "Periodic Offers By The Fund To Repurchase
Common Shares From Its Shareholders - Special Considerations of Repurchases,"
below.
To provide some shareholder liquidity, the Fund has adopted a fundamental
policy that requires it to make quarterly repurchase offers to purchase a
specified percentage (between 5% and 25%) of the Fund's outstanding Common
Shares at the then-current net asset value. The initial repurchase offer
will occur in March, 1998. See "Periodic Offers by the Fund to Repurchase
Common Shares From Its Shareholders."
The Fund has made an application to the SEC for an exemptive order (the
"Exemptive Order") that would permit the Fund to impose an early withdrawal
charge upon the repurchase of Common Shares within a set period after such
shares were purchased. If the Fund receives the Exemptive Order and this
Prospectus is revised accordingly, repurchases of Common Shares purchased
after the date of the revised Prospectus and held for less than twelve months
will be subject to a 1.00% early withdrawal charge subject to certain waivers
as described in the revised Prospectus.
PROSPECTUS INFORMATION
This Prospectus is intended to provide you with clear and concise information
about the Fund that you should know before investing. Please keep it for
future reference.
COMMON SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK. ALSO, COMMON SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY. COMMON SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE COMMON SHARES IN ANY STATE IN WHICH
THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY BE
OBTAINED FROM DISTRIBUTORS AT THE ADDRESS AND TOLL-FREE TELEPHONE NUMBER
LISTED ABOVE.
- ----------------------------- --------------- ---------------------------
PRICE TO PUBLIC (1) SALES PROCEEDS TO FUND (3)
LOAD (2)
- ----------------------------- --------------- ---------------------------
Per Share $10.00 $0.00 $10.00
- ----------------------------- --------------- ---------------------------
Total $100,000,000 $0.00 $100,000,000
- ----------------------------- --------------- ---------------------------
(1) Common Shares are offered at a price equal to net asset value, which
initially is $10.00 per share, and are offered on a best efforts basis,
meaning that the Fund will commence operations regardless of the number of
Common Shares sold. See "Purchasing Common Shares of the Fund."
(2) Franklin Distributors, Inc., the Fund's distributor, will pay all sales
commissions to selected dealers from its own assets.
(3) Before deduction of expenses payable by the Fund that are incurred to
organize the Fund and to offer the Common Shares to investors, estimated at
$ and $ , respectively. Organizational expenses will remain a
liability of the Fund and will be gradually reduced as a liability in equal
installments over a period not to exceed 60 months from the date the Fund
commences investment operations. Offering expenses will be deducted from net
proceeds upon the completion of the offering.
The date of this Prospectus and Statement
of Additional Information is 1997
CONTENTS
Page
Expense Summary 6
Prospectus Summary 7
Information About the Fund 15
How Proceeds from Sales of Common Shares Are Used 15
What Kinds of Securities Does the Fund Purchase? 15
What Are the Investment Restrictions on the Fund? 32
What Are the Risks of This Investment? 33
How to Buy Common Shares of the Fund 37
Periodic Offers by the Fund to Repurchase Common
Shares From its Shareholders 39
Early Withdrawal Charge to Shareholders 42
Who Manages the Fund? 45
Trustees and Officers
Portfolio Transactions by the Fund 51
Dividends and Distributions to Shareholders 53
Taxation of the Fund and its Shareholders 54
Automatic Investment Plan 59
Exchange Privilege 60
Valuation of Common Shares 60
Description of Common Shares 62
Investment Performance Information 64
Additional General Information 65
Financial Statements 65
EXPENSE SUMMARY
The following tables may assist you in understanding the direct and
indirect expenses associated with investing in the Fund.
SHAREHOLDER TRANSACTION EXPENSES+
Sales Charge (as a percentage of offering price) None
Early Withdrawal Charge None1
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF DAILY NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Management Fees 0.80%
Other Expenses 0.60%
Shareholder Servicing Fees 0.40%
Administration Fees 0.15%
Other Expenses 0.05%
Total Annual Fund Operating Expenses 1.40%
- ----------------------
1 If the Fund receives the Exemptive Order and the Prospectus is
revised, an early withdrawal charge of 1.00% will be payable on
tender and repurchase of Common Shares that have been purchased
after the Prospectus has been revised and have been held for less
than twelve months, as a percentage of the repurchase proceeds
exclusive of reinvestments and capital appreciation in the account
and subject to certain waivers described in the revised Prospectus.
+If your transaction is processed through your securities dealer,
you may be charged a fee by your securities dealer for this service.
Other Expenses are based on estimated amounts for the current fiscal
year. For a more detailed discussion of these fees, charges and
expenses, you should refer to the appropriate sections of this
Prospectus.
EXAMPLE
As a shareholder you would pay the following expenses if you
invested $1,000 in Common Shares over various time periods. This
example assumes a 5% annual rate of return on your investment:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Assuming no tender of
Common Shares for
repurchase by the Fund $14 $44 $77 $168
Assuming tender
of Common Shares for
repurchase by the Fund
on last day of period
and, for the one-year
period, imposition of
the early withdrawal charge $24
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF EXPENSES YOU WOULD
PAY IN THE FUTURE AS A SHAREHOLDER OF THE FUND. THE EXPENSES YOU WOULD PAY
MAY BE MORE OR LESS THAN THOSE SHOWN. Federal securities regulations require
the example to assume an annual return of 5%, but the Fund's actual return
may be more or less than 5%.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARIZES MORE DETAILED INFORMATION THAT IS COVERED ELSEWHERE
IN THIS PROSPECTUS. YOU SHOULD CAREFULLY CONSIDER THE MORE DETAILED
INFORMATION, WHICH IS MORE COMPLETE AND TAKES PRECEDENCE OVER THIS SUMMARY IN
CASE THERE ARE ANY DIFFERENCES BETWEEN THAT INFORMATION AND THIS SUMMARY.
FOR A MORE DETAILED DISCUSSION OF RISKS OF INVESTING IN THE FUND, SEE
"SPECIAL CONSIDERATIONS AND RISK FACTORS" BELOW.
THE FUND Franklin Floating Rate Trust (the "Fund") is a newly-organized,
continuously offered, investment company, organized as a Delaware business
trust on May 20, 1997. As a non-diversified, closed-end management
investment company, the Fund's principal business is investing assets on an
ongoing managed basis; the Fund does not issue redeemable shares (shares that
may be redeemed at any time); and the Fund is not limited by investment
company law as to the percentage of its assets that may be invested in any
single issuer of securities. See "Information About the Fund" below.
INITIAL AND CONTINUOUS OFFERING Franklin/Templeton Distributors, Inc.
("Distributors") and other securities dealers that have entered into selected
dealer agreements with Distributors, will offer and sell Common Shares of the
Fund on a continuous basis beginning with an initial offering on October XX,
1997, unless the initial offering date is delayed. The public offering price
of Common Shares initially will be $10.00 per share without a front-end sales
charge.
After the initial offering, the Fund will engage in a continuous offering of
Common Shares at a price equal to the next determined net asset value per
share without a front-end sales charge. The minimum initial purchase during
the initial and continuous offering periods is $1,000 and the minimum
subsequent investment in the continuous offering is $50, except with respect
to tax sheltered retirement plans, for which the minimum initial investment
is $250. The Fund reserves the right to waive or modify the initial and
subsequent minimum investment requirements at any time. Any purchase order
may be rejected by Distributors or the Fund and Distributors or the Fund may
suspend the continuous offering of Common Shares at any time.
The Fund does not intend to list Common Shares on any national securities
exchange or arrange for quotation of Common Shares on any over-the-counter
market. The Fund will, on a quarterly basis, make tender offers to
repurchase a portion of the Common Shares from shareholders. If the Fund
receives the Exemptive Order and this Prospectus is revised accordingly, an
early withdrawal charge payable to Distributors will be imposed on the
repurchase proceeds of certain Common Shares that were purchased after the
Prospectus has been revised and that have been held for less than twelve
months and are tendered by shareholders and accepted for repurchase by the
Fund. See "How to Buy Common Shares of the Fund" and "Early Withdrawal
Charge to Shareholders."
INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to
provide as high a level of current income and preservation of capital as is
consistent with investment primarily in senior secured corporate loans
("Corporate Loans") (including participation interests in Corporate Loans
("Participation Interests") or assignments of Corporate Loans
("Assignments"), as more fully described below) and senior secured debt
securities ("Corporate Debt Securities") that are determined by Franklin
Advisers, Inc., the Fund's investment manager ("Advisers") to be suitable
investments for the Fund based on Advisers' credit analysis. The Fund
generally will invest in such loans, interests, assignments or debt
securities that are rated B or higher by an NRSRO or, if unrated, determined
to be of comparable quality by Advisers. The Fund may, however, invest in
such investments that are rated less than B by an NRSRO or, if unrated, of
comparable quality, if Advisers' determines that such investment is suitable
for the Fund based on Advisers' independent credit analysis. Under normal
market conditions, the Fund will invest primarily, that is, at least 65% of
its total assets, in such Corporate Loans and Corporate Debt Securities made
to or issued by U.S. companies and U.S. subsidiaries of non-U.S.
corporations, partnerships and other entities ("Borrowers") that: (i) have
variable interest rates which adjust to a base interest rate, such as the
London InterBank Offered Rate ("LIBOR") or the Certificate of Deposit ("CD")
rate on set dates; (ii) have interest rates that float at a margin above a
generally recognized base lending interest rate such as the prime rate
("Prime Rate") of a designated U.S. bank; or (iii) have one of the foregoing
interest rates and are convertible to fixed rate instruments; provided that
upon conversion of any such loans or securities to fixed rate instruments,
the Fund shall as promptly as is reasonable rebalance its investments to meet
the 65% level described above.
Under normal market conditions, the Fund may invest up to 35% of its total
assets in (i) senior loans and debt securities made on an unsecured basis to
Borrowers that are judged by Advisers to be creditworthy("Unsecured Corporate
Loans and Unsecured Corporate Debt Securities"), (ii) secured or unsecured
short-term debt obligations rated within the four highest rating categories
assigned by an NRSRO, or, if unrated, determined to be of comparable quality
by Advisers, (iii) fixed rate obligations of U.S. companies or U.S.
subsidiaries of non-U.S. companies that are judged by Advisers to be
creditworthy and that the Fund expects to swap to a floating rate structure,
or (iv) cash.
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans and Corporate Debt Securities in which
the Fund will invest will have stated maturities ranging from three to ten
years and the Fund's Corporate Loans and Corporate Debt Securities will have
an expected average life of three to five years.
The Fund will invest in a Corporate Loan (including a Participation Interest
or Assignment) or Corporate Debt Security only if, in Advisers' judgment, the
Borrower can meet debt service on such Corporate Loan or Corporate Debt
Security and will invest in an Unsecured Corporate Loan or Unsecured
Corporate Debt Security only if the Borrower is judged by Advisers to be
creditworthy under the same analysis as Advisers uses for Corporate Loans and
Corporate Debt Securities.
A Corporate Loan in which the Fund may invest typically is negotiated and
structured by a group of lenders ("Lenders") consisting of commercial banks,
thrift institutions, insurance companies, finance companies or other
financial institutions, one or more of which administers the Loan on behalf
of all the Lenders (the "Agent Bank"). The investment of the Fund in a
Corporate Loan may take one of three forms: (1) a direct investment in the
Corporate Loan by the Fund as one of the Lenders; (2) a Participation
Interest; or (3) an Assignment.
A direct investment in a Corporate Loan by the Fund as one of the Lenders is
most advantageous to the Fund because such an investment is at par, that is,
the Fund receives a return at the full interest rate for the Corporate Loan
and does not have to pay a premium on the investment through its receipt of a
return at a discounted interest rate, and, consequently, the Fund's return on
such an investment will be greater. The Fund's investment in a Participation
Interest or Assignment will normally receive a return at an interest rate
that is less than the interest rate on the Corporate Loan to which the
Participation Interest or Assignment relates and the Fund's return on such
investment will not be as great as the Fund's return on a direct investment
in a Corporate Loan. Direct investments in Corporate Loans are currently less
available than investments through Participation Interests or Assignments and
the Fund often may not be able to invest in Corporate Loans other than
through Participation Interests or Assignments. The limited availability of
direct investments in Corporate Loans and, to a lesser degree, of investments
in Participation Interests or Assignments increases the risks that the Fund
may not be able to invest 65% or more of it total assets as described above
(and such risk would be increased if the SEC were to require that the Fund
invest 80% or more of its total assets in accordance with the Fund's name as
described above). See "Special Considerations and Risk Factors - Limited
Availability of Corporate Loans, Participation Interests, Assignments and
Corporate Debt Securities" below.
Participation Interests may be acquired from a Lender or other holders of
Participation Interests ("Participants"). If the Fund purchases an
Assignment from a Lender, the Fund will generally become a "Lender" for
purposes of the relevant loan agreement, with direct contractual rights
thereunder and under any related collateral security documents in favor of
the Lenders. On the other hand, if the Fund purchases a Participation
Interest either from a Lender or a Participant, the Fund will have a
fractional interest in the Corporate Loan and will not have established any
direct contractual relationship with the Borrower and the Fund is thus
subject to the credit risk of both the Borrower and a Lender or Participant
who sold the Participation Interest. The Fund will invest in Corporate Loans
through the purchase of Participation Interests only if at the time of
investment, the outstanding debt obligations of the Agent Bank and any
Lenders and Participants interposed between the Fund and a Borrower are
investment grade; i.e., rated in the four highest ratings categories assigned
by an NRSRO such as BBB, A-3 or higher by Standard & Poor's Corporation
("S&P"), or Baa, P-3 or higher by Moody's Investors Service, Inc.
("Moody's"), or, if unrated, determined to be of comparable quality in the
judgment of Advisers. See "What Kinds of Securities Does the Fund Purchase?"
Corporate Debt Securities typically are in the form of notes or bonds issued
in a public or private placement in the securities markets. Corporate Debt
Securities will typically have substantially similar terms to Corporate
Loans, but will not be in the form of Participations or Assignments.
It is anticipated that a significant portion of the Corporate Loans and
Corporate Debt Securities in which the Fund invests (which may be as much as
100% of the Fund's total assets) may be issued in highly leveraged
transactions, such as leveraged buyout loans, leveraged recapitalization
loans, and other types of acquisition financing. See "Prospectus Summary -
Special Considerations and Risk Factors - Credit Risks Associated with
Corporate Loans and Corporate Debt" and "What Are The Risks of This
Investment? - Credit Risks" and "- Collateral Impairment."
INVESTMENT MANAGER Franklin Advisers, Inc. ("Advisers") manages the Fund's
assets and makes its investment decisions. Advisers also performs similar
services for other funds. Advisers is wholly-owned by Franklin Resources,
Inc. ("Resources"), a publicly owned holding company whose shares are listed
and traded on the New York Stock Exchange (the "Exchange"). Resources is
engaged in various aspects of the financial services industry through its
various subsidiaries (the "Franklin Templeton Group"). Together, Advisers
and its affiliates manage over $215 billion in assets. See "Who Manages the
Fund?"
ADMINISTRATOR Franklin Templeton Services, Inc. ("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. See "Who Manages the Fund?"
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. ("Investor Services"), a wholly-owned subsidiary of Resources,
is the Fund's shareholder servicing and transfer agent. Investor Services
provides certain services to the holders of the Fund's Common Shares and acts
as the Fund's transfer agent and dividend-paying agent. See "Who Manages the
Fund?"
FEES AND EXPENSES The Fund will pay Advisers a monthly management fee at an
annual rate of 0.80% of the average daily net assets of the Fund as defined
below in "Who Manages the Fund?" The management fee, while higher than the
fees paid by other management investment companies in general, is comparable
to the fees paid by several similar, publicly offered, closed-end management
investment companies with an investment objective and policies similar to
those of the Fund.
Under its administration agreement, the Fund will pay 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 of
$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.
