As Filed with the Securities and Exchange Commission on October 7, 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. / 2 /
Post-Effective Amendment No. / /
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. / 2 /
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 Proposed
Title of Maximum Maximum
Securities Offering Aggregate Amount of
Being Amount Being 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 Back Not Applicable
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 of the Prospectus Summary; Information
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 Debt, Dividends and Distributions to
and Other Securities Shareholders; Taxation of the Fund
and its Shareholders; Description of
Common Shares
11. Defaults and Arrears on Senior Not Applicable
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.
FRANKLIN FLOATING RATE TRUST
PROSPECTUS
OCTOBER 8, 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. At least 65% of the Fund's total assets will be invested 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 Fund may invest up to 100% of its portfolio in high yield, high risk,
lower-rated, debt securities. These entail default and other risks greater than
those associated with higher-rated securities. You should carefully assess the
risks associated with an investment in the Fund in light of the securities in
which the Fund invests. See "Prospectus Summary--Special Considerations and Risk
Factors--Credit Risks Associated with Corporate Loans and Corporate Debt
Securities." The Corporate Loans and Corporate Debt Securities in which the Fund
invests are not lower-rated bonds, commonly referred to as "junk bonds," and
have features that junk bonds generally do not have, including the features that
Corporate Loans and Corporate Debt Securities are senior obligations of the
issuer that are secured by collateral and generally are subject to certain
restrictive covenants in favor of the lenders that invest in such loans or debt
securities.
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 8, 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. During the
continuous offering of Common Shares, the price of the Common Shares will
fluctuate, depending upon the Fund's Net Asset Value per share.
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, AND COMMON SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY OF THE U.S. GOVERNMENT. COMMON SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SEC 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,
JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS AT THE ADDRESS AND
TOLL-FREE TELEPHONE NUMBER LISTED ABOVE.
- --------------- ---------------------- ----------- ----------------------
PRICE TO PUBLIC (1) SALES PROCEEDS TO FUND (3)
LOAD (2)
- --------------- ---------------------- ----------- ----------------------
$10.00 $0.00 $10.00
Per Share
- --------------- ---------------------- ----------- ----------------------
$100,000,000 $0.00 $100,000,000
Total
- --------------- ---------------------- ----------- ----------------------
(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 $124,000 and $22,300,
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 gradually reduced as a liability in equal
installments over a period not to exced 12 months from the date
the Fund commences investment operations.
FRANKLIN FLOATING RATE TRUST
OCTOBER 8, 1997
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS PAGE
Expense Summary 6
Prospectus Summary 7
Information About the Fund 19
How Proceeds from Sales of Common Shares Are Used 19
What Kinds of Securities Does the Fund Purchase? 19
What Are the Investment Restrictions on the Fund? 37
What Are the Risks of This Investment? 38
How to Buy Common Shares of the Fund 42
Periodic Offers by the Fund to Repurchase Common
Shares From its Shareholders 44
Early Withdrawal Charge to Shareholders 48
Who Manages the Fund? 49
Trustees and Officers 51
Portfolio Transactions by the Fund 55
Dividends and Distributions to Shareholders 57
Taxation of the Fund and its Shareholders 59
Valuation of Common Shares 63
Description of Common Shares 64
Investment Performance Information 66
Transaction Procedures and Special Requirements 67
Services to Help You Manage Your Account 71
Additional General Information 73
Glossary - Useful Terms and Definitions 73
Appendix - Description of Corporate Bond Ratings 75
Financial Statements 77
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 0.65%*
Other Expenses 0.60%
Administration Fees 0.15%
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.
* Advisers has agreed in advance to limit its management fees and make
certain payments to reduce the Fund's expenses so the Fund's total operating
expenses do not exceed 1.40% for the current fiscal year. Without this
reduction, contractual and expected management fees would be 0.80% and total
Fund operating expenses would be 1.55%. After July 31, 1998, Advisers may end
this arrangement at any time."
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. 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 8,
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. 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. At least 65% of
the Fund's total assets will be invested 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 up to 35% of its total assets 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
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 (for example, commercial paper, CDs, or bankers'
acceptances) 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 expected average life of
the Corporate Loans and Corporate Debt Securities is less than their stated
maturities because they are freely prepayable at par and prepayment is more
likely because covenants of such Corporate Loans provide that the Lenders will
have priority in prepayment in case of sales of assets of the Borrowers.
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 S&P or Baa, P-3 or higher by
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.
Each Corporate Loan and Corporate Debt Security will generally be secured by
collateral having a fair market value at least equal to 100% of the amount of
such loan or debt security. The value of the collateral generally will be
determined by customary valuation techniques considered appropriate in the
judgment of Advisers. Although the terms of the Corporate Loans and Corporate
Debt Securities require that the collateral be maintained at a value at least
equal to 100% of the amount of such loan or debt security, the value of the
collateral may decline subsequent to the Fund's investment in the loan or debt
security. In the event of a default, the ability of the Lender to have access to
the collateral may be limited by bankruptcy and other insolvency laws. 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.
The collateral 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 debt securities.
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 NYSE. 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."
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.
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
starndards, practices and requirements comparable to those applicable to U.S.
Borrowers. In addition, the Fund may have more difficulty enforcing judgments in
foreign countries with respect to U.S. subsidiaries of non-U.S. Borrowers.
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. However, because variable interest rates reset only
periodically, the Fund's Net Asset Value however, may fluctuate from time to
time in the event of an imperfect correlation between either the interest
rates on variable rate loans held by the Fund, or the variable interest rates
on nominal amounts in the Fund's interest rate swap transactions, 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. Under certain limited circumstances where certain
regulatory requirements are met, the Board may, upon notice to the
shareholders, suspend or postpone the quarterly Tender Offer by the Fund to
repurchase Common Shares from the shareholders of the Fund. In such an event,
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 continues to make its public offering of 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. Also, the Lenders or the Agent Bank may have an interest in making
available to investors such as the Fund the less desirable Corporate Loans,
Participation Interests or Assignments and keeping the more desirable of such
investments for their own inventory, thereby limiting the availability of the
more desirable of such investments. 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. Corporate Loans and Corporate Debt Securities may also
include senior obligations of a Borrower that is on the verge of bankruptcy
or that are issued in connection with a restructuring pursuant to Chapter 11
of the U.S. Bankruptcy Code provided that such senior obligations are
determined by Advisers, upon its credit analysis, to be a suitable investment
by the Fund. 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. In the event of a default, the ability of
the Lender to have access to the collateral may be limited by bankruptcy and
other insolvency laws. 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. 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. The
value of the collateral 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., Borrowers are required to comply
with the terms of the Corporate Loans and Corporate Debt Securities,
including various restrictive covenants with respect to such loans or debt
securities and acceleration in the repayment of such loans or debt securities
may result in the case of a breach of such terms or covenants.
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. Highly leveraged Corporate Loans and Corporate Debt
Securities also may be less liquid than other Corporate Loans and Corporate
Debt Securities.
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 within seven days in the ordinary course of
business 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 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.
COMMITMENTS OF THE FUND TO MAKE ADDITIONAL PAYMENTS TO BORROWERS. Corporate
Loans may be structured to include both term loans, which are 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. Where the Fund purchases
a Participation, the Intermediate Participant, as defined below, may have 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 and to
limit investments in such Corporate Loans or Participations to amounts that
would not require commitments for future advances to exceed 20% of the Fund's
total assets.
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 1/3% 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 and 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 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 that 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 no 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. At least 65% of its total
assets will be invested 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 up to
35% of its total assets 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 provides a degree of
diversification, but not to the extent that the Fund is deemed a diversified
investment company under the 1940 Act. The Fund may invest a relatively high
percentage of its assets in the obligations of a limited number of issuers,
but has no current intention of investing more than 15% of its assets in the
obligations of any single Borrower and, with respect to 50% of its assets,
may not invest more than 5% of its assets in the obligations of any single
Borrower (excluding U.S. Government securities).) 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
reset only 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. 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. In addition, the Fund may
have more difficulty enforcing judgments in foreign countries with respect to
U.S. subsidiaries of non-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 having a fair market value at least equal to 100% of the amount of
such loan or debt security. The value of the collateral 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. Although the terms of the Corporate Loans and Corporate Debt
Securities require that the collateral be maintained at a value at least
equal to 100% of the amount of such loan or debt security, 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.
With respect to the Corporate Loans and Corporate Debt Securities, 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. 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.
The Lenders or the Agent Bank may have an interest in making available to
investors such as the Fund the less desirable Corporate Loans, Participation
Interests or Assignments and keeping the more desirable of such investments
for their own inventory, thereby limiting the availability of the more
desirable of such investments. 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.