The Fund will pay Investor Services a monthly shareholder servicing fee at an
annual rate of 0.40% of the average daily net assets of the Fund. See "Who
Manages the Fund?"
DISTRIBUTIONS The Fund's policy will be to declare daily and pay monthly
distributions to holders of Common Shares of substantially all net investment
income of the Fund. Distributions to holders of Common Shares cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, are to be distributed to holders of
Common Shares at least annually. Holders of Common Shares may elect to have
distributions automatically reinvested in additional Common Shares. See
"Dividends and Distributions to Shareholders," "Taxation of the Fund and its
Shareholders" and "Dividend Reinvestments."
PERIODIC OFFERS TO REPURCHASE COMMON SHARES FROM SHAREHOLDERS Common Shares
will not be listed on any securities exchange or quoted on any
over-the-counter market and it is not currently anticipated that a secondary
market for Common Shares will develop. In view of this, the Fund will, as a
fundamental policy of the Fund, offer each calendar quarter to repurchase a
portion of the Common Shares from shareholders that tender such shares to the
Fund. These offers are called tender offers (each, a "Tender Offer") and
constitute an offer by the Fund to repurchase a portion of the Common Shares
from shareholders at a price per share equal to the net asset value per share
of the Common Shares determined at the close of business on the day the
Tender Offer terminates.
If the Fund receives the Exemptive Order and this Prospectus is revised
accordingly, Common Shares purchased after the date of the revision to the
Prospectus and that have been held for less than twelve months and are
repurchased by the Fund pursuant to Tender Offers will be subject to an early
withdrawal charge of 1.00% of the lesser of the then current net asset value
or the original purchase price of the Common Shares being tendered, subject
to certain waivers, to be described in the revised Prospectus, for certain
categories of shareholders or for Common Shares that are tendered in exchange
for shares of other investment companies distributed by Distributors (the
"Franklin Templeton Funds.") See "Periodic Offers by the Fund to Repurchase
Common Shares from Its Shareholders" and "Early Withdrawal Charge to
Shareholders" below.
SPECIAL CONSIDERATIONS AND RISK FACTORS:
FOREIGN INVESTMENTS. As noted above, the Fund may invest in Corporate Loans
and Corporate Debt Securities that are made to U.S. subsidiaries of non-U.S.
Borrowers, provided that any such Borrower is judged by Advisers to be
creditworthy under the same analysis Advisers uses for U.S. Borrowers. The
Fund similarly may invest in loans to and securities issued by U.S. Borrowers
with significant non-U.S. dollar-denominated revenues, provided that the
loans are U.S. dollar-denominated or otherwise provide for payment in U.S.
dollars. In all cases where the Corporate Loans or Corporate Debt Securities
are not denominated in U.S. dollars, provision will be made for payments to
the Lenders, including the Fund, in U.S. dollars pursuant to foreign currency
swap arrangements. Loans to, and securities issued by, such U.S.
subsidiaries of non-U.S. Borrowers or U.S. Borrowers may involve risks not
typically involved in domestic investment including fluctuation in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or U.S.
governmental laws or restrictions applicable to such loans.
INTEREST RATE FLUCTUATIONS. In general, the net asset value of the shares of
an investment company, like the Fund, that invests primarily in fixed-income
securities changes as the general level of interest rates fluctuates.
Because the Fund will invest primarily in floating and variable rate
Corporate Loans and Corporate Debt Securities and, to a lesser extent,
short-term instruments, Advisers expects the value of the Fund to fluctuate
less as a result of interest rate changes than would a portfolio of
fixed-rate obligations. The Fund's net asset value, however, may fluctuate
from time to time in the event of an imperfect correlation between the
interest rates on variable rate loans held by the Fund and prevailing
interest rates. Also, defaults on Corporate Loans and Corporate Debt
Securities and changes in the creditworthiness of Borrowers, and, in the case
of Corporate Loans, in the creditworthiness of Lenders or Participants
interposed between the Fund and the Borrowers could cause a decline in the
Fund's net asset value.
ILLIQUIDITY. As a newly-organized entity, the Fund has no operating
history. The Fund does not intend to list Common Shares for trading on any
national securities exchange. The Fund expects that there will be no
secondary market for Common Shares and an investment in Common Shares should
be considered illiquid. In the event that the Fund's Board of Trustees does
not, at any time or from time to time, authorize the Fund to engage in Tender
Offers for Common Shares, it is unlikely that a holder of Common Shares will
be able to otherwise sell Common Shares. Moreover, Distributors and other
selected dealers are prohibited under applicable law from making a market in
Common Shares while the Fund is making either a public offering of, or a
Tender Offer to repurchase, Common Shares. To the extent a secondary market
for Common Shares does develop, however, investors should be aware that the
shares of closed-end funds frequently trade in the secondary market at a
discount from their net asset value. Should there be a secondary market for
Common Shares, the market price in the secondary market of the shares may
vary from net asset value from time to time. Because the Fund intends to
offer Common Shares continuously at a price equal to net asset value, it is
unlikely that Common Shares would trade at a premium to net asset value
should a secondary market for Common Shares develop. Because of the lack of
a secondary market and the early withdrawal charge, the Fund is designed
primarily for long-term investors and should not be considered a vehicle for
short-term trading purposes.
NON-DIVERSIFICATION. The Fund has registered as a "non-diversified"
investment company for purposes of the Investment Company Act of 1940, as
amended (the "1940 Act"). This means that the Fund will be able to invest
more than 5% of the value of its assets in the obligations of any single
issuer, including Corporate Loans (including Assignments) of a single
Borrower or Participations purchased from a single Lender subject to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), applicable to the Fund. Since the Fund may
invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible than a more
widely diversified fund to any single economic, political or regulatory
occurrence. However, the Fund has no current intention of investing more
than 15% of its assets in the obligations of any single Borrower. The Fund
has taken measures which it believes significantly reduce its exposure to
such risk. See "Information About the Fund," "What Kinds of Securities Does
the Fund Purchase? -- Description of Participation Interests and Assignments"
and "What Are the Investment Restrictions on the Fund."
LIMITED AVAILABILITY OF CORPORATE LOANS, PARTICIPATION INTERESTS, ASSIGNMENTS
AND CORPORATE DEBT SECURITIES. The Fund's ability to invest 65% or more of
its total assets in Corporate Loans, Participation Interests, Assignments and
Corporate Debt Securities as described above is subject to certain risks
based on the current limited availability of direct investments in Corporate
Loans and, to a lesser degree, of investments in Participation Interests or
Assignments. The limited availability of such investment products may be due
to relatively high demand for a limited amount of such investment products,
relatively limited allocations of such products by the direct Lenders and
potentially limited access by new investors, such as the Fund, to such
products. During the period when the Fund is commencing operations, it is
anticipated that the Fund will have $50 million or more to invest and may not
be able to invest such large amounts in such limited investment products for
six months or more after the Fund commences operations. Furthermore, if the
Fund were to experience a large inflow of assets during any period after the
initial period of commencing operations, the same problem of deploying such
assets quickly and effectively would apply. Finally, the Fund has no current
intention of investing more than 20% of its assets in the obligations of
Borrowers in any single industry. The limited availability of Corporate
Loans, Participation Interests, Assignments and Corporate Debt Securities may
reduce the Fund's ability to invest readily 20% or less of its assets in the
obligations of Borrowers in any single industry. See "Non-concentration in a
Single Industry" below. To the extent that the Fund is not investing its
assets primarily in Corporate Loans, Participation Interests, Assignments and
Corporate Debt Securities due to the foregoing risks, the Fund may be unable
to achieve its investment objective.
CREDIT RISKS ASSOCIATED WITH CORPORATE LOANS AND CORPORATE DEBT SECURITIES.
The following describes the various credit risks associated with investments
in Corporate Loans and Corporate Debt Securities.
NONPAYMENT OF SCHEDULED INTEREST OR PRINCIPAL PAYMENTS. The Corporate Loans,
Corporate Debt Securities and other debt obligations in which the Fund may
invest are subject to the risk of nonpayment of scheduled interest or
principal payments. In the event that a nonpayment occurs, the Fund may
experience a decline in the value of the debt obligations, resulting in a
decline in the net asset value of Common Shares. There is no assurance that
the liquidation of collateral underlying Corporate Loans and Corporate Debt
Securities will satisfy the related Borrowers' obligations in the event of
nonpayment of scheduled interest or principal, or that the collateral could
be readily resold.
CREDIT RISKS, DEFAULT AND BANKRUPTCY. Corporate Loans and Corporate Debt
Securities made in connection with highly leveraged transactions are subject
to greater credit risks than other Corporate Loans and Corporate Debt
Securities in which the Fund may invest. These credit risks include a
greater possibility of default or bankruptcy of the Borrower and the
assertion that the pledging of collateral to secure the loan constituted a
fraudulent conveyance or preferential transfer that can be nullified or
subordinated to the rights of other creditors of the Borrower under
applicable law.
CHANGES IN INTEREST RATES. Generally, changes in interest rates may affect
the market value of debt investments, resulting in changes in the net asset
value of the shares of funds, like the Fund, investing in such investments.
It is expected, however, that a portfolio consisting primarily of floating
and variable rate Corporate Loans and Corporate Debt Securities and Unsecured
Corporate Loans and Unsecured Corporate Debt Securities, and, normally to an
extent of less than 35% of the Fund's total assets, short-term instruments,
will experience less significant fluctuations in value as a result of
interest rate changes than would a portfolio of medium or long-term
fixed-rate obligations.
PREPAYMENTS. Prepayments of principal by Borrowers may result from a decline
in interest rates or excess cash flow. Such prepayments may require that the
Fund replace its Corporate Loan, Corporate Debt Security or other investment
with a lower yielding security, which may adversely affect the net asset
value of the Fund.
ILLIQUIDITY. Some or all of the Corporate Loans and Corporate Debt
Securities in which the Fund may invest will be considered to be illiquid,
which means that the Fund may not be able to sell the Corporate Loans or
Corporate Debt Securities at the price at which the Fund values such
securities. Highly leveraged Corporate Loans and Corporate Debt Securities
also may be less liquid than other Corporate Loans and Corporate Debt
Securities. This may impair the Fund's ability to realize the full value of
its assets in the event of a voluntary or involuntary liquidation of such
assets. To the extent that such investments are illiquid, the Fund may have
difficulty disposing of portfolio securities and thus, have difficulty
repurchasing Common Shares pursuant to Tender Offers, if any. The Board of
Trustees of the Fund will consider the liquidity of the Fund's portfolio
securities in determining whether a Tender Offer should be made by the Fund
and, if so, for what percentage of the Fund's outstanding Common Shares the
Tender Offer should be made.
See "Valuation of Common Shares" for information with respect to the
valuation of illiquid Corporate Loans and Corporate Debt Securities.
LEVERAGE AND BORROWINGS. The Fund is authorized to borrow money in an amount
up to 33 1/2% of the Fund's total assets (after giving effect to the amount
borrowed) for the purpose of obtaining short-term credits in connection with
Tender Offers by the Fund for Common Shares, for temporary, extraordinary or
emergency purposes. While it has no current intention of doing so, the Fund
may also borrow for the purpose of financing additional investments.
Leverage creates certain risks for holders of Common Shares, including the
risk of higher volatility in the net asset value per share of Common Shares.
Under certain conditions, the benefit of leverage to holders of Common Shares
would be reduced and the Fund's leveraged capital structure could result in a
lower rate of return to holders of Common Shares than if the Fund were not
leveraged. The rights of any lenders to the Fund to receive payments of
interest on, and repayments of principal of, such borrowings will be senior
to those of the holders of Common Shares, and the terms of any such
borrowings may contain provisions which limit certain activities of the Fund,
including the payment of dividends to holders of Common Shares in certain
circumstances. Furthermore, the terms of any such borrowings may, and the
provisions of the 1940 Act do (in certain circumstances), grant lenders
certain voting rights in the event of default in the payment of interest or
repayment of principal. In the event that such provisions would impair the
Fund's status as a regulated investment company under the Code, the Fund,
subject to its ability to liquidate its relatively illiquid portfolio
securities, intends to repay the borrowings. Interest payments and fees
incurred in connection with any such borrowings will reduce the amount of net
income available for payment to the holders of Common Shares.
CREDIT RISKS ASSOCIATED WITH INVESTMENTS IN PARTICIPATION INTERESTS. As
described in this Prospectus, the Fund will purchase Participation
Interests. With respect to any given Corporate Loan, the terms of related
Participation Interests are arrived at through private negotiations between
the Fund and the seller of such an interest in a Corporate Loan, and may
result in the Fund having rights which differ from, and are more limited
than, the rights of Lenders or of persons who acquire such interests by
Assignment. Participation Interests typically result in the Fund having a
contractual relationship with the Lender selling the Participation Interests,
but not with the Borrower. In the event of the insolvency of the Lender
selling the Participation Interest, the Fund may be treated as a general
creditor of such Lender, and may not have any exclusive or senior claim with
respect to such Lender's interest in, or the collateral with respect to, the
Corporate Loan. As such, the Fund may incur the credit risk of the Lender
selling the Participation Interest in addition to the credit risk of the
Borrower with respect to the Corporate Loan. Consequently, the Fund may not
benefit directly from the security provided by the collateral supporting the
Corporate Loan with respect to which such Participation Interest was sold.
The Fund has implemented measures designed to reduce such risk. The Fund may
pay a fee or forgo a portion of interest payments when acquiring
Participation Interests or Assignments. See "What Kinds of Securities Does
the Fund Purchase?"
CERTAIN INVESTMENT PRACTICES. The Fund may use various investment practices
that involve special considerations, including lending its portfolio
securities, entering into when-issued and delayed delivery transactions and
entering into repurchase agreements. In addition, the Fund has the authority
to engage in interest rate and other hedging and risk management
transactions. For further discussion of these practices and associated
special considerations, see "What Kinds of Securities Does the Fund Purchase."
ANTI-TAKEOVER PROVISIONS. The Fund's Declaration of Trust includes
provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or to change the
composition of its Board of Trustees and could have the effect of depriving
holders of Common Shares of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. See "Description of Common Shares -- Certain
Anti-Takeover Provisions of the Declaration of Trust."
INFORMATION ABOUT THE FUND
Franklin Floating Rate Trust (the "Fund") is a newly-organized, continuously
offered, non-diversified, closed-end management investment company which was
organized as a Delaware business trust on May 20, 1997. The Fund's principal
office is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA
94403-7777 and its telephone number is 1-800/DIAL BEN.
HOW PROCEEDS FROM SALES OF
COMMON SHARES ARE USED
Assuming all Common Shares currently registered with the SEC under the
Securities Act of 1933, as amended (the "1933 Act") are sold in the offering,
the net proceeds from the sale of Common Shares offered hereby will be
approximately $100 million after payment of organizational and offering
expenses by the Fund and will be invested in accordance with the Fund's
investment objective and policies within approximately [SIX MONTHS] after the
initial offering of Common Shares, depending on the availability of Corporate
Loans and Corporate Debt Securities and other relevant conditions. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term debt obligations or instruments in which the Fund may normally
invest or more than 35% of its total assets as described below. Investments
in such short-term debt obligations or investments will reduce the Fund's
yield. See "Special Considerations and Risk Factors - Limited Availability
of Corporate Loans, Participation Interests, Assignments and Cooperate Debt
Securities" and "What Kinds of Securities Does the Fund Purchase?"
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
(Some of the capitalized terms used in this section are defined in
"Prospectus Summary" above.) The Fund's investment objective is to provide
as high a level of current income and preservation of capital as is
consistent with investment primarily in senior secured Corporate Loans and
Corporate Debt Securities determined by Advisers to be suitable for
investment by the Fund based on Advisers' credit analysis. This is a
fundamental policy of the Fund, which means that it may not be changed
without a vote of majority of the outstanding shares of the Fund. There can
be no assurance that the investment objective of the Fund will be achieved.