Furthermore, 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. Because the Fund will maintain such
segregated accounts for such contingent obligations, Advisers believes that
such obligations do not constitute senior securities under the federal
securities laws as interpreted by the SEC. 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 will 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. See "Valuation of
Common Shares" 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 1/3%
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 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 1/3% of its total assets to
qualified securities dealers or other institutional investors. 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 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%. The
collateral shall consist of cash, securities issued by the United States
Government, its agencies or instrumentalities, or irrevocable letters of
credit.
The borrower of such loaned securities may use such securities for delivery
to purchasers to whom such borrower has sold short. In such a case, the
borrower acquires identical securities to replace the loaned securities in
time to return them to the Fund. 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 AND 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 and as provided in this prospectus and statement
of additional information.
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 will 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.
6. Buy or sell real estate (other than (i) interests in real estate
investment trusts, (ii) loans or securities that are secured, directly or
indirectly, by real estate, or (iii) securities issued by companies that
invest or deal in real estate), provided that the Fund may hold for prompt
sale and sell real estate or interests in real estate to which the Fund may
gain an ownership interest through the forfeiture of collateral securing
loans or debt securities held by the Fund.
7. Buy or sell commodities or commodity contracts (other than financial
futures), provided that forward foreign currency exchange contracts shall not
be deemed to be commodity contracts.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets not be considered a
violation of any of the foregoing restrictions.
WHAT ARE THE RISKS OF THIS INVESTMENT?
EFFECTS OF LEVERAGE. The Fund may borrow money in amounts up to 33 1/3% 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 that 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 8, 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
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.
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 suspension, shareholders who reinvest their distributions
in additional Common Shares will be permitted to continue such reinvestments.
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 NYSE (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 NYSE on that day. If the purchase orders are
not received by Distributors or securities dealers prior to the close of
business on the NYSE, 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 making tender offers
limited to a certain percentage of the outstanding Common Shares During 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 results may occur when more
shares are tendered than the percentage limit of the Tender Offer and the Fund
is required to repurchase Common Shares on a pro rata basis with any
consequentioal rending of repurchases that may occur. Such Common Shares will
not be subject to any investment restriction and may be resold pursuant to this
Prospectus.
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. To open
your account, contact your investment representative or complete
and sign the enclosed shareholder application and return it to the
Fund with your check. CURRENTLY, THE FUND DOES NOT ALLOW
INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
To Open Your Account... $1,000
To Add to Your Account. $ 50
*We waive or lower these minimums for certain investors listed
below. We may also refuse any order to buy shares.
The Fund's minimum initial investment requirement will not apply to purchases
by:
Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
Accounts opened under your states Uniform Gifts/Transfers to Minors
Act, subject to a $100 minimum investment requirement
Accounts opened under the Automatic Investment Plan, subject to a
$50 minimum
PAYMENTS TO SECURITIES DEALERS
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 you since these
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 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 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. 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 designated quarter. The Board 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 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, 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. The Board has not yet determined the amount of the initial repurchase
offer. Before the first Tender Offer the Board will determine in its sole
discretion the percentage at which the initial repurchase offer will be set.
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. The 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. Shareholders may
readily ascertain the Net Asset Value per share during an open tender offer
period, and on any day the NYSE is open for business, by calling 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 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's 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 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 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 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 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 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
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 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. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned 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. Together, Advisers and its affiliates manage over 215 billion in
assets.
Advisers provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered
by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics.
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
Mr. Lufkin is Vice President and portfolio manager of the Fund since its
inception and a Portfolio Manager of Franklin Advisers, Inc. since 1990. He
was 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).
Management Agreement. The management agreement is in effect until
September 16, 1999. It may continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the management agreement or interested persons
of any such party (other than as members of the Board), cast in person at a
meeting called for that purpose. The management agreement may be terminated
without penalty at any time by the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, or by Advisers on 30
days' written notice, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certainadministrative services
and facilities for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of
Resources.
Under its administration agreement, 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 over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion.
SHAREHOLDER SERVICING AND TRANSFER AGENT. Investor Services, a wholly owned
subsidiary of Resources, is the Fund's shareholder servicing agent and acts
as the Fund's transfer agent and dividend-paying agent. Investor Services is
compensated at an 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 Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
NAME, AGE AND POSITIONS AND PRINCIPAL OCCUPATION
ADDRESS OFFICES WITH THE DURING THE PAST FIVE
TRUST 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.
*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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not
currently paid by the Fund although they may receive fees in the future. As
shown above, the nonaffiliated Board members also serve as directors or
trustees of other investment companies in the Franklin Templeton Group of
Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members
by other funds in the Franklin Templeton Group of Funds.
TOTAL FEES RECEIVED NUMBER OF BOARDS IN
FROM THE FRANKLIN THE FRANKLIN TEMPLETON
TEMPLETON GROUP OF GROUP OF FUNDS ON WHICH
FUNDS* EACH SERVES**
NAME
Frank H. Abbott, III $165,236 29
Harris J. Ashton $343,591 53
S. Joseph Fortunato $360,411 55
Frank W.T. LaHaye $139,233 27
Gordon S. Macklin $335,541 50
*For the calendar year ended December 31, 1996.
**We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 58 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
benefits, directly or indirectly from the Fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or Board members who are shareholders
of Resources may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Many of the Board members own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
PORTFOLIO TRANSACTIONS BY THE FUND
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by
the Fund is negotiated between Advisers and the broker executing the
transaction. The determination and evaluation of the reasonableness of
the brokerage commissions paid are based to a large degree on the
professional opinions of the persons responsible for placement and
review of the transactions. These opinions are based on the experience
of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily
place orders to buy and sell over-the-counter securities on a principal
rather than agency basis with a principal market maker unless, in the
opinion of Advisers, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will
include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between
the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
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 Advisers receives from dealers effecting
transactions in portfolio securities. The allocation of transactions
in order to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to receive the
views and information of individuals and research staffs of other
securities firms. As long as it is lawful and appropriate to do so,
Advisers and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of
Fund shares, as well as shares of other funds in the Franklin Templeton
Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will
be tendered through Distributors if it is legally permissible to do
so. In turn, the next management fee payable to Advisers will be
reduced by the amount of any fees received by Distributors in cash,
less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered
at or about the same time, transactions in these securities will be
allocated among the several investment companies and clients in a
manner deemed equitable to all by Advisers, taking into account the
respective sizes of the funds and the amount of securities to be
purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to
participate in volume transactions 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 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.
VALUATION OF COMMON SHARES
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the 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, 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.
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 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 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 IN 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:
merger, consolidation or statutory share exchange of the Fund with or
into any other business trust;
issuance of any securities of the Fund to any person or entity for cash;
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
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 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 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.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell shares of the Fund at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one next calculated
after we receive your transaction request in proper form. If you buy shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is
promptly transmitted to the Fund.
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.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00
p.m. Pacific time.
PROPER FORM
An order to buy shares is in proper form when we receive your signed
shareholder application and check. Written requests to sell or exchange
shares during the quarterly Tender Offer period are in proper form when we
receive written instructions signed by all registered owners, with a
signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
Your name,
The Fund's name,
A description of the request,
Your account number,
The dollar amount or number of shares, and
A telephone number where we may reach you during the day, or in the
evening if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares. The certificates should be properly
endorsed. You can do this either by signing the back of the certificate or by
completing a share assignment form. For your protection, you may prefer to
complete a share assignment form and to send the certificate and assignment
form in separate envelopes.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, ALL owners must sign instructions to process
transactions and changes to the account. Even if the law in your state says
otherwise, we cannot accept instructions to change owners on the account
unless all owners agree in writing. If you would like another person or owner
to sign for you, please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
- --------------------------------------------------------------------------------
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax
identification number on a signed shareholder application or applicable tax
form. Federal law requires us to withhold 31% of your taxable distributions
and sale proceeds if (i) you have not furnished a certified correct taxpayer
identification number, (ii) you have not certified that withholding does not
apply, (iii) the IRS or a Securities Dealer notifies the Fund that the number
you gave us is incorrect, or (iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if
the IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
CUMULATIVE QUANTITY DISCOUNTS
You may include the cost or current value (whichever is higher) of your Fund
shares when determining if you may buy Class I shares of another Franklin
Templeton Fund at a discount. You may also include your Fund shares towards
the completion of a Letter of Intent established in connection with the
purchase of Class I shares of another Franklin Templeton Fund.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund
directly to a checking account. If the checking account is with a bank that
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
obtain information about your account;
obtain price and performance information about any Franklin Templeton Fund;
request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code
number is 020.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying shares of the Fund may be available to
institutional accounts. Institutional investors may also be required to
complete an institutional account application. For more information, call
Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers Inc., the Fund's investment manager
BOARD - The Board of Directors Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
FINANCIAL STATEMENTS
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 September 19, 1997.
FRANKLIN FLOATING RATE TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 8, 1997
ASSETS:
Cash held by custodian $ 100,000
Unamortized organization costs 124,000
Unamortized offering costs 51,103
-----------
Total assets 275,103
-----------
LIABILITIES:
Accrued expenses:
Organization Costs 124,000
Offering Costs 51,103
-----------
Total liabilities 175,103
-----------
NET ASSETS $ 100,000
===========
Computation of net asset value and offering
price per share:
Net assets, at value $100,000
===========
Shares outstanding 10,000
===========
Net asset value per share* $10.00
===========
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
Note: Franklin Floating Rate Trust (the "Fund") is a closed-end, non-diversified
management investment company registered under the Investment Company Act of
1940 and organized as a Delaware Business Trust on May 20, 1997. Organization
expenses and offering expenses are being amortized over a five-year period and
one-year period, respectively, from the effective date of the Fund's
registration under the Securities Act of 1933. As part of their organization,
the Fund has issued, in a private placement, 10,000 shares of beneficial
interest to Franklin Resources, Inc., at $10.00 per share. These shares have
been designated as "initial shares". In the event that any of the initial shares
of the fund are redeemed during the organization cost amortization period, the
redemption proceeds will be reduced by any unamortized organization and
registration expenses in the same proportion as the number of shares being
redeemed bears to the number of initial shares outstanding at the time of such
redemption.
FRANKLIN FLOATING RATE TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF THE FRANKLIN FLOATING RATE TRUST:
We have audited the accompanying statement of assets and liabilities of the
Franklin Floating Rate Trust (the Fund) as of September 8, 1997. The financial
statement is the responsibility of the Fund's management . Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of September 8,
1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
September 19, 1997
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
Statement of Assets and Liabilities
(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
(2) Form of Fund Administration Agreement
(h) (1) Form of Distribution Agreement
(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
(k) Not Applicable
(l) Opinion and Consent of Counsel
(m) Not Applicable
(n) Consent of Independent Auditors
(o) Not Applicable
(p) Form of Letter of Investment Intent
(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
Printing and Engraving Expenses............................ 8,800
Legal Fees................................................. 120,000
Accounting Expenses........................................ 4,000
Blue Sky Filing Fees and Expenses.......................... 12,000
Total...................................................... $175,103
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
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 7th
day of October, 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 & October 7, 1997
Charles B. Johnson Chairman of
the Board
FRANK H. ABBOTT, III* Trustee October 7, 1997
Frank H. Abbott, III
HARRIS J. ASHTON* Trustee October 7, 1997
Harris J. Ashton
RUPERT H. JOHNSON, JR.* Trustee October 7, 1997
Rupert H. Johnson, Jr. & President
MARTIN L. FLANAGAN* Principal October 7, 1997
Martin L. Flanagan Financial Officer
DIOMEDES LOO-TAM* Principal October 7, 1997
Diomedes Loo-Tam Accounting Officer
S. JOSEPH FORTUNATO* Trustee October 7, 1997
S. Joseph Fortunato
FRANK W. T. LAHAYE* Trustee October 7, 1997
Frank W. T. LaHaye
DAVID W. GARBELLANO* Trustee October 7, 1997
David W. Garbellano
GORDON S. MACKLIN* Trustee October 7, 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 Attached
EX-99.2g(2) Form of Fund Administration Agreement Attached
EX-99.2h(1) Form of Distribution Agreement Attached
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 Attached
EX-99.2l Opinion and Consent of Counsel Attached
EX-99.2n Consent of Independent Auditors Attached
EX-99.2p Form of Letter of Investment Intent Attached
EX-99.2s Power of Attorney dated May 13, 1997 *
*Incorporated by Reference
[FORM]
FRANKLIN FLOATING RATE TRUST
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN FLOATING RATE
TRUST, a Delaware business trust (the "Trust"), and FRANKLIN ADVISERS, INC.,
a California corporation, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment manager and to have an investment
manager perform various management, statistical, research, investment
advisory and other services for the Trust; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Trust.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Trust's assets and to
administer its affairs, subject to the direction of the Board of Trustees and
the officers of the Trust, for the period and on the terms hereinafter set
forth. The Manager hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Manager shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust or the Trust in any way or
otherwise be deemed an agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Trust's assets
subject to and in accordance with the investment objectives and policies of
the Trust and any directions which the Trust's Board of Trustees may issue
from time to time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Trust's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Trust's
investment securities shall be exercised. The Manager shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Trust's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Trust, orders for the execution of the
Trust's securities transactions. When placing such orders, the Manager shall
seek to obtain the best net price and execution for the Trust, but this
requirement shall not be deemed to obligate the Manager to place any order
solely on the basis of obtaining the lowest commission rate if the other
standards set forth in this section have been satisfied. The parties
recognize that there are likely to be many cases in which different brokers
are equally able to provide such best price and execution and that, in
selecting among such brokers with respect to particular trades, it is
desirable to choose those brokers who furnish research, statistical,
quotations and other information to the Trust and the Manager in accordance
with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees
determines that the Trust will benefit, directly or indirectly, by doing so,
the Manager may place orders with a broker who charges a commission for that
transaction which is in excess of the amount of commission that another
broker would have charged for effecting that transaction, provided that the
excess commission is reasonable in relation to the value of "brokerage and
research services" (as defined in Section 28(e) (3) of the Securities
Exchange Act of 1934) provided by that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Trust's transactions
from among:
(i) Those brokers and dealers who provide quotations
and other services to the Trust, specifically including
the quotations necessary to determine the Trust's net
assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to securities,
actual or potential, of the Trust, or which place the
Manager in a better position to make decisions in
connection with the management of the Trust's assets and
securities, whether or not such data may also be useful
to the Manager and its affiliates in managing other
portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Trust
may also be considered as a factor in the selection of
broker-dealers to execute the Trust's portfolio
transactions.
(c) When the Manager has determined that the Trust
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Manager nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Manager or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust shall enter into an agreement with the Manager and/or Distributors
to reimburse them for all such expenses connected with attempting to collect
such fees, including legal fees and expenses and that portion of the
compensation due to their employees which is attributable to the time
involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage
business has been placed by the Manager, on behalf of the Trust, with brokers
falling into each of the categories referred to above and the manner in which
the allocation has been accomplished.
(e) The Manager agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's paramount duty to obtain the
best net price and execution for the Trust.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The
Manager, its officers and employees will make available and provide
accounting and statistical information required by the Trust in the
preparation of registration statements, reports and other documents required
by federal and state securities laws and with such information as the Trust
may reasonably request for use in the preparation of such documents or of
other materials necessary or helpful for the underwriting and distribution of
the Trust's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Manager shall make
its officers and employees available to the Board of Trustees and officers of
the Trust for consultation and discussions regarding the administration and
management of the Trust and its investment activities.
3. EXPENSES OF THE TRUST. It is understood that the Trust will pay
all of its own expenses other than those expressly assumed by the Manager
herein, which expenses payable by the Trust shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian,
dividend disbursing agent and shareholder record-keeping services, including
the expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the
value of the Trust's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Manager or its affiliates;
F. Taxes levied against the Trust;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Trust;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Trust, reports to the Trust's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Trust's legal
existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Trust and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Trust's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE MANAGER. The Trust shall pay a management
fee in cash to the Manager based upon a percentage of the value of the
Trust's managed assets, calculated as set forth below, as compensation for
the services rendered and obligations assumed by the Manager, during the
preceding month, on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the
net assets of the Trust shall be determined in the same manner as that Trust
uses to compute the value of its net assets in connection with the
determination of the net asset value of its shares, all as set forth more
fully in the Trust's current prospectus and statement of additional
information. To determine the Trust's managed assets, the Trust's net assets
shall be added to the value of any senior securities outstanding, including
but not limited to the value of any borrowings, debt securities or preferred
stock offering, provided that the amount of such borrowing or the proceeds of
such offering have been used to purchase portfolio securities for the Trust.