Except during interim periods pending investment of the net proceeds of the
initial public offering of the Fund's securities and during temporary
defensive periods when, in the opinion of Advisers, suitable Corporate Loans
and Corporate Debt Securities are not available for investment by the Fund or
prevailing market or economic conditions warrant, the Fund will invest at
least 65% of its total assets in Corporate Loans and Corporate Debt
Securities made to or issued by Borrowers (which may include U.S. companies
and U.S. subsidiaries of non-U.S. companies), that: (i) have variable rates
which adjust to a base rate, such as the LIBOR or the CD rate on set dates,
typically every 30 days but not to exceed one year; (ii) have interest rates
that vary at a set margin above a generally recognized base lending interest
rate such as the Prime Rate of a designated U.S. bank; or (iii) have one of
the foregoing interest rates and are convertible to fixed rate instruments;
provided that upon conversion of any such loans or securities to fixed rate
instruments, the Fund shall as promptly as is reasonable rebalance its
investments to meet the 65% level described above. The Fund generally will
invest in such loans, interests, assignments or debt securities that are
rated B or higher by an NRSRO or, if unrated, determined to be of comparable
quality by Advisers. The Fund may, however, invest in such investments that
are rated less than B by an NRSRO or, if unrated, of comparable quality, if
Advisers determines that such investment is suitable for the Fund based on
Advisers' independent credit analysis.
The Fund may invest up to 35% of its total assets in any of the following:
(a) senior loans made and notes issued on an unsecured basis to Borrowers
that are judged by Advisers to be creditworthy ("Unsecured Corporate Loans"
and "Unsecured Corporate Debt Securities"); (b) secured or unsecured
short-term debt obligations including, but not limited to, U.S. Government
and Government agency securities (some of which may not be backed by the full
faith and credit of the United States), bank money instruments (such as
certificates of deposit and bankers' acceptances), corporate and commercial
obligations (such as commercial paper and medium-term notes) and repurchase
agreements, none of which are required to be secured but all of which will be
(or counterparties associated therewith will be) investment grade (rated Baa,
P-3 or higher by Moody's or BBB, A-3 or higher by S&P or, if unrated,
determined to be of comparable quality in the judgment of Advisers); (c)
fixed-rate obligations which the Fund will swap for a floating rate
structure; or (d) cash.
Securities rated Baa, BBB, P-3 or A-3 are considered to have adequate
capacity for payment of principal and interest, but are more susceptible to
adverse economic conditions than higher rated securities and, in the case of
securities rated BBB or Baa (or comparable unrated securities), have
speculative characteristics. Such securities or cash will not exceed 35% of
the Fund's total assets except (i) during interim periods pending investment
of the net proceeds of public offerings of the Fund's securities, (ii)
pending reinvestment of proceeds of the sale of a security, and (iii) during
temporary defensive periods when, in the opinion of Advisers, suitable
Corporate Loans and Corporate Debt Securities are not available for
investment by the Fund or prevailing market or economic conditions warrant.
Investments in Unsecured Corporate Loans and Unsecured Corporate Debt
Securities will be made on the same basis as investments in Corporate Loans
and Corporate Debt Securities as described herein, except with respect to
collateral requirements. To a limited extent, incidental to and in connection
with its lending activities, the Fund also may acquire warrants and other
equity securities.
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans and Corporate Debt Securities in which
it will invest will have stated maturities ranging from three to ten years.
However, Corporate Loans usually will require, in addition to scheduled
payments of interest and principal, the prepayment of the Corporate Loan from
excess cash flow, as discussed above, and may permit the Borrower to prepay
at its election. The degree to which Borrowers prepay Corporate Loans,
whether as a contractual requirement or at their election, cannot be
predicted with accuracy, and may be affected by general business conditions,
the financial condition of the Borrower and competitive conditions among
Lenders, among other factors. However, it is anticipated that the Fund's
Corporate Loans and Corporate Debt Securities will have an average expected
life of three to five years. See "Description of Corporate Loans and
Corporate Debt Securities."
BENEFITS OF INVESTING IN THE FUND. Investment in Common Shares of the Fund
offers several benefits. The Fund offers investors the opportunity to receive
a high level of current income by investing in a professionally managed
portfolio comprised primarily of Corporate Loans, a type of investment
typically not available directly to individual investors. In managing the
Fund, Advisers provides the Fund and its shareholders with professional
credit analysis and portfolio diversification. The Fund also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of such investments, if available to individual investors. The
benefits are at least partially offset by the expenses involved in operating
an investment company. Such expenses primarily consist of the management and
administrative fees and operations costs.
RISKS FROM FLUCTUATIONS IN GENERAL INTEREST RATES. Generally, the net asset
value of the shares of an investment company which invests primarily in
fixed-income securities changes as the general levels of interest rates
fluctuate in the national and international markets for fixed income
securities and debt obligations. When interest rates decline, the value of a
fixed-income portfolio can be expected to decline. Advisers expects the
Fund's net asset value to be relatively stable during normal market
conditions, because the Fund's investments will consist primarily of three
types: (i) floating and variable rate Corporate Loans and Corporate Debt
Securities; (ii) fixed rate Corporate Loans and Corporate Debt Securities
hedged by interest rate swap transactions; and (iii) short-term instruments.
For these reasons, Advisers expects the value of the Fund to fluctuate as a
result of interest rate changes significantly less than would the value of a
portfolio of fixed-rate obligations. However, because variable interest rates
only reset periodically, the Fund's net asset value may fluctuate from time
to time in the event of an imperfect correlation between either the interest
rates on variable rate loans in the Fund's portfolio or the variable interest
rates on nominal amounts in the Fund's interest rate swap transactions, and
prevailing interest rates. Also, a default on a Corporate Loan or Corporate
Security in which the Fund has invested or a sudden and extreme increase in
prevailing interest rates may cause a decline in the Fund's net asset value.
Conversely, a sudden and extreme decline in interest rates could result in an
increase in the Fund's net asset value.
THE FUND'S NON-DIVERSIFIED CLASSIFICATION. The Fund is classified as
non-diversified within the meaning of the 1940 Act, which means that the Fund
is not limited by the 1940 Act in the proportion of its assets that it may
invest in securities of a single issuer. However, the Fund's investments will
be limited so as to enable the Fund to qualify as a "regulated investment
company" for purposes of the Code. Accordingly, the Fund will limit its
investments so that, at the close of each quarter of its taxable year, (i)
not more than 25% of the value of its total assets will be invested in the
securities (including Corporate Loans but excluding U.S. Government
securities) of a single issuer and (ii) with respect to 50% of the value of
its total assets, its investments will consist of cash, U.S. Government
securities and securities of other issuers limited, in respect of any one
issuer to not more than 5% of the value of its total assets and not more than
10% of the issuer's outstanding voting securities. To the extent the Fund
assumes large positions in the securities of a small number of issuers, the
Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. However, the Fund has no current intention of
investing more than 15% of its total assets in the obligations of any single
Borrower.
DESCRIPTION OF CORPORATE LOANS AND
CORPORATE DEBT SECURITIES
The Corporate Loans and Corporate Debt Securities in which the Fund invests
primarily consist of obligations of a Borrower undertaken to finance the
growth of the Borrower's business through product development or marketing,
or to finance changes in the way the Borrower deploys its assets and invested
or borrowed financial resources, that is, capital restructurings. Corporate
Loan and Corporate Debt Securities may also include senior obligations of a
borrower issued in connection with a restructuring pursuant to Chapter 11 of
the United States Bankruptcy Code provided that such senior obligations are
determined by Advisers upon its credit analysis to be a suitable investment
by the Fund. It is anticipated that a significant portion of such Corporate
Loans and Corporate Debt Securities (which may be as much as 100% of the
Fund's total assets) may be issued in transactions in which the Borrower
assumes large amounts of debt in order to control large amounts of financial
resources to achieve business objectives, transactions which are called
"highly leveraged transactions". Such transactions may include leveraged
buyout loans, leveraged recapitalization loans and other types of acquisition
financing. Such Corporate Loans and Corporate Debt Securities present special
risks. See "Prospectus Summary - Special Considerations and Risk Factors -
Credit Risks Associated With Corporate Loans and Corporate Debt" and "What
Are The Risks of This Investment? - Credit Risks" and " - Collateral
Impairment." Such Corporate Loans may be structured to include both term
loans, which are generally fully funded at the time of the Fund's investment,
and revolving credit facilities, which would require the Fund to make
additional investments in the Corporate Loans as required under the terms of
the credit facility. Such Corporate Loans may also include receivables
purchase facilities, which are similar to revolving credit facilities secured
by a Borrower's receivables.
The Fund may invest in Corporate Loans and Corporate Debt Securities which
are made to U.S. subsidiaries of non-U.S. Borrowers, provided that (i) the
loans and securities are U.S. dollar-denominated, that is, they provide for
payment of the loaned or invested amount, repayment of such amount and
payment of interest, dividends or distributions in U.S. dollars; and (ii) any
such Borrower is judged by Advisers to be creditworthy under the same
analysis Advisers uses for U.S. Borrowers. The Fund similarly may invest in
Corporate Loans and Corporate Debt Securities made to U.S. Borrowers with
significant non-U.S. dollar denominated revenues, provided that the loans are
U.S. dollar-denominated or otherwise provide for payment to the Fund in U.S.
dollars. In all cases where the Corporate Loans or Corporate Debt Securities
are not denominated in U.S. dollars, provision will be made for payments to
the Lenders, including the Fund, in U.S. dollars pursuant to foreign currency
swap arrangements. Loans to such U.S. subsidiaries of non-U.S. Borrowers or
U.S. Borrowers may involve risks not typically involved in domestic
investment, including fluctuation in foreign exchange rates (for example,
changes in the value of the French franc as compared to the U.S. dollar),
future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S. governmental laws or
restrictions applicable to such loans. With respect to certain foreign
countries, there is the possibility that the government or a government
agency may take over the assets of the Fund for political or economic reasons
or impose taxation that is so heavy that it amounts to confiscation of the
assets taxed, political or social instability, or diplomatic developments
which could affect the Fund's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payment position. In addition, information with respect to U.S. subsidiaries
of non-U.S. Borrowers may differ from that available with respect to U.S.
Borrowers, since foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. Borrowers.
ADVISERS' CREDIT ANALYSIS. The Corporate Loans and Corporate Debt Securities
in which the Fund invests will, in most instances, hold the most senior
position in the capitalization structure of the Borrower, which means that
payment of obligations of the Borrower to the Lenders as compared with all
other securities or obligations issued by the Borrower, will be made first.
In any case, the Corporate Loans and Corporate Debt Securities will, in the
judgment of Advisers, be in the category of senior debt of the Borrower. Each
Corporate Loan and Corporate Debt Security will generally be secured by
collateral the value of which generally will be determined by reference to
financial statements of the Borrower, by an independent appraisal, by
obtaining the market value of such collateral (e.g., cash or securities) if
it is readily ascertainable and/or by other customary valuation techniques
considered appropriate in the judgment of Advisers. In the event of a
default, however, the ability of the Lender to have access to the collateral
may be limited by bankruptcy and other insolvency laws. The value of the
collateral may decline subsequent to the Fund's investment in the loan or
debt security. Under certain circumstances, the collateral may be released
with the consent of the Agent Bank and Lenders or pursuant to the terms of
the underlying credit agreement with the Borrower or bond indenture. The
credit agreement or bond indenture is the document establishing the rights of
Lenders with respect to a specific offering of Corporate Loans or Corporate
Debt Securities. There is no assurance that the liquidation of the
collateral would satisfy the Borrower's obligation in the event of nonpayment
of scheduled interest or principal, or that the collateral could be readily
liquidated. As a result, the Fund might not receive payments to which it is
entitled and thereby may experience a decline in the value of the investment
and, possibly, its net asset value.
In the case of highly leveraged loans, a Borrower generally is required to
pledge collateral which may include (i) working capital assets, such as
accounts receivable or inventory, (ii) tangible fixed assets, such as real
property, buildings and equipment (iii) intangible assets, such as
trademarks, copyrights and patent rights and (iv) security interests in
securities of subsidiaries or affiliates. In the case of Corporate Loans to
or Corporate Debt Securities of privately held companies, the companies'
owners may provide additional security by giving personal guarantees of
performance and/or agreeing to transfer other securities that they own to the
Lenders if the loans or investments are not repaid in accordance with the
terms of the loans or securities. There may be temporary periods in the
course of providing financing to a Borrower where the collateral for the loan
consists of common stock having a value not less than 200% of the value of
the loan on the date the loan is made. Under such circumstances, the Borrower
generally proceeds with a subsequent transaction which will permit it to
pledge assets of a company as collateral for the loan, although there can be
no assurance that the Borrower will be able to effect such transaction.
The Fund will invest in a Corporate Loan or Corporate Debt Security only if,
in Advisers' judgment, the Borrower can meet debt service on such loan. In
addition, Advisers will consider other factors deemed by it to be appropriate
to the analysis of the Borrower and the Corporate Loan or Corporate Debt
Security. Such factors may include financial ratios of the Borrower such as
interest coverage, fixed charge coverage and leverage ratios. In its analysis
of these factors, Advisers also will be influenced by the nature of the
industry in which the Borrower is engaged, the nature of the Borrower's
assets and Advisers' assessment of the general quality of the Borrower. The
factors utilized have been reviewed and approved by the Fund's Board of
Trustees. The Corporate Loans and Corporate Debt Securities in which the Fund
invests generally are not rated by any NRSRO.
The primary consideration in selecting such Corporate Loans and Corporate
Debt Securities for investment by the Fund is the creditworthiness of the
Borrower. In evaluating Corporate Loans and Corporate Debt Securities, the
quality ratings assigned to other debt obligations of a Borrower may not be a
determining factor, since they will often be subordinated to the Corporate
Loans or Corporate Debt Securities. Instead, Advisers will perform its own
independent credit analysis of the Borrower, and of the collateral structure
for the loan or security. In making this analysis, Advisers will utilize any
offering materials and, in the case of Corporate Loans, information prepared
and supplied by the Agent Bank, Lender or Participant from whom the Fund
purchases its Participation Interest in a Corporate Loan. Advisers' analysis
will continue on an ongoing basis for any Corporate Loans and Corporate Debt
Securities in which the Fund has invested. Although Advisers will use due
care in making such analysis, there can be no assurance that such analysis
will disclose factors which may impair the value of the Corporate Loan or
Corporate Debt Security.
Corporate Loans and Corporate Debt Securities made in connection with highly
leveraged transactions are subject to greater credit risks than other
Corporate Loans and Corporate Debt Securities in which the Fund may invest.
These credit risks include a greater possibility of default or bankruptcy of
the Borrower and the assertion that the pledging of collateral to secure the
loan constituted a fraudulent conveyance or preferential transfer which can
be nullified or subordinated to the rights of other creditors of the Borrower
under applicable law. Highly leveraged Corporate Loans and Corporate Debt
Securities also may be less liquid than other Corporate Loans and Corporate
Debt Securities.
A Borrower also must comply with various restrictive covenants contained in
any Corporate Loan agreement between the Borrower and the lending syndicate
("Corporate Loan Agreement") or in any trust indenture or comparable document
in connection with a Corporate Debt Security ("Corporate Debt Security
Document"). A restrictive covenant is a promise by the Borrower to not take
certain actions which may impair the rights of Lenders. Such covenants, in
addition to requiring the scheduled payment of interest and principal, may
include restrictions on dividend payments and other distributions to
shareholders, provisions requiring the Borrower to maintain specific
financial ratios or relationships and limits on total debt. In addition, the
Corporate Loan Agreement or Corporate Debt Security Document may contain a
covenant requiring the Borrower to prepay the Corporate Loan or Corporate
Debt Security with any excess cash flow. Excess cash flow generally includes
net cash flow after scheduled debt service payments and permitted capital
expenditures, among other things, as well as the proceeds from asset
dispositions or sales of securities. A breach of a covenant (after giving
effect to any cure period) in a Corporate Loan Agreement which is not waived
by the Agent Bank and the lending syndicate normally is an event of
acceleration; i.e., the Agent Bank has the right to demand immediate
repayment in full of the outstanding Corporate Loan. Acceleration may also
occur in the case of the breach of a covenant in a Corporate Debt Security
Document.