The rate of the management fee payable by the Trust shall be calculated daily
at the following annual rates:
0.80% of the average daily managed assets of the Trust
B. The management fee payable by the Trust shall be reduced
or eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Trust as set forth in
the laws, regulations and administrative interpretations of those states in
which the Trust's shares are registered. The Manager may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Manager shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Trust's expenses, as if such waiver or
limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued management fee shall be paid to the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the
Trust hereunder are not to be deemed exclusive, and the Manager and any of
its affiliates shall be free to render similar services to others. Subject
to and in accordance with the Agreement and Declaration of Trust and By-Laws
of the Trust and Section 10(a) of the 1940 Act, it is understood that
trustees, officers, agents and shareholders of the Trust are or may be
interested in the Manager or its affiliates as directors, officers, agents or
stockholders; that directors, officers, agents or stockholders of the Manager
or its affiliates are or may be interested in the Trust as trustees,
officers, agents, shareholders or otherwise; that the Manager or its
affiliates may be interested in the Trust as shareholders or otherwise; and
that the effect of any such interests shall be governed by said Agreement and
Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Trust or to any shareholder of the Trust for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Trust.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Manager
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Manager or any of its affiliates or any of
their officers, directors, employees or stockholders. The Manager shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Manager therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Manager or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of the Trust or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment
of any penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Trust on 60
days' written notice to the Manager;
(ii) shall immediately terminate with respect to the
Trust in the event of its assignment; and
(iii) may be terminated by the Manager on 60 days'
written notice to the Trust.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the other party at
any office of such party.
E. Unless otherwise agreed by the Manager, upon
termination of this Agreement, the Trust shall cease to use the "Franklin"
name and logo.
8. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the ____ day of September, 1997.
FRANKLIN FLOATING RATE TRUST
By:
[NAME]
[TITLE]
FRANKLIN ADVISERS, INC.
By:
[NAME]
[TITLE]
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of September 16, 1997 between FRANKLIN
FLOATING RATE TRUST, a Delaware business trust (the "Trust"), and FRANKLIN
TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Trust:
(a) providing office space, telephone, office equipment and
supplies for the Trust;
(b) providing trading desk facilities for the Trust, unless
these facilities are provided by the Trust's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Trust;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual Shareholders when asked to do so by the Trust's shareholder
servicing agent or other agents of the Trust;
(e) coordinating the daily pricing of the Trust's investment
portfolio, including collecting quotations from pricing services engaged by
the Trust; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law
firms, printers and other third party service providers;
(g) supervising compliance by the Trust with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and
the rules and regulations thereunder, supervising compliance with
recordkeeping requirements imposed by state laws or regulations, and
maintaining books and records for the Trust (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Trust's
income tax returns, and monitoring the Trust's compliance with subchapter M
of the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Trust's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; the Trust's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Trust's Board of
Trustees or ("Board") or by the Adviser and applicable to the Trust;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Trust to pay any compensation to
the officers of the Trust. Nothing in this Agreement shall obligate the
Administrator to pay for the services of third parties, including attorneys,
auditors, printers, pricing services or others, engaged directly by the Trust
to perform services on behalf of the Trust.
(2) The Trust agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.15% of the first
$200 million of the average daily net assets of the Trust during the month
preceding each payment, reduced as follows: on such net assets in excess of
$200 million up to $700 million, a monthly fee equal on an annual basis to
0.135%; on such net assets in excess of $700 million up to $1.2 billion, a
monthly fee equal on an annual basis to 0.10%; and on such net assets in
excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of each affected Trust's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Trust.
(4) This Agreement may be terminated by the Trust at any time on
sixty (60) days' written notice without payment of penalty, provided that
such termination by the Trust shall be directed or approved by the vote of a
majority of the Board of the Trust in office at the time or by the vote of a
majority of the outstanding voting securities of the Trust (as defined by the
1940 Act); and shall automatically and immediately terminate in the event of
its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN FLOATING RATE TRUST
By:
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:
Harmon E. Burns
Executive Vice President
FRANKLIN FLOATING RATE TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as a
continuously offered closed-end management investment company or "mutual
fund", which is registered under the Investment Company Act of 1940 (the
"1940 Act") and whose shares are registered under the Securities Act of 1933
(the "1933 Act"). We desire to issue one or more series or classes of our
authorized but unissued shares of capital stock or beneficial interest (the
"Shares") to authorized persons in accordance with applicable Federal and
State securities laws. The Fund's Shares may be made available in one or
more separate series, each of which may have one or more classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company
is a member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor
for the Shares. We have been authorized to execute and deliver this
Distribution Agreement ("Agreement") to you by a resolution of our Board of
Directors or Trustees ("Board") passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or with you or your related organizations, were present
and voted in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement
and in consideration of the agreements on your part herein expressed and upon
the terms and conditions set forth herein, we hereby appoint you as the
exclusive sales agent for our Shares and agree that we will deliver such
Shares as you may sell. You agree to use your best efforts to promote the
sale of Shares, but are not obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales
of its Shares without sales charges consistent with the terms of the then
current prospectus and statement of additional information (hereinafter,
collectively, "prospectus") and applicable law, and to engage in other
legally authorized transactions in its Shares which do not involve the sale
of Shares to the general public. Such other transactions may include,
without limitation, transactions between the Fund or any series or class and
its shareholders only, transactions involving the reorganization of the Fund
or any series, and transactions involving the merger or combination of the
Fund or any series with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no
authority or power to obligate or bind us by your actions, conduct or
contracts except that you are authorized to promote the sale of Shares. You
may appoint sub-agents or distribute through dealers or otherwise as you may
determine from time to time, but this Agreement shall not be construed as
authorizing any dealer or other person to accept orders for sale or
repurchase on our behalf or otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price
equivalent to the net asset value per share of that series and class plus any
applicable percentage of the public offering price as sales commission or as
otherwise set forth in our then current prospectus. On each business day on
which the New York Stock Exchange is open for business, we will furnish you
with the net asset value of the Shares of each available series and class
which shall be determined in accordance with our then effective prospectus.
All Shares will be sold in the manner set forth in our then effective
prospectus and statement of additional information, and in compliance with
applicable law.
4. COMPENSATION.
A. SALES COMMISSION. To the extent set forth in the Fund's then
current prospectus, you shall be entitled to charge a sales commission on the
sale or repurchase, as appropriate, of each series and class of the Fund's
Shares in the amount of any applicable initial, deferred or contingent
deferred sales charge. You may allow any subagents or dealers such
commissions or discounts from and not exceeding the total sales commission as
you shall deem advisable, so long as any such commissions or discounts are
set forth in the Fund's then current prospectus to the extent required by
applicable federal and state securities laws. You may make payments to
sub-agents or dealers from your own resources, subject to the following
conditions: (a) any such payments shall not create any obligation for or
recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our
prospectus or statement of additional information to the extent such laws may
require.
B. EARLY WITHDRAWAL CHARGE. Your compensation as principal
underwriter under this Agreement shall be the Early Withdrawal Charges, if
any, that are collected on the Shares as set forth in the Fund's then current
prospectus.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale
only in those jurisdictions where they have been properly registered or are
exempt from registration, and only to those groups of people which the Board
may from time to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be
directed to the Fund's shareholder services agent, for acceptance on behalf
of the Fund. At or prior to the time of delivery of any of our Shares you
will pay or cause to be paid to the custodian of the Fund's assets, for our
account, an amount in cash equal to the net asset value of such Shares.
Sales of Shares shall be deemed to be made when and where accepted by the
Fund's shareholder services agent. The Fund's custodian and shareholder
services agent shall be identified in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our
Shares for your own account for purposes of resale to the public, but you may
purchase Shares for your own investment account upon your written assurance
that the purchase is for investment purposes and that the Shares will not be
resold except through repurchase by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net
asset value to certain of your and our affiliated persons pursuant to the
applicable provisions of the federal securities statutes and rules or
regulations thereunder (the "Rules and Regulations"), including Rule 22d-1
under the 1940 Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any
Post-Effective Amendments ("Amendments") to our
Registration Statement under the 1933 Act or 1940 Act,
including the prospectus, or in reports to existing
shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to
offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of
all Amendments and supplements to our prospectuses if the
Amendment or supplement arises from your (including your
"Parent's") activities or Rules and Regulations related to
your activities and those expenses would not otherwise have
been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we
have prepared for distribution to our existing
shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such
information with respect to each series and class of Shares, in such form and
signed by such of our officers as you may reasonably request, and we warrant
that the statements therein contained, when so signed, will be true and
correct. We will also furnish you with such information and will take such
action as you may reasonably request in order to qualify our Shares for sale
to the public under the Blue Sky Laws of jurisdictions in which you may wish
to offer them. We will furnish you with annual audited financial statements
of our books and accounts certified by independent public accountants, with
semi-annual financial statements prepared by us, with registration statements
and, from time to time, with such additional information regarding our
financial condition as you may reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective
prospectus, you will not issue any sales material or statements except
literature or advertising which conforms to the requirements of Federal and
State securities laws and regulations and which have been filed, where
necessary, with the appropriate regulatory authorities. You will furnish us
with copies of all such materials prior to their use and no such material
shall be published if we shall reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs
with us and with dealers, brokers or investors in accordance with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.
12. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
13. TERM OF AGREEMENT. This Agreement shall become effective on the
date of its execution, and shall remain in effect for a period of two (2)
years. The Agreement is renewable annually thereafter, with respect to the
Fund or, if the Fund has more than one series, with respect to each series,
for successive periods not to exceed one year (i) by a vote of (a) a majority
of the outstanding voting securities of the Fund or, if the Fund has more
than one series, of each series, or (b) by a vote of the Board, AND (ii) by a
vote of a majority of the members of the Board who are not parties to the
Agreement or interested persons of any parties to the Agreement (other than
as members of the Board), cast in person at a meeting called for the purpose
of voting on the Agreement.
This Agreement may at any time be terminated by the Fund or by
any series without the payment of any penalty, (i) either by vote of the
Board or by vote of a majority of the outstanding voting securities of the
Fund or any series on 90 days' written notice to you; or (ii) by you on 90
days' written notice to the Fund; and shall immediately terminate with
respect to the Fund and each series in the event of its assignment.
14. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
15. MISCELLANEOUS. This Agreement shall be subject to the laws of
the State of California and shall be interpreted and construed to further
promote the operation of the Fund as a closed-end investment company. This
Agreement shall supersede all Distribution Agreements and Amendments
previously in effect between the parties. As used herein, the terms "Net
Asset Value," "Offering Price," "Investment Company," "Closed-End Investment
Company," "Assignment," "Principal Underwriter," "Interested Person,"
"Parent," "Affiliated Person," and "Majority of the Outstanding Voting
Securities" shall have the meanings set forth in the 1933 Act or the 1940 Act
and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or
to our securities holders to which you would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of
your duties hereunder, or by reason of your reckless disregard of your
obligations and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN FLOATING RATE TRUST
By:____________________________
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By:_____________________________
Harmon E. Burns
Executive Vice President
DATED: September 16, 1997
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as
of February 16, 1996, by and between each Investment Company listed on
Exhibit A, for itself and for each of its Series listed on Exhibit A, and
BANK OF NEW YORK, a New York corporation authorized to do a banking business
(the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") that invests and reinvests, for itself or on behalf of its Series, in
Domestic Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment
Company that the Custodian is, a "bank" as that term is defined in Section
2(a)(5) of the Investment Company Act of 1940, as amended, and is eligible to
receive and maintain custody of investment company assets pursuant to Section
17(f) and Rule 17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the
terms and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of
a Master Custody Agreement for administrative convenience, this Agreement
shall create a separate custody agreement for each Investment Company and for
each Series designated on Exhibit A, as though each Investment Company had
separately executed an identical custody agreement for itself and for each of
its Series. No rights, responsibilities or liabilities of any Investment
Company or Series shall be attributed to any other Investment Company or
Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have
the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any
day, other than a Saturday or Sunday, that is not a day on which banking
institutions are authorized or required by law to be closed in The City of
New York and, with respect to Foreign Securities, a London Business Day.
"London Business Day" shall mean any day on which dealings and deposits in
U.S. dollars are transacted in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in
Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of a
Board.
"Foreign Custodian" shall have the meaning provided in Section
4.1 hereof.
"Foreign Securities" shall have the meaning provided in Section
2.1 hereof.
"Foreign Securities Depository" shall have the meaning provided
in Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an
Investment Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1
hereof.
"Securities System" shall have the meaning provided in Section
3.1 hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the
Investment Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting
transfer agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication
by telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 APPOINTMENT OF CUSTODIAN. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each
Fund, including cash denominated in U.S. dollars or foreign currency
("cash"), securities the Fund desires to be held within the United States
("Domestic Securities") and securities it desires to be held outside the
United States ("Foreign Securities"). Domestic Securities and Foreign
Securities are sometimes referred to herein, collectively, as "Securities."
The Custodian hereby accepts such appointment and designation and agrees that
it shall maintain custody of the assets of each Fund delivered to it
hereunder in the manner provided for herein.
2.2 DELIVERY OF ASSETS. Each Investment Company may deliver to
the Custodian Securities and cash owned by the Funds, payments of income,
principal or capital distributions received by the Funds with respect to
Securities owned by the Funds from time to time, and the consideration
received by the Funds for such Shares or other securities of the Funds as may
be issued and sold from time to time. The Custodian shall have no
responsibility whatsoever for any property or assets of the Funds held or
received by the Funds and not delivered to the Custodian pursuant to and in
accordance with the terms hereof. All Securities accepted by the Custodian
on behalf of the Funds under the terms of this Agreement shall be in "street
name" or other good delivery form as determined by the Custodian.
2.3 SUBCUSTODIANS. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper
Instructions and a certified copy of a resolution of the Board or of the
Executive Committee, and certified by the Secretary or an Assistant
Secretary, of an Investment Company, the Custodian may from time to time
appoint one or more other Subcustodians or Foreign Custodians to hold assets
of the affected Funds in accordance with the provisions of this Agreement.
2.4 NO DUTY TO MANAGE. The Custodian, a Subcustodian or a
Foreign Custodian shall not have any duty or responsibility to manage or
recommend investments of the assets of any Fund held by them or to initiate
any purchase, sale or other investment transaction in the absence of Proper
Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held
through a registered clearing agency, a registered securities depository, the
Federal Reserve's book-entry securities system (referred to herein,
individually, as a "Securities System"), or held by a Subcustodian, Foreign
Custodian or in a Foreign Securities Depository.
3.2 DELIVERY OF SECURITIES. Except as otherwise provided
in Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions,
shall release and deliver Securities owned by a Fund and held by the
Custodian in the following cases or as otherwise directed in Proper
Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase
agreement related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in
connection with (i) a tender or other similar offer for Securities owned by
the Fund, or (ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such
Securities are called, redeemed, retired or otherwise become payable;
provided, that in any such case, the cash or other consideration is to be
delivered to the Custodian, a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into
the name or nominee name of the Fund, the name or nominee name of the
Custodian, the name or nominee name of any Subcustodian or Foreign Custodian;
or for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of units;
provided that, in any such case, the new Securities are to be delivered to
the Custodian, a Subcustodian or Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, or reorganization of the issuer of
such Securities, or pursuant to a conversion of such Securities; provided
that, in any such case, the new Securities and cash, if any, are to be
delivered to the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities,
the surrender thereof in connection with the exercise of such warrants,
rights or similar Securities or the surrender of interim receipts or
temporary Securities for definitive Securities; provided that, in any such
case, the new Securities and cash, if any, are to be delivered to the
Custodian, a subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of
Securities made by the Fund, but only against receipt by the Custodian, a
Subcustodian or a Foreign Custodian of adequate collateral as determined by
the Fund (and identified in Proper Instructions communicated to the
Custodian), which may be in the form of cash or obligations issued by the
United States government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be credited to the
account of the Custodian, a Subcustodian or a Foreign Custodian in the
Federal Reserve's book-entry securities system, the Custodian will not be
held liable or responsible for the delivery of Securities owned by the Fund
prior to the receipt of such collateral;
(k) for delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets by the Fund, but only
against receipt by the Custodian, a Subcustodian or a Foreign Custodian of
amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign
Custodian and a broker-dealer relating to compliance with the rules of
registered clearing corporations and of any registered national securities
exchange, or of any similar organization or organizations, regarding escrow
or other arrangements in connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign
Custodian and a futures commission merchant, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any contract market,
or any similar organization or organizations, regarding account deposits in
connection with transactions by the Fund;
(n) upon the receipt of instructions from the Transfer
Agent for delivery to the Transfer Agent or to the holders of Shares in
connection with distributions in kind in satisfaction of requests by holders
of Shares for repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of
the Executive Committee certified by the Secretary or an Assistant Secretary
of the Fund, specifying the securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom delivery of such
securities shall be made.
3.3 REGISTRATION OF SECURITIES. Securities held by the
Custodian, a Subcustodian or a Foreign Custodian (other than bearer
Securities) shall be registered in the name or nominee name of the
appropriate Fund, in the name or nominee name of the Custodian or in the name
or nominee name of any Subcustodian or Foreign Custodian. Each Fund agrees
to hold the Custodian, any such nominee, Subcustodian or Foreign Custodian
harmless from any liability as a holder of record of such Securities.