DESCRIPTION OF FLOATING OR VARIABLE INTEREST RATES. The rate of interest
payable on floating or variable rate Corporate Loans or Corporate Debt
Securities is established as the sum of a base lending rate plus a specified
margin. These base lending rates generally are LIBOR, the Prime Rate of a
designated U.S. bank, the CD rate, or another base lending rate used by
commercial lenders. The interest rate on Prime Rate-based Corporate Loans and
Corporate Debt Securities floats daily as the Prime Rate changes, while the
interest rate on LIBOR-based and CD-based Corporate Loans and Corporate Debt
Securities is reset periodically, typically every 30 days to one year.
Certain of the floating or variable rate Corporate Loans and Corporate Debt
Securities in which the Fund will invest may permit the Borrower to select an
interest rate reset period of up to one year. A portion of the Fund's
investments may consist of Corporate Loans with interest rates that are fixed
for the term of the loan. Investment in Corporate Loans and Corporate Debt
Securities with longer interest rate reset periods or fixed interest rates
may increase fluctuations in the Fund's net asset value as a result of
changes in interest rates. However the Fund may attempt to hedge all of its
fixed-rate Corporate Loans and Corporate Debt Securities against fluctuations
in interest rates by entering into interest rate swap transactions. The Fund
also will attempt to maintain a portfolio of Corporate Loans and Corporate
Debt Securities that will have a dollar weighted average period to the next
interest rate adjustment of no more than 90 days.
Corporate Loans and Corporate Debt Securities traditionally have been
structured so that Borrowers pay higher margins when they elect LIBOR and
CD-based borrower options, in order to permit Lenders to obtain generally
consistent yields on Corporate Loans and Corporate Debt Securities,
regardless of whether Borrowers select the LIBOR or CD-based options, or the
Prime-based option. In recent years, however, the differential between the
lower LIBOR and CD base rates and the higher Prime Rate base rates prevailing
in the commercial bank markets has widened to the point where the higher
margins paid by Borrowers for LIBOR and CD-based pricing options do not
currently compensate for the differential between the Prime Rate and the
LIBOR and CD base rates. Consequently, Borrowers have increasingly selected
the LIBOR-based pricing option, resulting in a yield on Corporate Loans and
Corporate Debt Securities that is consistently lower than the yield would be
if Borrowers selected the Prime Rate-based pricing option. This trend will
significantly limit the ability of the Fund to achieve a net return to
shareholders that consistently approximates the average published prime rate
of leading U.S. banks. At the date of this Prospectus, Advisers cannot
predict any significant change in this market trend.
FEES. The Fund may receive and/or pay certain fees in connection with its
lending activities. These fees are in addition to interest payments received
and may include facility fees, commitment fees, commissions and prepayment
penalty fees. When the Fund buys a Corporate Loan or Corporate Debt Security
it may receive a facility fee and when it sells a Corporate Loan or Corporate
Debt Security may pay a facility fee. In certain circumstances, the Fund may
receive a prepayment penalty fee on the prepayment of a Corporate Loan or
Corporate Debt Security by a Borrower. In connection with the acquisition of
Corporate Loans or Corporate Debt Securities, the Fund may also acquire
warrants and other equity securities of the Borrower or its affiliates. The
acquisition of such equity securities will only be incidental to the Fund's
purchase of a Corporate Debt Security or an interest in a Corporate Loan.
MATURITIES. It is expected that a majority of the Corporate Loans and
Corporate Debt Securities held by the Fund will have stated maturities
ranging from three to ten years, which means that a Lender will be completely
repaid within that time period. However, such Corporate Loans and Corporate
Debt Securities usually will require, in addition to scheduled payments of
interest and principal, the prepayment of the Corporate Loan or Corporate
Debt Security from excess cash flow, as discussed above, and may permit the
Borrower to prepay at its election. The degree to which Borrowers prepay
Corporate Loans and Corporate Debt Securities, whether as a contractual
requirement or at their election, may be affected by general business
conditions, the financial condition of the Borrower and competitive
conditions among Lenders, among other factors. Accordingly, prepayments
cannot be predicted with accuracy. Upon a prepayment, the Fund may receive
both a prepayment penalty fee from the prepaying Borrower and a facility fee
on the purchase of a new Corporate Loan or Corporate Debt Security with the
proceeds from the prepayment of the former. Such fees may help mitigate any
adverse impact on the yield on the Fund's investments which may arise as a
result of prepayments and the reinvestment of such proceeds in Corporate
Loans or Corporate Debt Securities bearing lower interest rates.
CURRENCY CONVERSIONS. Loans to U.S. subsidiaries of non-U.S. Borrowers and
to U.S. Borrowers with significant non-U.S. dollar-denominated revenues may
provide for conversion of all or part of the loan from a U.S.
dollar-denominated obligation into a foreign currency obligation at the
option of the Borrower. The Fund may invest in Corporate Loans and Corporate
Debt Securities which have been converted into non-U.S. dollar-denominated
obligations only when provision is made for payments to the lenders in U.S.
dollars pursuant to foreign currency swap arrangements.
FOREIGN CURRENCY SWAPS. Foreign currency swaps involve the exchange by the
lenders, including the Fund, with another party (the "counterparty") of the
right to receive the currency in which the loans are denominated for the
right to receive U.S. dollars. The Fund will enter into a transaction subject
to a foreign currency swap only if, at the time of entering into such swap,
the outstanding debt obligations of the counterparty are investment grade,
i.e., rated BBB or A-3 or higher by S&P or Baa or P-3 or higher by Moody's or
determined to be of comparable quality in the judgment of Advisers. The
amounts of U.S. dollar payments to be received by the Lenders and the foreign
currency payments to be received by the counterparty are fixed at the time
the swap arrangement is entered into. Accordingly, the swap protects the Fund
from the fluctuations in exchange rates and locks in the right to receive
payments under the loan in a predetermined amount of U.S. dollars. If there
is a default by the counterparty, the Fund will have contractual remedies
pursuant to the swap arrangements; however, the U.S. dollar value of the
Fund's right to foreign currency payments under the loan will be subject to
fluctuations in the applicable exchange rate to the extent that a replacement
swap arrangement is unavailable or the Fund is unable to recover damages from
the defaulting counterparty. If the Borrower defaults on or prepays the
underlying Corporate Loan or Corporate Debt Security, the Fund may be
required pursuant to the swap arrangements to compensate the counterparty to
the extent of fluctuations in exchange rates adverse to the counterparty. In
the event of such a default or prepayment, an amount of cash or high grade
liquid debt securities having an aggregate net asset value at least equal to
the amount of compensation that must be paid to the counterparty pursuant to
the swap arrangements will be maintained in a segregated account by the
Fund's custodian.
DESCRIPTION OF PARTICIPATION INTERESTS AND ASSIGNMENTS
A Corporate Loan in which the Fund may invest typically is originated,
negotiated and structured by a group of Lenders consisting of commercial
banks, thrift institutions, insurance companies, finance companies or other
financial institutions, which is administered on behalf of the syndicate by
an Agent Bank. The investment of the Fund in a Corporate Loan may take one of
three forms: (1) a direct investment in the Corporate Loan by the fund as one
of the Lenders; (2)Participation Interests; or (3) an Assignment.
A direct investment in a Corporate Loan by the Fund as one of the Lenders is
most advantageous to the Fund because such an investment is at par, that is,
the Fund receives a return at the full interest rate for the Corporate Loan
and does not have to pay a premium on the investment through its receipt of a
return at a discounted interest rate, and, consequently, the Fund's return on
such investment will be greater. The Fund's investment in a Participation
Interest or Assignment will normally receive a return at an interest rate
that is less than the interest rate on the Corporate Loan to which the
Participation Interest or Assignment relates and the Fund's return on such
investment will not be as great as the Fund's return on a direct investment
in a Corporate Loan. Direct investments in Corporate Loans are currently less
available than investments through Participation Interests or Assignments and
the Fund often may not be able to invest in Corporate Loans other than
through Participation Interests or Assignments. The limited availability of
direct investments in Corporate Loans and, to a lesser degree, of investments
in Participation Interests or Assignments increases the risks that the Fund
may not be able to invest 65% or more of its total assets as described above.
See "Special Considerations and Risk Factors - Limited Availability or
Corporate Loans, Participations Interests, Assignments and Corporate Debt
Securities" above.
Participation Interests may be acquired from a Lender or other Participants.
If the Fund purchases a Participation Interest either from a Lender or a
Participant, the Fund will not have established any direct contractual
relationship with the Borrower. The Fund would be required to rely on the
Lender or the Participant that sold the Participation Interest not only for
the enforcement of the Fund's rights against the Borrower but also for the
receipt and processing of payments due to the Fund under the Corporate Loans.
The Fund is thus subject to the credit risk of both the Borrower and a
Participant. Lenders and Participants interposed between the Fund and a
Borrower, together with Agent Banks, are referred to herein as "Intermediate
Participants."
On the other hand, if the Fund purchases an Assignment from a Lender, the
Fund will generally become a "Lender" for purposes of the relevant loan
agreement. As such, the Fund will step into the shoes of the original Lender
and have direct contractual rights thereunder and under any related
collateral security documents in favor of the Lenders. An Assignment from a
Lender gives the Fund the right to receive payments of principal and interest
and other amounts directly from the Borrower and to enforce its rights as a
Lender directly against the Borrower. The Fund will not act as an Agent Bank
guarantor, sole negotiator or sole structuror with respect to a Corporate
Loan.
Because it may be necessary to assert through an Intermediate Participant
such rights as may exist against the Borrower, in the event the Borrower
fails to pay principal and interest when due, the Fund may be subject to
delays, expenses and risks that are greater than those that would be involved
if the Fund could enforce its rights directly against the Borrower. Moreover,
under the terms of a Participation, the Fund may be regarded as a creditor of
the Intermediate Participant (rather than of the Borrower), which means that
the Fund does not have any direct contractual rights against the Borrower.
As a creditor of the Intermediate Participant, the Fund may also be subject
to the risk that the Intermediate Participant may become insolvent. Similar
risks may arise with respect to the Agent Bank, as described below. Further,
in the event of the bankruptcy or insolvency of the Borrower, the obligation
of the Borrower to repay the Corporate Loan may be subject to certain
defenses that can be asserted by such Borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant. The Fund will invest
in Corporate Loans only if, at the time of investment, all outstanding debt
obligations of the Agent Bank and Intermediate Participants are investment
grade, i.e., rated BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's or determined to be of comparable quality in the judgment of Advisers.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal
and interest and fee payments from the Borrower and the apportionment of
these payments to the credit of all Lenders which are parties to the
Corporate Loan Agreement. The Fund generally will rely on the Agent Bank or
an Intermediate Participant to collect its portion of the payments on the
Corporate Loan. Furthermore, the Fund will rely on the Agent Bank to use
appropriate creditor remedies against the Borrower. Typically, under
Corporate Loan Agreements, the Agent Bank is given broad discretion in
enforcing the Corporate Loan Agreement, and is obligated to use only the same
care it would use in the management of its own property. The Borrower
compensates the Agent Bank for these services. Such compensation may include
special fees paid on structuring and funding Corporate Loans and other fees
paid on a continuing basis. In the event that an Agent Bank becomes
insolvent, or has a receiver, conservator, or similar official appointed for
it by the appropriate bank regulatory authority or becomes a debtor in a
bankruptcy proceeding, assets held by the Agent Bank under the Corporate Loan
Agreement should remain available to holders of Corporate Loans. If, however,
assets held by the Agent Bank for the benefit of the Fund were determined by
an appropriate regulatory authority or court to be subject to the claims of
the Agent Bank's general or secured creditors, the Fund might incur certain
costs and delays in realizing payment on a Corporate Loan or suffer a loss of
principal and/or interest. In situations involving Intermediate Participants
similar risks may arise, as described above.
Intermediate Participants may have certain obligations pursuant to a
Corporate Loan Agreement, which may include the obligation to make future
advances to the Borrower in connection with revolving credit facilities in
certain circumstances. The Fund currently intends to reserve against such
contingent obligations by segregating sufficient investments in high quality,
short-term, liquid instruments. The Fund will not invest in Corporate Loans
that would require the Fund to make any additional investments in connection
with such future advances if such commitments would exceed 20% of the Fund's
total assets or would cause the Fund to fail to meet the diversification
requirements described under "Investment Objective and Policies."
NON-CONCENTRATION IN A SINGLE INDUSTRY.
The Fund has no current intention of investing more than 20% of its assets in
the obligations of Borrowers in any single industry. The staff of the SEC
takes the position that investing more than 25% of the Fund's total assets in
a single industry or group of industries represents "concentration" in such
industry or group of industries. However, because the Fund will regard the
issuer of a Corporate Loan as including the Agent Bank and any Intermediate
Participant as well as the Borrower, the Fund may be deemed to be
concentrated in securities of issuers in the industry group consisting of
financial institutions and their holding companies, including commercial
banks, thrift institutions, insurance companies and finance companies. As a
result, the Fund is subject to certain risks associated with such
institutions. Banking and thrift institutions are subject to extensive
governmental regulations which may limit both the amounts and types of loans
and other financial commitments which such institutions may make and the
interest rates and fees which such institutions may charge. The profitability
of these institutions is largely dependent on the availability and cost of
capital funds, and has shown significant recent fluctuation as a result of
volatile interest rate levels. In addition, general economic conditions are
important to the operations of these institutions, with exposure to credit
losses resulting from possible financial difficulties of borrowers
potentially having an adverse effect. Insurance companies are also affected
by economic and financial conditions and are subject to extensive government
regulation, including rate regulation. The property and casualty companies
may be exposed to material risks, including reserve inadequacy, latent health
exposure and inability to collect from their reinsurance carriers. The
financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear.
In this regard, recent business combinations have included insurance, finance
and securities brokerage under single ownership. Moreover, the federal laws
generally separating commercial and investment banking arc currently being
studied by Congress.
ILLIQUID SECURITIES
Corporate Loans and Corporate Debt Securities are, at present, not readily
marketable and may be subject to significant restrictions on resale. Although
Corporate Loans and Corporate Debt Securities are transferred among certain
financial institutions, as described above, the Corporate Loans and Corporate
Debt Securities in which the Fund invests do not have the liquidity of
conventional investment grade debt securities traded in the secondary market
and may be considered illiquid. As the market for Corporate Loans and
Corporate Debt Securities matures, Advisers expects that liquidity will
improve. The Fund has no limitation on the amount of its investments which
are not readily marketable or are subject to restrictions on resale. Such
investments, which may be considered illiquid, may affect the Fund's ability
to realize the net asset value in the event of a voluntary or involuntary
liquidation of its assets. To the extent that such investments are illiquid,
the Fund may have difficulty disposing of securities in order to enable it to
repurchase Common Shares pursuant to Tender Offers, if any. The Board of
Trustees of the Fund will consider the liquidity of the Fund's investments in
determining whether a Tender Offer should be made by the Fund. See "Net Asset
Value" for information with respect to the valuation of illiquid Corporate
Loans and Corporate Debt Securities.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below:
LEVERAGE. The Fund is authorized to borrow money in amounts of up to 33 1/2%
of the value of its total assets at the time of such borrowings. Borrowings
by the Fund (commonly known as "leveraging") create an opportunity for
greater total return but, at the same time, increase exposure to capital
risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on the borrowed funds. The Fund has no
current intention of borrowing in order to have additional funds available to
it to make additional investments. The Fund also may issue one or more
series of preferred shares, although it has no present intention to do so.