3.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts for each Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and
shall hold in such account or accounts, subject to the provisions hereof, all
cash received by it hereunder from or for the account of each Fund, other
than cash maintained by a Fund in a bank account established and used in
accordance with Rule 17f-3 under the Fund Act. Funds held by the Custodian
for a Fund may be deposited by it to its credit as Custodian in the banking
departments of the Custodian, a Subcustodian or a Foreign Custodian. Such
funds shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity. In the event a
Fund's account for any reason becomes overdrawn, or in the event an action
requested in Proper Instructions would cause such an account to become
overdrawn, the Custodian shall immediately notify the affected Fund.
3.5 COLLECTION OF INCOME; TRADE SETTLEMENT; CREDITING OF
Accounts. The Custodian shall collect income payable with respect to
Securities owned by each Fund, settle Securities trades for the account of
each Fund and credit and debit each Fund's account with the Custodian in
connection therewith as stated in this Subsection 3.5. This Subsection shall
not apply to repurchase agreements, which are treated in Subsection 3.2(b),
above.
(a) Upon receipt of Proper Instructions, the Custodian
shall effect the purchase of a Security by charging the account of the Fund
on the contractual settlement date, and by making payment against delivery.
If the seller or selling broker fails to deliver the Security within a
reasonable period of time, the Custodian shall notify the Fund and credit the
transaction amount to the account of the Fund, but the Custodian shall have
no further liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian
shall effect the sale of a Security by withdrawing a certificate or other
indicia of ownership from the account of the Fund and by making delivery
against payment, and shall credit the account of the Fund with the amount of
such proceeds on the contractual settlement date. If the purchaser or the
purchasing broker fails to make payment within a reasonable period of time,
the Custodian shall notify the Fund, debit the Fund's account for any amounts
previously credited to it by the Custodian as proceeds of the transaction
and, if delivery has not been made, redeposit the Security into the account
of the Fund.
(c) The Fund is responsible for ensuring that the
Custodian receives timely and accurate Proper Instructions to enable the
Custodian to effect settlement of any purchase or sale. If the Custodian
does not receive such instructions within the required time period, the
Custodian shall have no liability of any kind to any person, including the
Fund, for failing to effect settlement on the contractual settlement date.
However, the Custodian shall use its best reasonable efforts to effect
settlement as soon as possible after receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund
with interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received
by the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the
Fund. The collection of income due the Fund on Domestic Securities loaned
pursuant to the provisions of Subsection 3.2(j) shall be the responsibility
of the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as
may be necessary to assist the Fund in arranging for the timely delivery to
the Custodian of the income to which the Fund is entitled. The Custodian
shall have no liability to any person, including the Fund, if the Custodian
credits the account of the Fund with such income or other amounts payable
with respect to Securities owned by the Fund (other than Securities loaned by
the Fund pursuant to Subsection 3.2(j) hereof) and the Custodian subsequently
is unable to collect such income or other amounts from the payors thereof
within a reasonable time period, as determined by the Custodian in its sole
discretion. In such event, the Custodian shall be entitled to reimbursement
of the amount so credited to the account of the Fund.
3.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to
the Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof
or in proper form for transfer; (ii) in the case of a purchase effected
through a Securities System, in accordance with the conditions set forth in
Subsection 3.8 hereof; or (iii) in the case of repurchase agreements entered
into between the Fund and the Custodian, another bank or a broker-dealer (A)
against delivery of the Securities either in certificated form to the
Custodian or a Subcustodian or through an entry crediting the Custodian's
account at the appropriate Federal Reserve Bank with such Securities or (B)
against delivery of the confirmation evidencing purchase by the Fund of
Securities owned by the Custodian or such broker-dealer or other bank along
with written evidence of the agreement by the Custodian or such broker-dealer
or other bank to repurchase such Securities from the Fund;
(b) in connection with conversion, exchange or surrender
of Securities owned by the Fund as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by
the Fund;
(d) for the payment of any expense or liability incurred
by the Fund, including but not limited to the following payments for the
account of the Fund: custodian fees, interest, taxes, management, accounting,
transfer agent and legal fees and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses; and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 APPOINTMENT OF SUBCUSTODIANS. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank
or trust company, which is itself qualified under the Investment Company Act
to act as a custodian (a "Subcustodian"), as the agent of the Custodian to
carry out such of the duties of the Custodian hereunder as a Custodian may
from time to time direct; provided, however, that the appointment of any
Subcustodian shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
3.8 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The Custodian
may deposit and/or maintain Domestic Securities owned by a Fund in a
Securities System in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and subject
to the following provisions:
(a) the Custodian may hold Domestic Securities of the Fund
in the Depository Trust Company or the Federal Reserve's book entry system
or, upon receipt of Proper Instructions, in another Securities System
provided that such securities are held in an account of the Custodian in the
Securities System ("Securities System Account") which shall not include any
assets of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities
purchased for the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred to the
Securities System Account, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the account of the
Fund. The Custodian shall transfer Domestic Securities sold for the account
of the Fund upon (A) receipt of advice from the Securities System that
payment for such securities has been transferred to the Securities System
Account, and (B) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund. Copies of all
advices from the Securities System of transfers of Domestic Securities for
the account of the Fund shall be maintained for the Fund by the Custodian
and be provided to the Fund at its request. Upon request, the Custodian
shall furnish the Fund confirmation of the transfer to or from the account of
the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund
with any report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding domestic securities deposited in the Securities System.
3.9 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or accounts
for and on behalf of a Fund, into which account or accounts may be
transferred cash and/or Securities, including Securities maintained in an
account by the Custodian pursuant to Section 3.8 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a
broker-dealer or futures commission merchant, relating to compliance with the
rules of registered clearing corporations and of any national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the Fund,
(ii) for purposes of segregating cash or securities in connection with
options purchased, sold or written by the Fund or commodity futures contracts
or options thereon purchased or sold by the Fund, and (iii) for other proper
corporate purposes, but only, in the case of this clause (iii), upon receipt
of, in addition to Proper Instructions, a certified copy of a resolution of
the Board or of the Executive Committee certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
3.10 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of each Fund held by it and in connection
with transfers of such securities.
3.11 PROXIES. The Custodian shall, with respect to the
Securities held hereunder, promptly deliver to each Fund all proxies, all
proxy soliciting materials and all notices relating to such Securities. If
the Securities are registered otherwise than in the name of a Fund or a
nominee of a Fund, the Custodian shall use its best reasonable efforts,
consistent with applicable law, to cause all proxies to be promptly executed
by the registered holder of such Securities in accordance with Proper
Instructions.
3.12 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of
Securities and expirations of rights in connection therewith and notices of
exercise of put and call options written by the Fund and the maturity of
futures contracts purchased or sold by the Fund) received by the Custodian
from issuers of Securities being held for the Fund. With respect to tender
or exchange offers, the Custodian shall transmit promptly to each Fund all
written information received by the Custodian from issuers of the Securities
whose tender or exchange is sought and from the party (or its agents) making
the tender or exchange offer. If a Fund desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Fund shall notify the Custodian at least three Business Days prior to the
date of which the Custodian is to take such action.
3.13 REPORTS BY CUSTODIAn. The Custodian shall each business
day furnish each Fund with a statement summarizing all transactions and
entries for the account of the Fund for the preceding day. At the end of
every month, the Custodian shall furnish each Fund with a list of the cash
and portfolio securities showing the quantity of the issue owned, the cost of
each issue and the market value of each issue at the end of each month. Such
monthly report shall also contain separate listings of (a) unsettled trades
and (b) when-issued securities. The Custodian shall furnish such other
reports as may be mutually agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED
STATES
4.1 CUSTODY OUTSIDE THE UNITED STATES. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and
subsidiaries of United States banks or bank holding companies (each a
"Foreign Custodian") and (iii) Foreign Securities depositories or clearing
agencies (each a "Foreign Securities Depository"); provided, however, that
the appropriate Board or Executive Committee has approved in advance the use
of each such Foreign Custodian and Foreign Securities Depository and the
contract between the Custodian and each Foreign Custodian and that such
approval is set forth in Proper Instructions and a certified copy of a
resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary of the appropriate Investment Company.
Unless expressly provided to the contrary in this Section 4, custody of
Foreign Securities and assets held outside the United States by the
Custodian, a Foreign Custodian or through a Foreign Securities Depository
shall be governed by this Agreement, including Section 3 hereof.