See "Special Considerations and Risk Factors -- Effects of Leverage."
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to its permitted investments but currently intends to do so only with
financial institutions such as broker-dealers and brokers which are deemed
creditworthy by Advisers. In a repurchase agreement transaction, the Fund
purchases a U.S. government security from a bank or broker-dealer. The
agreement provides that the security must be sold back to the bank or
broker-dealer at an agreed-upon price and date. The repurchase date usually
is within seven days of the original purchase date. The bank or
broker-dealer must transfer to the Fund's custodian securities with an
initial value, including any earned but unpaid interest, equal to at least
102% of the dollar amount invested by the Fund in each repurchase agreement
as collateral. The value of the underlying U.S. government security is
determined daily so that the Fund has collateral of at least 100% of the
value of the repurchase agreement. A repurchase agreement is considered to
be a loan by the Fund under the federal securities laws which regulate mutual
funds. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in liquidating the
collateral. The collateral is held on behalf of the Fund by a custodian
approved by the Board of Trustees and is held pursuant to a written
agreement. In all cases, Advisers must be satisfied with the
creditworthiness of the other party to the agreement before entering into a
repurchase agreement. In the event of the bankruptcy (or other insolvency
proceeding) of the other party to a repurchase agreement, the Fund might
experience delays in recovering its cash. To the extent that, in the
meantime, the value of these securities the Fund purchases may have declined,
the Fund could experience a loss.
LENDING OF FUND SECURITIES. The Fund may from time to time lend its portfolio
securities with a value not exceeding 33 1/2% of its total assets to
qualified securities dealers or other institutional investors. The borrower
must deposit with the Fund's custodian bank collateral with an initial market
value of at least 102% of the initial market value of the securities loaned,
including any accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
100%. This limitation is a fundamental policy, and it may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. The collateral shall consist
of cash, securities issued by the United States Government, its agencies or
instrumentalities, or irrevocable letters of credit.
The purpose of such loans is to permit the borrower to use such securities
for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment
is retained by the Fund. Alternatively, if securities are delivered to the
Fund as collateral, the Fund and the borrower negotiate a rate for the loaned
premium to be received by the Fund for lending its portfolio securities. In
either event, the total yield on the Fund is increased by loans of its
securities. Under the securities loan agreement, the Fund continues to be
entitled to all dividends or interest on the loaned securities, and the Fund
will have the right to regain record ownership of loaned securities to
exercise beneficial rights, such as voting rights and subscription rights.
Such loans are terminable at any time. The Fund may pay reasonable finder's,
administrative and custodial fees in connection with such loans. In the event
that the borrower defaults on its obligation to return borrowed securities,
because of insolvency or otherwise, the Fund could experience delays and
costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
NON-DIVERSIFICATION. The Fund has registered as a "non-diversified"
investment company for purposes of the 1940 Act, so that it will be able to
invest more than 5% of the value of its assets in the obligations of any
single issuer, including Corporate Loans of a single Borrower or
Participations purchased from a single Lender subject to the diversification
requirements of Subchapter M of the Code, applicable to the Fund. The Code
requires the Fund to diversify its holdings so that at the end of each
quarter of the Fund's taxable year (i) at least 50% of the value of the
Fund's assets is represented by cash, U.S. government securities, securities
of other regulated investment companies, and other securities which, with
respect to any one issuer, do not represent more than 5% of the value of the
Fund's assets or more than 10% of the voting securities of such issuer, and
(ii) not more than 25% of the value of the Fund's assets is invested in the
securities of any one issuer (other than U.S. government securities or the
securities of other regulated investment companies). Since the Fund may
invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Fund may be more susceptible than a more
widely diversified fund to any single economic, political or regulatory
occurrence. However, the Fund has no current intention of investing more
than 15% of its assets in the obligations of any single Borrower. The Fund
has taken measures which it believes significantly reduce its exposure to
such risk. See "Information About the Fund."
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell interests in Corporate Loans and Corporate Debt Securities and other
portfolio debt securities on a "when-issued" and "delayed delivery" basis. No
income accrues to the Fund on such interests or securities in connection with
such transactions prior to the date the Fund actually takes delivery of such
interests or securities. These securities are subject to market fluctuation
before delivery to the Fund and generally do not earn interest until their
scheduled delivery date; the value of the interests in Corporate Loans and
Corporate Debt Securities and other portfolio debt securities at delivery may
be more or less than their purchase price, and yield generally available on
such interests or securities when delivery occurs may be higher than yields
on the interests or securities obtained pursuant to such transactions. In
when-issued and delayed delivery transactions, because the Fund relies on the
buyer or seller, as the case may be, to complete the transaction, the other
party's failure may cause the Fund to miss a price or yield considered
advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash, or other
liquid assets having an aggregate value equal to the amount of such purchase
commitments until payment is made. Although the Fund will generally make
commitments to purchase such interests or securities on a when-issued basis
with the intention of acquiring such interests or securities, the Fund may
sell them before the settlement date if it is deemed advisable. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring interests or securities for the Fund
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage. The Fund is not subject to any percentage
limit on the amount of its assets which may be invested in when-issued
securities.
INTEREST RATE HEDGING TRANSACTIONS. Certain federal income tax requirements
may limit the Fund's ability to engage in interest rate hedging transactions.
Gains from transactions in interest rate hedges distributed to shareholders
will be taxable as ordinary income or, in certain circumstances, as long-term
capital gains. See "Taxation."
The Fund may enter into interest rate swaps in order to hedge all of its
fixed rate Corporate Loans and Corporate Debt Securities against fluctuations
in interest rates. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest,
such as an exchange of fixed rate payments for floating rate payments. For
example, if the Fund holds a Corporate Loan or Corporate Security with an
interest rate that is reset only once each year, it may swap the right to
receive interest at this fixed rate for the right to receive interest at a
rate that is reset every week. This would enable the Fund to offset a decline
in the value of the Corporate Loan or Corporate Debt Security due to rising
interest rates, but would also limit its ability to benefit from falling
interest rates.
Inasmuch as these interest rate hedging transactions are entered into for
good faith hedging purposes, Advisers believes that such obligations do not
constitute senior securities under the federal securities laws. Accordingly,
the Fund will not treat hedging transactions as being subject to its
borrowing restrictions. The Fund usually will enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis, and an amount of cash or high grade liquid debt securities
having an aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated accounted by the Fund's custodian. If the
interest rate swap transaction is entered into on other than a net basis, the
full amount of the Fund's obligations will be accrued on a daily basis, and
the full amount of the Fund's obligations will be maintained in a segregated
account by the Fund's custodian. The Fund will not enter into any interest
rate hedging transaction unless Advisers considers the credit quality of the
unsecured senior debt or the claims-paying ability of the other party thereto
to be investment grade. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Fund's rights as a
creditor. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, many
portions of the swap market has become relatively liquid in comparison with
other similar instruments traded in the interbank market. In addition,
although the terms of interest rate swaps may provide for termination, there
can be no assurance the Fund will be able to terminate an interest rate swap
or to sell or offset interest rate caps or floors that it has purchased.
The use of interest rate hedges is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio transactions. If Advisers is incorrect in its forecasts of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would have been
if these investment techniques were not used.
Except as noted above, there is no limit on the amount of interest rate
hedging transactions that may be entered into by the Fund. These transactions
do not involve the delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate hedges
is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the Corporate Loan underlying an interest
rate swap is prepaid and the Fund continues to be obligated to make payments
to the other party to the swap, the Fund would have to make such payments
from another source. If the other party to an interest rate swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that
the Fund contractually is entitled to receive. Since interest rate
transactions are individually negotiated, Advisers expects to achieve an
acceptable degree of correlation between the Fund's rights to receive
interest on Participation Interests and its rights and obligations to receive
and pay interest pursuant to interest rate swaps.
WHAT ARE THE INVESTMENT RESTRICTIONS ON THE FUND?
The following are fundamental investment restrictions of the Fund and, prior
to issuance of any preferred stock, may not be changed without the approval
of the holders of a majority of the Fund's outstanding Common Shares (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
Common Shares represented at a meeting at which more than 50% of the
outstanding Common Shares are represented or (ii) more than 50% of the
outstanding Common Shares). Subsequent to the issuance of a class of
preferred stock, the following investment restrictions may not be changed
without the approval of a majority of the outstanding Common Shares and of
the preferred stock, voting together as a class, and the approval of a
majority of the outstanding shares of preferred stock, voting separately by
class. None of the following restrictions shall be construed to prevent the
Fund from investing all of its assets in another management investment
company with an investment objective and investment policies and restrictions
that are substantially the same as the investment objective and investment
policies and restrictions of the Fund. The Fund may not:
1. Borrow money or issue senior securities, except as permitted
by Section 18 of the 1940 Act.
2. Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the 1933 Act in selling portfolio
securities.
3. Make loans to other persons, except that the Fund may invest
in loans (including Assignments and Participations, and including secured or
unsecured corporate loans), purchase debt securities, enter into repurchase
agreements, and lend its portfolio securities.
4. Invest more than 25% of its total assets in the securities of
issuers in any one industry; provided that this limitation shall not apply
with respect to obligations issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities; and provided further that the Fund may
invest more than 25% and may invest up to 100% of its assets in securities of
issuers in the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift institutions, insurance
companies and finance companies. For purposes of this restriction, the term
"issuer" includes the Borrower, the Agent Bank and any Intermediate
Participant (as defined under "Investment Objective and Policies --
Description of Participation Interests").
5. Purchase any securities on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities. The purchase of Corporate Loans,
Corporate Debt Securities, and other investment assets with the proceeds of a
permitted borrowing or securities offering will not be deemed to be the
purchase of securities on margin.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
WHAT ARE THE RISKS OF THIS INVESTMENT?
EFFECTS OF LEVERAGE. The Fund may borrow money in amounts up to 33 1/2% of
the value of its total assets to finance Tender Offers, for temporary,
extraordinary or emergency purposes, or, while the Fund has no current
intention of doing so, for the purpose of financing additional investments.
See "Tender Offers." The Fund also may issue one or more series of preferred
shares, although it has no current intention to do so. The Fund may borrow to
finance additional investments or issue a class of preferred shares only when
it believes that the return that may be earned on investments purchased with
the proceeds of such borrowings or offerings will exceed the costs, including
debt service and dividend obligations, associated therewith. However, to the
extent such costs exceed the return on the additional investments, the return
realized by the Fund's Common Shareholders will be adversely affected.
Capital raised through leverage will be subject to interest costs or dividend
payments which may or may not exceed the interest on the assets purchased.
The Fund also may be required to maintain minimum average balances in
connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of
borrowing over the stated interest rate. The issuance of additional classes
of preferred shares involves offering expenses and other costs and may limit
the Fund's freedom to pay dividends on Common Shares or to engage in other
activities. Borrowings and the issuance of a class of preferred stock having
priority over Common Shares create an opportunity for greater income per
share of Common Shares, but at the same time such borrowing or issuance is a
speculative technique in that it will increase the Fund's exposure to capital
risk. Such risks may be reduced through the use of borrowings and preferred
stock that have floating rates of interest. Unless the income and
appreciation, if any, on assets acquired with borrowed funds or offering
proceeds exceeds the costs of borrowing or issuing additional classes of
securities, the use of leverage will diminish the investment performance of
the Fund compared with what it would have been without leverage.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of
the aggregate outstanding principal balance of indebtedness. Additionally,
under the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its capital stock, or purchase any such
capital stock, unless the aggregate indebtedness of the Fund has at the time
of the declaration of any such dividend or distribution or at the time of any
such purchase an asset coverage of at least 300% after deducting the amount
of such dividend, distribution, or purchase price, as the case may be.
The Fund's willingness to borrow money for investment purposes, and the
amount it will borrow, will depend on many factors, the most important of
which are investment outlook, market conditions and interest rates.
Successful use of a leveraging strategy depends on Advisers' ability to
predict correctly interest rates and market movements. There is no assurance
that a leveraging strategy will be successful during any period in which it
is employed.
CREDIT RISK. Corporate Loans and Corporate Debt Securities may constitute
substantially all of the Fund's investments. Corporate Loans and Corporate
Debt Securities are primarily dependent upon the creditworthiness of the
Borrower for payment of interest and principal. The nonreceipt of scheduled
interest or principal on a Corporate Loan or Corporate Debt Security may
adversely affect the income of the Fund or the value of its investments,
which may in turn reduce the amount of dividends or the net asset value of
the shares of the Fund. The Fund's ability to receive payment of principal of
and interest on a Corporate Loan or a Corporate Debt Security also depends
upon the creditworthiness of any institution interposed between the Fund and
the Borrower. To reduce credit risk, Advisers actively manages the Fund as
described above.
Corporate Loans and Corporate Debt Securities made in connection with
leveraged buy-outs, recapitalizations and other highly leveraged transactions
are subject to greater credit risks than many of the other Corporate Loans
and Corporate Debt Securities in which the Fund may invest. These credit
risks include the possibility of a default on the Corporate Loan or Corporate
Debt Security or bankruptcy of the Borrower. The value of such Corporate
Loans and Corporate Debt Securities are subject to a greater degree of
volatility in response to interest rate fluctuations and may be less liquid
than other Corporate Loans and Corporate Debt Securities. The Corporate Loans
and Corporate Debt Securities in which the Fund invests generally are not
rated by any NRSRO.
Although Corporate Loans and Corporate Debt Securities in which the Fund
invests will generally hold the most senior position in the capitalization
structure of the Borrowers, the capitalization of many Borrowers will include
non-investment grade subordinated debt. During periods of deteriorating
economic conditions, a Borrower may experience difficulty in meeting its
payment obligations under such bonds and other subordinated debt obligations.
Such difficulties may detract from the Borrower's perceived creditworthiness
or its ability to obtain financing to cover short-term cash flow needs and
may force the Borrower into bankruptcy or other forms of credit restructuring.
COLLATERAL IMPAIRMENT. Corporate Loans and Corporate Debt Securities
(excluding Unsecured Corporate Loans and Unsecured Corporate Debt Securities)
will be secured unless (i) the Fund's security interest in the collateral is
invalidated for any reason by a court or (ii) the collateral is fully
released under the terms of a loan agreement as the creditworthiness of the
Borrower improves. There is no assurance that the liquidation of collateral
would satisfy the Borrower's obligation in the event of nonpayment of
scheduled interest or principal, or that collateral could be readily
liquidated. The value of collateral generally will be determined by reference
to financial statements of the Borrower, an independent appraisal performed
at the request of the Agent Bank at the time the Corporate Loan was initially
made, the market value of such collateral (e.g., cash or securities) if it is
readily ascertainable and/or by other customary valuation techniques
considered appropriate in the judgment of Advisers. Collateral is generally
valued on the basis of the Borrower's status as a going concern and such
valuation may exceed the immediate liquidation value of the collateral.
Collateral may include (i) working capital assets, such as accounts
receivable and inventory; (ii) tangible fixed assets, such as real property,
buildings and equipment; (iii) intangible assets, such as trademarks and
patent rights (but excluding goodwill); and (iv) security interests in shares
of stock of subsidiaries or affiliates. To the extent that collateral
consists of the stock of the Borrower's subsidiaries or other affiliates, the
Fund will be subject to the risk that this stock will decline in value. Such
a decline, whether as a result of bankruptcy proceedings or otherwise, could
cause the Corporate Loan or Corporate Debt Security to be under
collateralized or unsecured. In most credit agreements there is no formal
requirement to pledge additional collateral. In the case of Corporate Loans
made to non-public companies, the company's shareholders or owners may
provide collateral in the form of secured guarantees and/or security
interests in assets that they own. In addition, the Fund may invest in
Corporate Loans guaranteed by, or fully secured by assets of, such
shareholders or owners, even if the Corporate Loans are not otherwise
collateralized by assets of the Borrower; provided, however, that such
guarantees are fully secured. There may be temporary periods when the
principal asset held by a Borrower is the stock of a related company, which
may not legally be pledged to secure a Corporate Loan or Corporate Debt
Security. On occasions when such stock cannot be pledged, the Corporate Loan
or Corporate Debt Security will be temporarily unsecured until the stock can
be pledged or is exchanged for or replaced by other assets, which will be
pledged as security for the Corporate Loan or Corporate Debt Security.
However, the Borrower's ability to dispose of such securities, other than in
connection with such pledge or replacement, will be strictly limited for the
protection of the holders of Corporate Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the Corporate Loan or Corporate
Debt Security collateral or subordinate the Fund's rights under the Corporate
Loan or Corporate Debt Security to the interests of the Borrower's unsecured
creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the Corporate Loan
or Corporate Debt Security collateral to the Fund. For Corporate Loans or
Corporate Debt Securities made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Corporate Loan or Corporate Debt Security
were not received or retained by the Borrower, but were instead paid to other
persons (such as shareholders of the Borrower) in an amount which left the
Borrower insolvent or without sufficient working capital. There are also
other events, such as the failure to perfect a security interest due to
faulty documentation or faulty official filings, which could lead to the
invalidation of the Fund's security interest in Corporate Loan or Corporate
Debt Security collateral. If the Fund's security interest in Corporate Loan
or Corporate Debt Security collateral is invalidated or the Corporate Loan or
Corporate Debt Security is subordinated to other debt of a Borrower in
bankruptcy or other proceedings, it is unlikely that the Fund would be able
to recover the full amount of the principal and interest due on the Corporate
Loan or Corporate Debt Security.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS. In the event of an increase in
short-term rates or other changed market conditions to the point where the
Fund's leverage could adversely affect holders of Common Shares as noted
above, or in anticipation of such changes, the Fund may attempt to shorten
the average maturity of its investment portfolio, which would tend to offset
the negative impact of leverage on holders of Common Shares. To do this, the
Fund would purchase securities with generally shorter maturities.
HOW TO BUY COMMON SHARES OF THE FUND
INITIAL OFFERING
Franklin/Templeton Distributors, Inc. ("Distributors") acts as the
distributor of Common Shares of the Fund. Distributors, and other securities
dealers which have entered into selected dealer agreements with Distributors,
will offer Common Shares of the Fund initially on the first day of the
offering, expected to be October xx, 1997 unless delayed. The initial
offering date may be delayed for up to an additional 30 days upon agreement
between the Fund and Distributors. At the conclusion of this first day of
offering, Common Shares will be paid for and issued and the Fund will
commence operations.
The public offering price of Common Shares during the initial offering is $10
per share and does not include a front-end sales charge. The proceeds per
share to the Fund from the sale of all shares sold during the initial
offering will be $10. As set forth below, Distributors may make payments to
selected dealers from its own assets. A selected dealer may charge its
customers a fee in connection with transactions executed for such customers
by such dealer.
CONTINUOUS OFFERING
After completion of the initial offering, the Fund will engage in a
continuous offering of Common Shares through Distributors and other
securities dealers that have entered into selected dealer agreements with
Distributors. During any continuous offering of Common Shares, Common Shares
of the Fund may be purchased from Distributors or selected dealers, or by
mailing a purchase order directly to Franklin/Templeton Investor Services,
Inc. ("Investor Services") at 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, CA 94403-7777. The Fund may, at any time, suspend the offering and
sale of Common Shares and may refuse any order for the purchase of Common
Shares. A selected dealer may charge its customers a fee in connection with
transactions executed for such customers by such dealer.
If the Fund receives the Exemptive Order and this Prospectus is revised
accordingly, in connection with the continuous offering, an early withdrawal
charge, which will be paid to Distributors, will be imposed on most Common
Shares purchased after the date that the Prospectus is revised and that are
held for less than twelve months and are accepted for repurchase pursuant to
a Tender Offer, as set forth under "Early Withdrawal Charge to Shareholders".
From time to time the Fund may suspend the continuous offering of its Common
Shares. During any such suspension, shareholders who reinvest their
distributions in additional Common Shares will be permitted to continue such
reinvestments, and the Fund may permit tax sheltered retirement plans which
own Common Shares to purchase additional Common Shares of the Fund.
During the continuous offering of Common Shares, the applicable offering
price for Common Shares is the net asset value per share, next determined
after receipt of the purchase order by Distributors. As to purchase orders
received by Distributors [or securities dealers] prior to the close of
business on the New York Stock Exchange (the "Exchange") (generally, 1:00
p.m., Pacific Time), which includes orders received after the close of
business on the previous business day, the applicable offering price will be
based on the net asset value determined as of the close of business on the
Exchange on that day. If the purchase orders are not received by Distributors
[or securities dealers] prior to the close of business on the Exchange, such
orders shall be deemed received on the next business day. Any order may be
rejected by Distributors or the Fund. The Fund or Distributors may suspend
the continuous offering of Common Shares at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Neither Distributors nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Distributors is required to advise the Fund promptly of all purchase orders
and cause payments for Common Shares to be delivered promptly to the Fund.
Due to the administrative complexities associated with a continuous offering,
administrative efforts may result in Distributors or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5%) of
Common Shares which it may wish to resell. Such Common Shares will not be
subject to any investment restriction and may be resold pursuant to this
Prospectus.
Distributors compensates selected dealers at a rate of 1.00% of the dollar
amount of shares sold by the dealer, consisting of 0.75% of sales commission
and 0.25% of service fee (for the first year's services). If Common Shares
remain outstanding for at least one year from the date of their original
purchase, Distributors will, beginning in the thirteenth month, compensate
such dealers quarterly at an annual rate equal to 0.50% of the value of
Common Shares sold by such dealers and remaining outstanding. Compensation
paid to the selected dealers at the time of purchase and the monthly payments
mentioned above do not represent an additional expense to shareholders since
such payments will be made from the assets of Distributors, Advisers and
Investor Services. The compensation paid to selected dealers and
Distributors, including the compensation paid at the time of purchase, the
monthly payments mentioned above, [any additional incentives mentioned
below,] and the early withdrawal charge, if any, will not in the aggregate
exceed the applicable limit (currently 8.50%), as determined from time to
time by the National Association of Securities Dealers, Inc. ("NASD") unless
the approval of the NASD has been received.
PERIODIC OFFERS BY THE FUND TO REPURCHASE
COMMON SHARES FROM ITS SHAREHOLDERS
In recognition of the likelihood that a secondary market for the Fund's
Common Shares will not exist, the Fund has taken actions that will provide
some liquidity to shareholders. The Fund has adopted certain share repurchase
policies as fundamental policies which may not be changed without the vote of
the holders of a majority of the Fund's outstanding voting securities (as
determined under the 1940 Act.) Each calendar quarter the Fund will make
Tender Offers, i.e., offers to repurchase a portion of the Common Shares from
shareholders at a price per share equal to the net asset value per share of
the Common Shares determined at the close of business on the day the Tender
Offer terminates.
REPURCHASE PROCEDURES. The Fund will establish a maximum of fourteen days
prior to the deadline for repurchase requests and the applicable repurchase
date such that repurchases of Common Shares may occur on the last business
day of [each calendar quarter.] The Board of Trustees is authorized to
establish other policies relating to repurchases of Common Shares that are
consistent with the 1940 Act. Additional dates for repurchases of Common
Shares may be established by the Board of Trustees in its sole discretion,
not more frequently than once every two years. Shares tendered by
shareholders on any repurchase date will be repurchased, subject to the
aggregate repurchase amounts established for any such dates, at the then
current net asset value per share. Repurchase proceeds will be repaid, in
cash, within seven days after each of the Fund's repurchase dates (each, a
"Repurchase Payment Deadline").
REPURCHASE AMOUNTS. The number of Common Shares that the Fund will offer to
repurchase on any repurchase date (the "Repurchase Offer Amount") will be
determined by the Board of Trustees, in its sole discretion, but will be at
least 5% and no greater than 25% of the total number of Common Shares
outstanding on any such date. Currently, the Board of Trustees has determined
that the initial repurchase offer will be set at [5%;] however, this may
change prior to the date of the repurchase offer at the sole discretion of
the Board of Trustees.
If shareholders tender more than the repurchase offer amount, the Fund may
repurchase an additional amount of Common Shares, not to exceed two percent
(2%) of the shares outstanding on the repurchase request deadline. The Fund
will repurchase the Common Shares tendered on a pro rata basis. The Fund
may, however, accept all Tender Offers of shareholders who own less than one
hundred shares and who tender all their shares, before prorating other Tender
Offers. If shareholders who tender all their shares elect to have either all
or none or at least a minimum amount or none accepted, the Fund may first
accept all shares tendered by shareholders who do not so elect. After
accepting all such shares, the Fund may accept by lot shares tendered by
shareholders who make such an election.
NOTICES TO SHAREHOLDERS. Notice of both the quarterly repurchase offers and
any additional discretionary repurchase offers will be given to each
shareholder of record between twenty-one (21) and forty-two (42) days before
each repurchase request deadline. Such notice will contain information that
the shareholder should consider in deciding whether or not to tender Common
Shares and detailed instructions on how to tender such shares. Such notice
will state the Repurchase Offer Amount and any fees applicable to such
repurchase, the dates of the repurchase request deadline, repurchase pricing
date, and Repurchase Payment Deadline. Shareholders will be advised of the
risk of fluctuation in the net asset value between the repurchase request
deadline and the repurchase pricing date, and the possibility that the Fund
may use an earlier repurchase pricing date under certain circumstances, such
as customary national holidays described in the Prospectus. Procedures by
which shareholders may tender their Common Shares, the procedures by which
the Fund may repurchase such shares on a pro rata basis, and the
circumstances in which the Fund may suspend or postpone a repurchase offer
will be set forth in the notice to shareholders. Procedures by which
shareholders may withdraw or modify their tenders until the repurchase
request deadline will also be set forth in the notice. Finally, the notice
will set forth the net asset value of the Common Shares to be repurchased no
more than seven days before the date of notification, and the means by which
shareholders may ascertain the net asset value thereafter, as well as the
market price of such shares, if any, on the date on which the net asset value
was computed, and the means to determine the market price thereafter.
REPURCHASE PRICE. The current net asset value of the Common Shares will be
computed daily on the five business days before a repurchase request
deadline, at such times to be determined by the Board of Trustees.
Shareholders may readily ascertain the net asset value per share during an
open tender offer period, and on any day the Exchange is open for business,
by calling [the Fund] [Investor Services] at 1-800-DIAL BEN. The notice of
the repurchase offer will also provide information concerning the net asset
value per share, such as the net asset value as of a recent date or a
sampling of recent net asset values, and a toll-free number for information
regarding the repurchase offer. During the period from notification to
shareholders of a repurchase pricing date to the repurchase request deadline,
the Fund will maintain liquid assets in an amount equal to 100 percent of the
repurchase offer amount.
SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFER. The Fund will not suspend or
postpone a repurchase offer except pursuant to a vote of a majority of the
Fund's Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund, as defined in the 1940 Act (the "Independent
Trustees"). Furthermore, the Fund will suspend or postpone a repurchase
offer only if certain regulatory requirements are met. The Fund will give
shareholders notice of any such suspension or postponement, and likewise will
give notice of a renewed repurchase offer.
SPECIAL CONSIDERATIONS OF REPURCHASES. In compliance with the 1940 Act
requirements for periodic repurchase offers, a majority of the Fund's
Trustees are Independent Trustees and the selection and nomination of
additional Independent Trustees are within the discretion of the Independent
Trustees.
Subject to the Fund's investment restriction with respect to borrowings, the
Fund may at some time in the future borrow money to finance the repurchase of
Common Shares pursuant to any Tender Offers. See "Special Considerations and
Risk Factors -- Effects of Leverage" and "Investment Restrictions."
The Fund expects that ordinarily there will be no secondary market for the
Fund's Common Shares and that periodic Tender Offers will be the only source
of liquidity for Fund shareholders. Nevertheless, if a secondary market
develops for Common Shares of the Fund, the market price per share of the
Common Shares may vary from the net asset value per share of the Common
Shares from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the
Fund, especially as such factors affect the yield on and net asset value per
share of Common Shares of the Fund. The Tender Offers for Common Shares at
net asset value are expected to reduce any spread between net asset value and
market price that may otherwise develop. There can be no assurance, however,
that such action would result in Common Shares trading at a price that equals
or approximates net asset value per share.
Although the Board of Trustees believes that the Tender Offers generally will
be beneficial to holders of Common Shares, the acquisition of Common Shares
by the Fund will decrease the total assets of the Fund and therefore have the
likely effect of increasing the Fund's expense ratio (assuming such
acquisition is not offset by the issuance of additional Common Shares).
Furthermore, if the Fund should in the future borrow to finance the making of
Tender Offers, interest on such borrowings would reduce the Fund's net
investment income. It is the Board of Trustees' announced policy, which may
be changed by the Board, not to repurchase Common Shares pursuant to a Tender
Offer over the minimum amount required by the Fund's fundamental policies
regarding Tender Offers if the Board of Trustees determines that such a
repurchase is not in the Fund's best interest.
Repurchases pursuant to Tender Offers could significantly reduce the asset
coverage of any borrowing or outstanding senior securities. The Fund may not
repurchase Common Shares to the extent such repurchases would result in the
asset coverage with respect to such borrowing or senior securities being
reduced below the asset coverage requirements set forth in the 1940 Act.
Accordingly, in order to repurchase all Common Shares tendered, the Fund may
have to repay all or part of any then outstanding borrowing or redeem all or
part of any then outstanding senior securities to maintain the required asset
coverage. See "Special Considerations and Risk Factors -- Effects of
Leverage." In addition, the amount of Common Shares for which the Fund makes
any particular Tender Offer may be limited for the reasons set forth above or
in respect of other concerns to liquidity of the Fund.
[In the event that circumstances arise under which the Fund's Tender Offers
are often not sufficient to allow shareholders to have their Common Shares be
repurchased in amounts desired by such shareholders, the Board of Trustees
would consider alternative means of providing liquidity for holders of Common
Shares. Such action would include an evaluation of any secondary market that
then existed and a determination of whether such market provided liquidity
for holders of Common Shares. If the Board of Trustees determines that such
market, if any, fails to provide liquidity for the holders of Common Shares,
the Board expects that it will consider all then available alternatives to
provide such liquidity. Among the alternatives that the Board of Trustees may
consider is the listing of the Fund's Common Shares on a major domestic stock
exchange or quotation of such shares on an over-the-counter market in order
to provide such liquidity. The Board of Trustees also may consider causing
the Fund to repurchase its shares from time to time in open-market or private
transactions when it can do so on terms that represent a favorable investment
opportunity. In any event, the Board of Trustees expects that it will cause
the Fund to take whatever action it deems necessary or appropriate to provide
liquidity for the holders of Common Shares in light of the facts and
circumstances existing at such time.]
To consummate a Tender Offer for the repurchase of Common Shares, the Fund
may be required to liquidate portfolio securities, and realize gains or
losses, at a time when Advisers would otherwise consider it disadvantageous
to do so.
The repurchase of tendered Common Shares by the Fund is a taxable event. See
"Taxation." The Fund will pay all costs and expenses associated with the
making of any Tender Offer. If the Fund receives the Exemptive Order and
this Prospectus is revised accordingly, an Early Withdrawal Charge will be
imposed on certain Common Shares that are purchased after the Prospectus is
revised and that have been held for less than twelve months and are accepted
for repurchase pursuant to a Tender Offer, subject to certain waivers of such
charge described in the revised Prospectus. See "Early Withdrawal Charge to
Shareholders" below.
The Fund may also make offers to repurchase shares of which it is the issuer
pursuant to any other applicable rules of the SEC, in effect at the time of
the offer.