4.2 ASSETS TO BE HELD. The Custodian shall limit the securities
and other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities",
as defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii)
cash and cash equivalents in such amounts as the Custodian or an affected
Fund may determine to be reasonably necessary to effect the Fund's Foreign
Securities transactions.
4.3 OMITTED.
4.4 SEGREGATION OF SECURITIES. The Custodian shall identify on
its books and records as belonging to the appropriate Fund, the Foreign
Securities of each Fund held by each Foreign Custodian.
4.5 AGREEMENTS WITH FOREIGN CUSTODIANS. Each agreement between
the Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not
be amended in a way that materially adversely affects any Fund without the
prior written consent of the Fund. Upon request, the Custodian shall certify
to the Funds that an agreement between the Custodian and a Foreign Custodian
meets the requirements of Rule 17f-5 under the 1940 Act.
4.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUNDS. Upon
request of a Fund, the Custodian will use its best reasonable efforts to
arrange for the independent accountants or auditors of the Fund to be
afforded access to the books and records of any Foreign Custodian insofar as
such books and records relate to the custody by any such Foreign Custodian of
assets of the Fund.
4.7 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNTS. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by a
Fund, but, except to the extent explicitly provided herein, only in any of
the cases specified in Subsection 3.2. Upon receipt of Proper Instructions,
the Custodian shall pay out or instruct the appropriate Foreign Custodian to
pay out monies of a Fund in any of the cases specified in Subsection 3.6.
Notwithstanding anything herein to the contrary, settlement and payment for
Foreign Securities received for the account of a Fund and delivery of Foreign
Securities maintained for the account of a Fund may be effected in accordance
with the customary or established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later payment
for such securities from such purchaser or dealer. Foreign Securities
maintained in the custody of a Foreign Custodian may be maintained in the
name of such entity or its nominee name to the same extent as set forth in
Section 3.3 of this Agreement and each Fund agrees to hold any Foreign
Custodian and its nominee harmless from any liability as a holder of record
of such securities.
4.8 LIABILITY OF FOREIGN CUSTODIAN. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to
by the Custodian and a Fund, require the Foreign Custodian to exercise
reasonable care or, alternatively, impose a contractual liability for breach
of contract without an exception based upon a standard of care in the
performance of its duties and to indemnify and hold harmless the Custodian
from and against any loss, damage, cost, expense, liability or claim arising
out of or in connection with the Foreign Custodian's performance of such
obligations, excepting, however, Citibank, N.A., and its subsidiaries and
branches, where the indemnification is limited to direct money damages and
requires that the claim be promptly asserted. At the election of a Fund, it
shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Custodian as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim, unless such subrogation is prohibited by local
law.
4.9 MONITORING RESPONSIBILITIES.
(a) The Custodian will promptly inform each Fund in the
event that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's
financial condition has declined or is likely to decline below the minimum
levels required by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may
specify. Any Proper Instructions delivered to the Custodian by telephone
shall promptly thereafter be confirmed in accordance with procedures, and
limited in subject matter, as mutually agreed upon by the parties. Unless
otherwise expressly provided, all Proper Instructions shall continue in full
force and effect until canceled or superseded. If the Custodian requires test
arrangements, authentication methods or other security devices to be used
with respect to Proper Instructions, any Proper Instructions given by the
Funds thereafter shall be given and processed in accordance with such terms
and conditions for the use of such arrangements, methods or devices as the
Custodian may put into effect and modify from time to time. The Funds shall
safeguard any testkeys, identification codes or other security devices which
the Custodian shall make available to them. The Custodian may electronically
record any Proper Instructions given by telephone, and any other telephone
discussions, with respect to its activities hereunder. As used in this
Agreement, the term "Authorized Persons" means such officers or such agents
of a Fund as have been properly appointed pursuant to a resolution of the
appropriate Board or Executive Committee, a certified copy of which has been
provided to the Custodian, to act on behalf of the Fund under this
Agreement. Each of such persons shall continue to be an Authorized Person
until such time as the Custodian receives Proper Instructions that any such
officer or agent is no longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority
from a Fund:
(a) make payments to itself or others for minor expenses
of handling Securities or other similar items relating to its duties under
this Agreement, provided that all such payments shall be accounted for to the
Fund;
(b) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and
other dealings with the Securities and property of the Fund except as
otherwise provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate
or other instrument or paper believed by it to be genuine and to have been
properly given or executed by or on behalf of a Fund. The Custodian may
receive and accept a certified copy of a resolution of a Board or Executive
Committee as conclusive evidence (a) of the authority of any person to act in
accordance with such resolution or (b) of any determination or of any action
by the Board or Executive Committee as described in such resolution, and such
resolution may be considered as in full force and effect until receipt by the
Custodian of written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary
information in its possession (to the extent permissible under applicable
law) to the entity or entities appointed by the appropriate Board to keep the
books of account of a Fund and/or compute the net asset value per Share of
the outstanding Shares of a Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to
its activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours
of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Investment Company and employees and agents of the
Securities and Exchange Commission. The Custodian shall, at a Fund's
request, supply the Fund with a tabulation of Securities and Cash owned by
the Fund and held by the Custodian and shall, when requested to do so by the
Fund and for such compensation as shall be agreed upon between the Fund and
the Custodian, include certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian, as agreed upon from time to time
between each Investment Company, on behalf of each Fund, and the Custodian.
In addition, should the Custodian in its discretion advance funds (to include
overdrafts) to or on behalf of a Fund pursuant to Proper Instructions, the
Custodian shall be entitled to prompt reimbursement of any amounts advanced.
In the event of such an advance, and to the extent permitted by the 1940 Act
and the Fund's policies, the Custodian shall have a continuing lien and
security interest in and to the property of the Fund in the possession or
control of the Custodian or of a third party acting in the Custodian's
behalf, until the advance is reimbursed. Nothing in this Agreement shall
obligate the Custodian to advance funds to or on behalf of a Fund, or to
permit any borrowing by a Fund except for borrowings for temporary purposes,
to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only
such duties as are set forth herein or contained in Proper Instructions and
shall use reasonable care in carrying out such duties. The Custodian shall
be liable to a Fund for any loss which shall occur as the result of the
failure of a Foreign Custodian engaged directly or indirectly by the
Custodian to exercise reasonable care with respect to the safekeeping of
securities and other assets of the Fund to the same extent that the Custodian
would be liable to the Fund if the Custodian itself were holding such
securities and other assets. Nothing in this Agreement shall be read to
limit the responsibility or liability of the Custodian or a Foreign Custodian
for their failure to exercise reasonable care with regard to any decision or
recommendation made by the Custodian or Subcustodian regarding the use or
continued use of a Foreign Securities Depository. In the event of any loss
to a Fund by reason of the failure of the Custodian or a Foreign Custodian
engaged by such Foreign Custodian or the Custodian to utilize reasonable
care, the Custodian shall be liable to the Fund to the extent of the Fund's
damages, to be determined based on the market value of the property which is
the subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. The Custodian shall be
held to the exercise of reasonable care in carrying out this Agreement, and
shall not be liable for acts or omissions unless the same constitute
negligence or willful misconduct on the part of the Custodian or any Foreign
Custodian engaged directly or indirectly by the Custodian. Each Fund agrees
to indemnify and hold harmless the Custodian and its nominees from all taxes,
charges, expenses, assessments, claims and liabilities (including legal fees
and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as
may arise from any negligent action, negligent failure to act or willful
misconduct on the part of the indemnified entity or any Foreign Custodian.
The Custodian shall be entitled to rely, and may act, on advice of counsel
(who may be counsel for a Fund) on all matters and shall be without liability
for any action reasonably taken or omitted pursuant to such advice. The
Custodian need not maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian
shall have no liability for any loss occasioned by delay in the actual
receipt of notice by the Custodian, agent, Subcustodian or by a Foreign
Custodian of any payment, redemption or other transaction regarding
securities in respect of which the Custodian has agreed to take action as
provided in Section 3 hereof. The Custodian shall not be liable for any
action taken in good faith upon Proper Instructions or upon any certified
copy of any resolution of the Board and may rely on the genuineness of any
such documents which it may in good faith believe to be validly executed.
Notwithstanding the foregoing, the Custodian shall not be liable for any loss
resulting from, or caused by, the direction of a Fund to maintain custody of
any Securities or cash in a foreign country including, but not limited to,
losses resulting from nationalization, expropriation, currency restrictions,
civil disturbance, acts of war or terrorism, insurrection, revolution,
nuclear fusion, fission or radiation or other similar occurrences, or events
beyond the control of the Custodian. Finally, the Custodian shall not be
liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund
held by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment
Company's Agreement and Declaration of Trust, Articles of Incorporation, or
Agreement of Limited Partnership. The Custodian agrees that each Fund's
obligation hereunder shall be limited to the assets of the Fund, and that the
Custodian shall not seek satisfaction of any such obligation from the
shareholders of the Fund nor from any Board Member, officer, employee, or
agent of the Fund or the Investment Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in
Writing to the other provided that any termination by an Investment Company
shall be authorized by a resolution of the Board, a certified copy of which
shall accompany such notice of termination, and provided further, that such
resolution shall specify the names of the persons to whom the Custodian shall
deliver the assets of the affected Funds held by the Custodian. If notice of
termination is given by the Custodian, the affected Investment Companies
shall, within 90 days following the giving of such notice, deliver to the
Custodian a certified copy of a resolution of the Boards specifying the names
of the persons to whom the Custodian shall deliver assets of the affected
Funds held by the Custodian. In either case the Custodian will deliver such
assets to the persons so specified, after deducting therefrom any amounts
which the Custodian determines to be owed to it hereunder (including all
costs and expenses of delivery or transfer of Fund assets to the persons so
specified). If within 90 days following the giving of a notice of
termination by the Custodian, the Custodian does not receive from the
affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election,
may deliver such assets to a bank or trust company doing business in the
State of California to be held and disposed of pursuant to the provisions of
this Agreement or may continue to hold such assets until a certified copy of
one or more resolutions as aforesaid is delivered to the Custodian. The
obligations of the parties hereto regarding the use of reasonable care,
indemnities and payment of fees and expenses shall survive the termination of
this Agreement.
Section 14. MISCELLANEOUS
14.1 RELATIONSHIP. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund
of investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 FURTHER ASSURANCES. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party
may reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 ATTORNEYS' FEES. If any lawsuit or other action or
proceeding relating to this Agreement is brought by a party hereto against
the other party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (including allocated
costs and disbursements of in-house counsel), in addition to any other relief
to which the prevailing party may be entitled.
14.4 NOTICES. Except as otherwise specified herein, each notice
or other communication hereunder shall be in Writing and shall be delivered
to the intended recipient at the following address (or at such other address
as the intended recipient shall have specified in a written notice given to
the other parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 HEADINGS. The underlined headings contained herein are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original and both of which,
when taken together, shall constitute one agreement.
14.7 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the State of
New York (without giving effect to principles of conflict of laws).
14.8 FORCE MAJEURE. Notwithstanding the provisions of Section
11 hereof regarding the Custodian's general standard of care, no failure,
delay or default in performance of any obligation hereunder shall constitute
an event of default or a breach of this agreement, or give rise to any
liability whatsoever on the part of one party hereto to the other, to the
extent that such failure to perform, delay or default arises out of a cause
beyond the control and without negligence of the party otherwise chargeable
with failure, delay or default; including, but not limited to: action or
inaction of governmental, civil or military authority; fire; strike; lockout
or other labor dispute; flood; war; riot; theft; earthquake; natural
disaster; breakdown of public or common carrier communications facilities;
computer malfunction; or act, negligence or default of the other party. This
paragraph shall in no way limit the right of either party to this Agreement
to make any claim against third parties for any damages suffered due to such
causes.
14.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns, if any.
14.10 WAIVER. No failure on the part of any person to exercise
any power, right, privilege or remedy hereunder, and no delay on the part of
any person in the exercise of any power, right, privilege or remedy
hereunder, shall operate as a waiver thereof; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude any
other or further exercise thereof or of any other power, right, privilege or
remedy.
14.11 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as
to which it is determined to be invalid, unlawful, void or unenforceable,
shall not be impaired or otherwise affected and shall continue to be valid
and enforceable to the fullest extent permitted by law.
14.13 PARTIES IN INTEREST. None of the provisions of this
Agreement is intended to provide any rights or remedies to any person other
than the Investment Companies, for themselves and for the Funds, and the
Custodian and their respective successors and assigns, if any.
14.14 PRE-EMPTION OF OTHER AGREEMENTS. In the event of any
conflict between this Agreement, including without limitation any amendments
hereto, and any other agreement which may now or in the future exist between
the parties, the provisions of this Agreement shall prevail.
14.15 VARIATIONS OF PRONOUNS. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the
neuter gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: VICE PRESIDENT
By: ______________________________
Deborah R. Gatzek
Their: VICE PRESIDENT & SECRETARY
Stradley
Ronon
Stevens
& Young, LLP 2600 One Commerce Square Malvern, PA
Philadelphia, Pennsylvania 19103-7098 Cherry Hill, NJ
Fax: (215) 564-8120 Wilmington, DE
Attorneys At Law A Limited Liability Partnership
Direct Dial: (215) 564-8115
October 7, 1997
Franklin Floating Rate Trust
777 Mariners Island Boulevard
San Mateo, CA 94404
Re: Franklin Floating Rate Trust
Gentlemen:
We are furnishing this opinion with respect to the proposed offer
and sale from time to time of shares of beneficial interest, par value $.01
per share (the "Common Shares"), of the Franklin Floating Rate Trust (the
"Fund"), registered under the Securities Act of 1933, as amended (the "1933
Act") and the Investment Company Act of 1940, as amended (the "1940 Act") by
a Registration Statement on Form N-2 (File Nos. 333-30131 and 811-08271) as
amended from time to time (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission").
We have acted as general counsel to the Fund in connection with
its initial organization and registration, and we are familiar with the
actions taken by its Trustees to authorize the issuance of the Common Shares.
We have examined the Agreement and Declaration of Trust (the
"Trust Agreement") of the Fund, a Delaware business trust organized under
Delaware law, the By-Laws of the Fund, minute books and such other
certificates and documents as deemed necessary for the purpose of this
opinion.
We have examined the Registration Statement and the combined
prospectus and statement of additional information included therein (the
"Prospectus") relating to the issuance of the Common Shares of the Fund. We
have also examined the Fund's Notification of Registration on Form N-8A under
the 1940 Act. We have assisted in the preparation of the Fund's Registration
Statement, including all pre-effective amendments thereto, filed or to be
filed with the Commission.
Based upon the foregoing information and examination, it is our
opinion that:
1. The Fund is duly organized and validly existing as a
business trust in good standing under the laws of the State of Delaware.
2. The Fund's Common Shares to be offered for sale pursuant to
the Prospectus are duly authorized and, when sold, issued and paid for as
contemplated by the Prospectus, will be validly issued, fully paid and
nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Fund, covering the registration of the Fund's
Common Shares under the 1933 Act and the 1940 Act and the applications and
registration statements, and amendments thereto, filed in accordance with the
securities laws of the several states in which the Fund's Common Shares are
offered, and we further consent to reference in the Prospectus of the Fund to
the fact that this opinion has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By /s/ Bruce G. Leto
Bruce G. Leto
BGL/MS:lwk
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Pre-Effective Amendment No. 2 to the
Registration Statement of Franklin Floating Rate Trust on Form N-2 (File No.
333-30131) of our report dated September 19, 1997, on our audit of the
Statement of Assets and Liabilities of the Franklin Floating Rate Trust as of
September 8, 1997.
/s/Coopers & Lybrand L.L.P.
San Francisco, California
October 7, 1997
Franklin Resources, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
[FORM]
[DATE]
FRANKLIN FLOATING RATE TRUST
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire 10,000 shares of beneficial interest (the
"Shares") of the Franklin Floating Rate Trust (the "Fund"), at a purchase
price of $10.00 per share for a total of $100,000. We will purchase the
Shares in a private offering prior to the effectiveness of the Form N-2
registration statement filed by the Fund under the Securities Act of 1933.
The Shares are being purchased pursuant to section 14 of the Investment
Company Act of 1940 to serve as the seed money for the Fund prior to the
commencement of the public offering of its shares.
In connection with such purchase, we understand that: (i) we, the
purchaser, intend to acquire the Shares for our own account as the sole
beneficial owner thereof and have no present intention of redeeming or
reselling the Shares so acquired; and (ii) in the event any of the initial
10,000 Shares are redeemed or repurchased during the first five years, the
Fund may charge against our redemption or repurchased proceeds a pro rata
portion of any unamortized organizational expenses which would be borne by
such Shares during the balance of the initial five-year period were they not
to be redeemed or repurchased.
We consent to the filing of this Investment Letter as an exhibit to the
form N-2 registration statement of the Fund.
Sincerely,
FRANKLIN RESOURCES, INC.
By:
Harmon E. Burns
Executive Vice President