EARLY WITHDRAWAL CHARGE TO SHAREHOLDERS
If the Fund receives the Exemptive Order and this Prospectus is revised
accordingly, an Early Withdrawal Charge to recover distribution expenses
incurred by Distributors will be charged against the shareholder's proceeds
from the repurchase of Common Shares and paid to Distributors with respect to
Common Shares that are purchased after the Prospectus is revised and that are
held for less than twelve months, are accepted by the Fund for repurchase
pursuant to a Tender Offer in the manner described herein and are not subject
to any waiver of the Early Withdrawal Charge as described in the revised
Prospectus.
WAIVERS OF THE EARLY WITHDRAWAL CHARGE. If the Early Withdrawal Charge is
imposed following receipt of the Exemptive Order, such charge may be waived
under certain circumstances as will be described in the revised Prospectus
that discloses the imposition of the Early Withdrawal Charge.
WHO MANAGES THE FUND
THE BOARD. The Board of Trustees oversees the management of the Fund and
elects its officers. The officers are responsible for the Fund's day-to-day
operations.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Advisers manages the Fund's assets
and makes its investment decisions. Advisers also performs similar services
for other funds. Advisers is wholly owned by Resources, a publicly owned
holding company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
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 of Trustees to whom Advisers renders periodic reports of the Fund's
investment activities. Advisers provides office space and furnishings,
facilities and equipment required for managing the business affairs of the
Fund. Advisers is covered by fidelity insurance on its officers, directors
and employees 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 may buy or sell for its 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 or administers.
Of course, any transactions for the accounts of Advisers will be made in
compliance with the requirements of the 1940 Act.
MANAGEMENT FEES. Under its management agreement, the Fund will pay Advisers
a monthly fee at the annual rate of 0.80% of the average daily net assets of
the Fund. The fee is computed at the close of business on the last business
day of each month.
MANAGEMENT TEAM.
Chauncey F. Lufkin
Age: 39
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and the portfolio manager of the Fund since its inception and
a Portfolio Manager of Franklin Advisers, Inc. since 1990. Formerly an
employee of Manufacturers Hanover Trust Co. (now The Chase Manhattan Bank),
where he worked in the Acquisition Finance Group specializing in structuring
and negotiation of leveraged transactions, and formerly an employee of
Security Pacific Bank (now Bank of America).
[ANY OTHER PORTFOLIO MANAGERS]
MANAGEMENT AGREEMENT. The management agreement is in effect until
_____________, 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 of Trustees 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, or by
Advisers on 30 days' written notice, and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
ADMINISTRATOR. 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.
Under its administration agreement, the Fund 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 of
$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.
SHAREHOLDER SERVICING AND TRANSFER AGENT. Franklin/Templeton Investor
Services, Inc. ("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 at the
annual rate of 0.40% of the Fund's average daily net assets.
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.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund, their ages and their
principal occupations during the last five years, are set forth below.
Trustees who are considered "interested persons" of the Fund under the 1940
Act are indicated by an asterisk (*).
NAME, AGE AND POSITIONS AND PRINCIPAL
ADDRESS OFFICES WITH THE OCCUPATION
TRUST DURING THE
PAST FIVE
YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 29 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
General Host Corporation
Metro Center, 1 Station Place Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
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, General
Host Corporation (nursery and craft centers); and director or trustee, as the
case may be, of 55 of the investment companies in the Franklin Templeton
Group of Funds.
David W. Garbellano (82)
111 New Montgomery St. #402
San Francisco, CA 94105
Trustee
Private investor; Assistant Secretary/Treasurer and Director, Berkeley
Science Corporation (a venture capital company); and director or trustee, as
the case may be, of 28 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 54 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
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.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of 58 of the investment companies in the
Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 50 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, 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 58 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President and Director, Templeton Worldwide,
Inc.; Director, Executive Vice President and Chief Operating Officer,
Templeton Investment Counsel, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer, Franklin Investment Advisory Services,
Inc.; President, Franklin Templeton Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; officer, and or director or
trustee, as the case may be, of 58 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 58 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Chauncey F. Lufkin (39)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Employee of Franklin Advisers, Inc. since 1990; formerly, an employee of
Manufacturers Hanover Trust Co. and Security Pacific National Bank; and
officer of one investment company in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
The compensation of the officers and Trustees who are not Independent
Trustees of the Fund is paid by Advisers. The Fund pays the compensation of
all other officers and Trustees of the Fund.
PORTFOLIO TRANSACTIONS BY THE FUND
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Advisers in accordance with criteria set forth in the
management agreement and any directions that the Board of Trustees may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. When portfolio
transactions are done 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 in connection with portfolio transactions are
based to a large degree on the professional opinions of the persons
responsible for the placement and review of the transactions. These opinions
are based on, among others, 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.
The amount of commission is not the only factor Advisers considers in the
selection of a broker to execute a trade. If Advisers believes it is in the
Fund's best interest, Advisers may place portfolio transactions with brokers
who provide the type of services described below, even if it means the Fund
will pay a higher commission than if no weight were given to the broker's
furnishing of these services. This will be done only if, in the opinion of
Advisers, the amount of any additional commission is reasonable in relation
to the value of the services. Higher commissions will be paid only when the
brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist Advisers in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do
so, whether or not such services may also be useful to Advisers in advising
other clients.
When Advisers believes several brokers are equally able to provide the best
net price and execution, it may decide to execute transactions through
brokers who provide quotations and other services to the Fund, in an amount
of total brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary
to determine the Fund's net asset value, as well as research, statistical and
other data.
It is not possible to place a dollar value on the special executions or on
the research services received by Advisers from dealers effecting
transactions in portfolio securities. The allocation of transactions in
order to obtain additional research services permits Advisers to supplement
its own research and analysis activities and to receive the views and
information of individuals and research staff of other securities firms. As
long as it is lawful and appropriate to do so, 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 may also be considered a factor in the
election 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 would have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
The Fund engages in trading when Advisers has concluded that the sale of a
security owned by the Fund and/or the purchase of another security can
enhance principal and/or increase income. A security may be sold to avoid any
prospective decline in market value, or a security may be purchased in
anticipation of a market rise. Consistent with the Fund's investment
objective, a security also may be sold and a comparable security purchased
coincidentally in order to take advantage of what is believed to be a
disparity in the normal yield and price relationship between the two
securities.
The Fund's portfolio turnover rate is not expected to exceed 100%, but may
vary greatly from year to year and will not be a limiting factor when
Advisers deems portfolio changes appropriate. Although the Fund generally
does not intend to trade for short-term profits, the securities held by the
Fund will be sold whenever Advisers believes it is appropriate to do so,
without regard to the length of time a particular security may have been
held. Large Common Share repurchases by the Fund during the quarterly
repurchase periods may require the Fund to liquidate portions of its
securities holdings for funds to repurchase the Common Shares. The
liquidation of such holdings may result in a higher than expected portfolio
turnover rate. A 100% portfolio turnover rate would occur if the lesser of
the value of purchases or sales of the Fund's securities for a year
(excluding purchases of U.S. Treasury and other securities with a maturity at
the date of purchase of one year or less) were equal to 100% of the average
monthly value of the securities, excluding short-term investments, held by
the Fund during such year. Higher portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs that the Fund will
bear directly.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to distribute substantially all of its net investment
income, which consists generally of its share of the Fund's net investment
income, reduced by interest on the Fund's borrowings, and dividends or
interest on its senior securities, if any. Dividends from such income are
declared daily and paid monthly to holders of Common Shares. Substantially
all of the Fund's net realized long- and short-term capital gains, if any,
are distributed at least annually to Common Shareholders. Common Shares
accrue dividends as long as they are issued and outstanding (i.e., from the
settlement date of a purchase order to the settlement date of a Tender Offer).
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence it has an asset coverage of at least 300%
of the aggregate outstanding principal balance of the indebtedness.
Additionally, under the 1940 Act, the Fund may not declare any dividend or
other distribution on any class of its capital stock or purchase any such
capital stock unless it has, at the time of the declaration of any such
distribution or at the time of any such purchase, asset coverage of at least
300% of the aggregate indebtedness after deducting the amount of such
distribution, or purchase price, as the case may be. This latter limitation
- -- and a limitation on the Fund's ability to declare any cash dividends or
other distributions on the Common Shares while any shares of preferred stock
are outstanding -- could under certain circumstances impair its ability to
maintain its qualification for taxation as a regulated investment company.
See "Special Considerations and Risk Factors -- Effects of Leverage" and
"Taxation."
Dividends and other distributions will be taxable to shareholders whether
they are so reinvested in shares of the Fund or received in cash. See
"Taxation."
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 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 CLASS I SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may
direct your distributions to buy Class I 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" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS [ ] 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
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 reinvestment date
for us to process the new option.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
TAXATION OF THE FUND
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code. The Board of Trustees reserves the right not to
maintain the qualification of the Fund as a regulated investment company if
it determines this course of action to be beneficial to shareholders. In
that case, the Fund will be subject to federal and possibly state corporate
taxes on its taxable income and gains, and distributions to shareholders will
be taxable to the extent of the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the 12 month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to shareholders by December 31 of each
year in order to avoid the imposition of a federal excise tax. Under these
rules, certain distributions which are declared in October, November or
December but which, for operational reasons, may not be paid to shareholders
until the following January, will be treated for tax purposes as if paid by
the Fund and received by shareholders on December 31 of the calendar year in
which they are declared. The Fund intends as a matter of policy to declare
such dividends, if any, in December and to pay these dividends in December or
January to avoid the imposition of this tax, but does not guarantee that its
distributions will sufficient to avoid any or all federal excise taxes.
Repurchases and exchanges (if permitted) of Fund shares are taxable
transactions for federal and state income tax purposes. Gain or loss will be
recognized in an amount equal to the difference between the shareholder's
basis in the Common Shares and the amount the shareholder received, subject
to the rules described below. If such Common Shares are a capital asset in
the shareholder's hands, gain or loss will be capital gain or loss and will
be long-term for federal income tax purposes if the shareholder's Common
Shares have been held for more than one year.
In order for the Fund to qualify as a regulated investment company, at least
90% of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income. Foreign exchange gains derived by
the Fund with respect to the Fund's business of investing in Corporate Loans
or Corporate Debt Securities, are qualifying income for purposes of this 90%
limitation.
Currency speculation or the use of currency forward contracts or other
currency instruments for non-hedging purposes may generate gains deemed to be
not directly related to the Fund's principal business of investing in stock
or securities and related options or forward contracts. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the
Fund's compliance with the 30% limitation. The Fund will limit its
activities involving foreign exchange gains to the extent necessary to comply
with these requirements.
Interest received by the Fund may be subject to income, withholding, or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield on its securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
Gains or losses (1) from the disposition of foreign currencies, (2) on the
disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the
time the Fund accrues interest or other receivables or expenses or other
liabilities denominated in a foreign currency and the time it actually
collects the receivables or pays the liabilities, generally are treated as
ordinary income or loss. These gains or losses, referred to under the Code as
"section 988" gains or losses, may increase or decrease the amount of
investment company taxable income available to the Fund for distribution to
its shareholders.
The federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received
under such arrangements as ordinary income and to amortize payments under
certain circumstances. The Fund will limit its activity in this regard in
order to enable the Fund to maintain its qualification as a regulated
investment company.
TAXATION OF SHAREHOLDERS
Dividends paid by the Fund from its investment company taxable income,
whether received in cash or reinvested in Fund shares pursuant to the Plan
(as defined below), are taxable to its shareholders as ordinary income to the
extent of its earnings and profits. (Any distributions in excess of the
Fund's earnings and profits first will reduce the adjusted tax basis of a
holder's Common Shares and, after that basis is reduced to zero, will
constitute capital gains to the shareholder, assuming the Common Shares are
held as a capital asset.) Distributions, if any, from the Fund's net capital
gain, when designated as such, are taxable to its shareholders as long-term
capital gains, regardless of the length of time they have owned their Fund
shares and whether received by them in cash or reinvested in Fund shares
pursuant to the Plan. The Fund annually will provide its shareholders with a
written notice designating the amounts of any capital gain distributions.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Distributions by the Fund generally will not be eligible for the
dividends-received deduction allowed to corporations.
The Fund must withhold 31% from dividends, capital gain distributions, and
proceeds from sales of Common Shares pursuant to a Tender Offer, if any,
payable to any individuals and certain other unincorporated shareholders who
have not furnished to the Fund a correct taxpayer identification number
("TIN") or a properly completed claim for exemption on Form W-8 or W-9
("backup withholding"). Withholding at that rate also is required from
dividends and capital gain distributions payable to such shareholders who
otherwise are subject to backup withholding. When establishing an account, an
investor must certify under penalty of perjury that the investor's TIN is
correct and that the investor is not otherwise subject to backup withholding.
A loss realized on a sale or exchange of Common Shares of the Fund will be
disallowed if other Common Shares are acquired (whether through the
reinvestment of distributions under the Plan or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
Dividends paid by the Fund to a shareholder who, as to the United States, is
a nonresident alien individual or nonresident alien fiduciary of a trust or
estate, foreign corporation, or foreign partnership ("foreign shareholder")
will be subject to U.S. withholding tax (at a rate of 30% or lower treaty
rate). Withholding will not apply if a dividend paid by the Fund to a foreign
shareholder is "effectively connected with the conduct of a U.S. trade or
business," in which case the reporting and withholding requirements
applicable to domestic shareholders will apply. Distributions of net capital
gain are not subject to withholding, but in the case of a foreign shareholder
who is a nonresident alien individual, those distributions ordinarily will be
subject to U.S. income tax at a rate of 30% (or lower treaty rate) if the
individual is physically present in the United States for more than 182 days
during the taxable year and the distributions are attributable to a fixed
place of business maintained by the individual in the United States. Foreign
shareholders are urged to consult their own tax advisers concerning the
applicability of this withholding tax.
TAXATION OF TENDER OFFERS
A holder of Common Shares who, pursuant to any Tender Offer, tenders all
Common Shares owned by such shareholder and any Common Shares considered
owned thereby under attribution rules contained in the Code will realize a
taxable gain or loss depending upon such shareholder's basis for the shares.
Such gain or loss will be treated as capital gain or loss if the shares are
held as capital assets and will be long-term or short-term depending on the
shareholder's holding period for the shares.
Different tax consequences may apply to tendering and non-tendering holders
of Common Shares in connection with a Tender Offer, and these consequences
will be disclosed in the related offering documents. For example, if a
tendering holder of Common Shares tenders less than all Common Shares owned
by or attributed to such shareholder, and if the payment to such shareholder
does not otherwise qualify as a sale or exchange, the proceeds received will
be treated as a taxable dividend, a return of capital, or capital gain
depending on the Fund's earnings and profits and the shareholder's basis for
the tendered shares. Also, there is a risk that nontendering holders of
Common Shares may be considered to have received a deemed distribution that
may be a taxable dividend in whole or in part. Holders of Common Shares may
wish to consult their tax advisers prior to tendering. See "Periodic Offers
by the Fund to Repurchase Common Shares From Its Shareholders" above.
The foregoing is a general and abbreviated summary of certain federal tax
considerations affecting the Fund and its shareholders. For further
information, reference should be made to the pertinent Code sections and the
regulations promulgated thereunder, which are subject to change by
legislative, judicial, or administrative action either prospectively or
retroactively. Investors are urged to consult their tax advisers regarding
specific questions as to federal, state, local, or foreign taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.
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.
VALUATION OF COMMON SHARES
The net asset value per share of Common Shares is determined Monday through
Friday as of the scheduled close of the Exchange (generally, 1:00 p.m.,
Pacific Time), each day that the Exchange is open for trading. The Fund is
informed that, as of the date of this Prospectus, the Exchange observes the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day (day observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday,
respectively.
For the purposes of determining the net asset value of a share of Common
Shares, the Fund's uninvested assets plus its share of the value of the
securities and any cash or other assets (including interest accumulated but
not yet received) held by the Fund minus all liabilities (including accrued
expenses) of the Fund and its share of all liabilities (including accrued
expenses) of the Fund is divided by the total number of Common Shares
outstanding at such time. Expenses, including the fees payable to Advisers,
are accrued daily.
Advisers, subject to guidelines adopted and periodically reviewed by the
Fund's Board of Trustees, values the Corporate Loans and Corporate Debt
Securities at fair value, which approximates market value. In valuing a
Corporate Loan or Corporate Debt Security, Advisers considers, among other
factors, (i) the creditworthiness of the Borrower and any Intermediate
Participants, (ii) the current interest rate, period until next interest rate
reset and maturity of the Corporate Loan or Corporate Debt Security, (iii)
recent prices in the market for instruments of similar quality, rate, period
until next prices in the market for instruments of similar quality, rate,
period until next interest rate reset and maturity. Advisers believes that
Intermediate Participants selling Corporate Loans or otherwise involved in a
Corporate Loan transaction may tend, in valuing Corporate Loans for their own
accounts, to be less sensitive to interest rate and credit quality changes
and, accordingly, Advisers may not rely solely on such valuations in valuing
the Corporate Loans for the Fund's account. In addition, because a secondary
trading market in Corporate Loans and Corporate Debt Securities has not yet
fully developed, in valuing Corporate Loans and Corporate Debt Securities,
Advisers may not rely solely on but may consider prices or quotations
provided by banks, dealers or pricing services with respect to secondary
market transactions in Corporate Loans and Corporate Debt Securities. To the
extent that an active secondary market in Corporate Loans and Corporate Debt
Securities develops to a reliable degree, or exists in respect of other loans
or instruments deemed to be similar to Corporate Loans and Corporate Debt
Securities, Advisers may rely to an increasing extent on such market prices
and quotations in valuing the Corporate Loans and Corporate Debt Securities
held by the Fund.
Other portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. In certain circumstances,
portfolio securities are valued at the last sale price on the exchange that
is the primary market for such securities, or the last quoted bid price for
those securities for which the over-the-counter market is the primary market
or for listed securities in which there were no sales during the day. The
value of interest rate swaps, caps and floors is determined in accordance
with a formula and then confirmed periodically by obtaining a bank quotation.
Positions in options are valued at the last sale price on the market where
any such option is principally traded. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock or stock acquired
pursuant to the exercise of a right or warrant, may be valued taking into
account various factors such as original cost to the Fund, earnings and net
worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third
party transactions involving the issuer's securities. Securities for which
there exist no price quotations or valuations and all other assets are valued
at fair value as determined in good faith by or on behalf of the Board of
Trustees of the Fund.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, which may be offered in multiple classes. Although it has no
current intention of doing so, the Board of Trustees of the Fund is
authorized to classify and reclassify any unissued shares of beneficial
interest from time to time by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
terms and conditions of redemption of such shares by the Fund. The
description of the Common Shares and the description under "Description of
Common Shares--Certain Anti-Takeover Provisions of the Declaration of Trust"
are subject to the provisions contained in the Fund's Declaration of Trust
and Bylaws.
COMMON SHARES
Common Shares have no preemptive, conversion, exchange or redemption rights.
Each share has equal voting, dividend, distribution and liquidation rights.
The outstanding Common Shares are, and those offered hereby, when issued,
will be, fully paid and nonassessable. Shareholders are entitled to one vote
per share. All voting rights for the election of trustees are noncumulative,
which means that the holders of more than 50% of the shares can elect 100% of
the trustees then nominated for election if they choose to do so and, in such
event, the holders of the remaining shares will not be able to elect any
trustees.
As of the date of this Prospectus prior to the continuous public offering of
the Common Shares, Advisers owned 100% of the issued and outstanding Common
Shares of the Fund and was deemed to control the Fund under the 1940 Act.
Any additional offerings of the Fund's Common Shares, if made, will require
approval of its Board of Trustees and will be subject to the requirement of
the 1940 Act that shares may not be sold at a price below the then-current
net asset value, exclusive of underwriting discounts and commissions, except,
among other things, in connection with an offering to existing shareholders
or with the consent of a majority of the holders of the Fund's outstanding
voting securities. Common Shares will be held in book-entry form unless
physical certificates are requested in writing by a Common Shareholder.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST. The Fund
presently has provisions in its Declaration of Trust that have the effect of
limiting (i) the ability of other entities or persons to acquire control of
the Fund, (ii) the Fund's freedom to engage in certain transactions, and
(iii) the ability of the Fund's trustees or shareholders to amend the
Declaration of Trust. These provisions of the Declaration of Trust may be
regarded as "anti-takeover" provisions. Under Delaware law and the Fund's
Declaration of Trust, the affirmative vote of the holders of at least a
majority of the votes entitled to be cast is required for the consolidation
of the Fund with another business trust, a merger of the Fund with or into
another business trust (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the
successor, a sale or transfer of all or substantially all of the Fund's
assets, the dissolution of the Fund and any amendment to the Fund's
Declaration of Trust. In addition, the affirmative vote of the holders of at
least 66 2/3% (which is higher than that required under Delaware law or the
1940 Act) of the Fund's outstanding shares of beneficial interest is required
generally to authorize any of the following transactions or to amend the
provisions of the Declaration of Trust relating to such transactions:
o merger, consolidation or statutory share exchange of the Fund with or
into any other business trust;
o issuance of any securities of the Fund to any person or entity for cash;
o sale, lease or exchange of all or any substantial part of
the assets of the Fund to any entity or person (except assets having an
aggregate market value of less than $1,000,000); or
o sale, lease or exchange to the Fund, in exchange for
securities of the Fund, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000) if such trust,
person or entity is directly, or indirectly through affiliates, the
beneficial owner of more than 5% of the outstanding shares of the Fund (a
"Principal Shareholder"). A similar vote also would be required for any
amendment of the Declaration of Trust to convert the Fund to an open-end
investment company by making any class of the Fund's shares a "redeemable
security," as that term is defined in the 1940 Act. Such vote would not be
required with respect to any of the foregoing transactions, however, when,
under certain conditions, the Board of Trustees approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative
vote of the holders of a majority of the Fund's outstanding shares would
nevertheless be required. Reference is made to the Declaration of Trust of
the Fund, on file with the SEC, for the full text of these provisions.
The provisions of the Declaration of Trust described above and the Fund's
right to make a tender offer for its shares could have the effect of
depriving the shareholders of opportunities to sell their shares at a premium
over net asset value by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of
a merger or the assumption of control by a Principal Shareholder. They
provide, however, the advantage of potentially requiring persons seeking
control of the Fund to negotiate with its management regarding the price to
be paid and facilitating the continuity of the Fund's management, investment
objectives and policies. The Board of Trustees of the Fund has considered the
foregoing anti-takeover provisions and concluded that they are in the best
interest of the Fund and its shareholders.
INVESTMENT PERFORMANCE INFORMATION
From time to time, the Fund may include its yield and/or total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders.
The yield of the Fund refers to the income generated by an investment in the
Fund over a stated period. Yield is calculated by analyzing the most recent
monthly distribution and dividing the product by the average maximum offering
price.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and
any capital gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value of such
investment at the end of the period.
The calculation of yield and total return does not reflect the imposition of
any Early Withdrawal Charges or the amount of any shareholder's tax liability.
Yield and total return figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's yield is
expected to fluctuate, and its total return will vary, depending on market
conditions, the Corporate Loans, Corporate Debt Securities and other
securities comprising the Fund's investments, the Fund's operating expenses
and the amount of net realized and unrealized capital gains or losses during
the period.
On occasion, the Fund may compare its yield to (1) LIBOR, quoted daily in THE
WALL STREET JOURNAL, (2) the Prime Rate, quoted daily in THE WALL STREET
JOURNAL as the base rate on corporate loans at large U.S. money center
commercial banks, (3) the CD rate, quoted daily in THE WALL STREET JOURNAL as
the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million and more, (4) one or more
averages compiled by Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market mutual
funds, (5) the average yield reported by the Bank Rate Monitor National
Index(R) for money market deposit accounts offered by the 100 leading banks and
thrift institutions in the ten largest standard metropolitan statistical
areas, (6) yield data published by Lipper Analytical Services, Inc., or (7)
the yield on an investment in 90-day Treasury bills on a rolling basis,
assuming quarterly compounding. In addition, the Fund may compare the Prime
rate, the CD rate, the Donoghue's averages and the other yield data described
above to each other. As with yield quotations, yield comparisons should not
be considered indicative of the Fund's yield or relative performance for any
future period.
ADDITIONAL GENERAL INFORMATION
LEGAL MATTERS. Certain legal matters in connection with the Common Shares
offered hereby will be passed on for the Fund by Stradley, Ronon, Stevens &
Young, LLP.
FURTHER INFORMATION. Further information concerning the Common Shares and
the Fund may be found in the Registration Statement, filed electronically
with the SEC. [internet address?]
FINANCIAL STATEMENTS
The Fund will send unaudited semiannual and audited annual financial
statements of the Fund to shareholders, including a list of the portfolio of
investments held by the Fund. The following are the audited financial
statements for the initial capitalization of the Fund and the report of
Coopers & Lybrand L.L.P., independent auditors of the Fund, dated
, 1997. [To be supplied.] ---
FRANKLIN FLOATING RATE TRUST
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Included in Parts A/B:
Report of Independent Auditors [to be supplied]
Statement of Assets and Liabilities [to be supplied]
(2) EXHIBITS:
(a) Agreement and Declaration of Trust
Incorporated by Reference to:
Registration Statement on Form N-2
File No. 333-30131
Filing Date: June 27, 1997
(b) By-Laws
Incorporated by Reference to:
Registration Statement on Form N-2
File No. 333-30131
Filing Date: June 27, 1997
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
(g) (1) Form of Management Agreement [to be supplied]
(2) Form of Fund Administration Agreement [to be supplied]
(h) (1) Form of Distribution Agreement [to be supplied]
(2) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and Securities Dealers [to be
filed by amendment]
(i) Not Applicable
(j) Form of Custodian Agreement [to be supplied]
(k) Not Applicable
(l) Opinion and Consent of Counsel [to be supplied]
(m) Not Applicable
(n) Consent of Independent Auditors [to be supplied]
(o) Not Applicable
(p) Letter of Investment Intent [to be supplied]
(q) Not Applicable
(r) Not Applicable
(s) Power of Attorney dated May 13, 1997
Incorporated by Reference to:
Registration Statement on Form N-2
File No. 333-30131
Filing Date: June 27, 1997
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission Fees.................$ 30,303
National Association of
Securities Dealers, Inc. Fees...........................
Printing and Engraving Expenses..........................
Legal Fees............................................... 120,000
Accounting Expenses......................................
Blue Sky Filing Fees and Expenses........................
Miscellaneous Expenses...................................
Total...................................................$
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Franklin Resources, Inc. is a control person of the Registrant and also
directly or indirectly controls the following persons:
Percentage of Voting
Securities owned or other
Persons State or Organization Basis of Control
1.
2.
3.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD
SHAREHOLDERS AS OF
TITLE OF CLASS xx
Shares of Beneficial Interest, par value $0.01 per share
None
ITEM 29. INDEMNIFICATION
Under Article III, Section 7 of Registrant's Agreement and Declaration
of Trust, if any shareholder or former shareholder of Registrant (each, a
"Shareholder") shall be exposed to liability by reason of a claim or demand
relating to his or her being or having been a Shareholder, and not because of
his or her acts or omissions, the Shareholder or former Shareholder (or his
or her heirs, executors, administrators, or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of
the assets of the Registrant against all loss and expense arising from such
claim or demand.
Under Article VII, Section 2 of Registrant's Agreement and Declaration
of Trust, the Trustees of Registrant (each, a "Trustee," and collectively,
the "Trustees") shall not be responsible or liable in any event for any
neglect or wrong-doing of any officer, agent, employee, the investment
manager or principal underwriter of the Registrant, nor shall any Trustee be
responsible for the act or omission of any other Trustee, and the Registrant
out of its assets shall indemnify and hold harmless each and every Trustee
from and against any and all claims and demands whatsoever arising out of or
related to each Trustee's performance of his or her duties as a Trustee of
the Registrant; provided that nothing contained in Registrant's Agreement and
Declaration of Trust shall indemnify, hold harmless or protect any Trustee
from or against any liability to the Registrant or any Shareholder to which
he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act") 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 1933 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 Trustee,
officer or controlling person in connection with 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 or
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Franklin Advisers, Inc.
See "Who Manages the Fund?"
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 is a director of General Host
Corporation. For additional information please see 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 31. 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, as amended, are kept by the
Registrant or its shareholder services agent, Franklin/Templeton Investor
Services, Inc., both of whose address is 777 Mariners Island Blvd., San
Mateo, CA 94404.
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of its shares until
it amends its Prospectus if-
(a) subsequent to the effective date of this Registration
Statement, the net asset value per share declines more than
10% from its net asset value per share as of the effective
date of the Registration Statement; or
(b) The net asset value increases to an amount greater than its
net proceeds as stated in the Prospectus.
(2) Registrant undertakes:
(a) to file, during any period in which offers or sales are
being made, a post-effective amendment to the registration
statement:
(1) to include any prospectus required by Section
10(a)(3) of the 1933 Act;
(2) to reflect in the prospectus any facts or
events after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(3) to include any material information with
respect to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
b. that, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of those
securities at that time shall be deemed to be the initial
bona fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
3. Registrant further undertakes to send by first class mail or
other means designed to ensure equally prompt delivery, within
two business days of receipt of a written or oral request, any
Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of San Mateo, and the State of California, on the
26th day of September, 1997.
FRANKLIN FLOATING RATE TRUST
(Registrant)
BY /S/ RUPERT H. JOHNSON, JR., PRESIDENT
Rupert H. Johnson, Jr., President
Pursuant to the requirements of the Securities Act of 1933 this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
SIGNATURE TITLE DATE
CHARLES B. JOHNSON* Trustee & September 26, 1997
Charles B. Johnson Chairman of
the Board
FRANK H. ABBOTT, III* Trustee September 26, 1997
Frank H. Abbott, III
HARRIS J. ASHTON* Trustee September 26, 1997
Harris J. Ashton
RUPERT H. JOHNSON, JR.* Trustee September 26, 1997
Rupert H. Johnson, Jr. & President
MARTIN L. FLANAGAN* Principal September 26, 1997
Martin L. Flanagan Financial Officer
DIOMEDES LOO-TAM* Principal September 26, 1997
Diomedes Loo-Tam Accounting Officer
S. JOSEPH FORTUNATO* Trustee September 26, 1997
S. Joseph Fortunato
FRANK W. T. LAHAYE* Trustee September 26, 1997
Frank W. T. LaHaye
DAVID W. GARBELLANO* Trustee September 26, 1997
David W. Garbellano
GORDON S. MACKLIN* Trustee September 26, 1997
Gordon S. Macklin
*BY /s/ Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN FLOATING RATE TRUST
REGISTRATION STATEMENT
EXHIBIT INDEX
Exhibit No. Description Location
EX-99.2a Agreement and Declaration of Trust *
EX-99.2b By-Laws *
EX-99.2g(1) Form of Management Agreement (to be supplied)
EX-99.2g(2) Form of Fund Administration Agreement (to be supplied)
EX-99.2h(1) Form of Distribution Agreement (to be supplied)
EX-99.2h(2) Form of Dealer Agreement between (to be filed by
Franklin/Templeton Distributors, Inc. amendment)
and Securities Dealers
EX-99.2j Form of Custodian Agreement (to be supplied)
EX-99.2l Opinion and Consent of Counsel (to be supplied)
EX-99.2n Consent of Independent Auditors (to be supplied)
EX-99.2p Letter of Investment Intent (to be supplied)
EX-99.2s Power of Attorney dated May 13, 1997 *
*Incorporated by Reference
