As filed with the Securities and Exchange Commission on November 24, 1998.
1933 Act File No. 333-65111
1940 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. / /
Post-Effective Amendment No. / 1 /
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. / 12 /
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: December 1, 1998
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan check
the following box. [x]
It is proposed that this filing will become effective (check
appropriate box)
[ ] when declared effective pursuant to section 8 (c)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on December 1, 1998, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 486
[ ] This post-effective amendment designates a new effective date for a
previously filed registration statement.
[ ] This Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities
Act registration statement number of the earlier effective
registration statement for the same offering is _________.
This Registration incorporates a combined prospectus pursuant to Rule 429 which
relates to an earlier registration statement filed by the Registrant on June 27,
1997, as amended to date (File No. 333-30131).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Offering Aggregate Amount of
Being Amount Being Price Offering Registration
Registered Registered Per Unit Price Fee
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
par value $0.01 (1) 35,000,000 shares $ 9.98 (2) $349,300,000 $103,044.00
- -------------------------------------------------------------------------------------
Common Stock
par value $0.01 (1) 15,000,000 shares $10.05(3) $150,750,000 $ 44,471.25
- -------------------------------------------------------------------------------------
Common Stock,
par value $0.01 (1) 10,000,000 shares $10.05(4) $100,500,000 $ 29,647.50
- -------------------------------------------------------------------------------------
</TABLE>
(1) Previously registered
(2) Calculated pursuant to Rule 457 (d) based on the net asset value per
share of $ 9.98 as of September 24, 1998.
(3) Calculated pursuant to Rule 457(d) based on the net asset value per
share of $10.05 as of June 15, 1998
(4) Calculated pursuant to Rule 457(d) based on the net asset value per
share of $10.05 as of May 1, 1998
PROSPECTUS & APPLICATION
FRANKLIN
FLOATING RATE
TRUST
INVESTMENT STRATEGY
INCOME
DECEMBER 1, 1998
Franklin Floating Rate Trust is a closed-end investment company. Its goal 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 with Floating Interest Rates. Franklin Advisers, Inc.,
the fund's investment manager, uses its credit analysis to select Corporate
Loans and Corporate Debt Securities that are suitable investments for the fund.
The fund will invest at least 65% of its total assets 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 the manager.
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how the fund invests and the
services available to shareholders.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated December 1, 1998,
which we may amend from time to time.
We have filed the SAI with the SEC and have incorporated it by reference into
this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN. The Table of Contents of
the SAI appears on page 64 of this prospectus.
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.
LIKE ALL INVESTMENT COMPANY SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The fund may invest up to 100% of its 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 consider
these risks before investing in the fund. Please see "prospectus summary -
special considerations and risk factors" beginning on page 11.
FRANKLIN FLOATING RATE TRUST
THIS PROSPECTUS IS NOT AN OFFERING OF THE COMMON SHARES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
The fund began offering its Common Shares and began investment operations on
October 10, 1997. The fund engages in a continuous offering of Common Shares.
The fund is authorized as a business trust to issue an unlimited number of
Common Shares and has registered 70,000,000 Common Shares. Common Shares are
offered at a price equal to the next determined Net Asset Value per share which,
as of November 6, 1998, was $9.91 per share. There is no front-end sales charge
on purchases of Common Shares. An Early Withdrawal Charge of 1% will be imposed
on Common Shares purchased after March 31, 1998, that are held less than twelve
months and that are accepted by the fund for repurchase in a Tender Offer.
Certain waivers of this charge may apply. Please see "Early Withdrawal Charge."
The price of Common Shares will fluctuate, depending upon the fund's Net Asset
Value per share.
The net proceeds of the offering of Common Shares registered to date are
estimated at $700,254,609.75 and, subject to any repurchases, will be invested
by the fund over the course of the continuous offering.
Offering expenses that have been incurred by the fund are summarized in the
table below.
Expenses
Date of Offering Number of Deducted from
(on or after) Shares Registered Proceeds to fund
--------------------------------------------------------------------
October 10, 1997 10,000,000 $ 61,603.00
May 15, 1998 10,000,000 40,197.50
July 10, 1998 15,000,000 60,046.25
October 12, 1998 35,000,000 133,543.50
The fund has incurred organizational expenses of $111,000.00. These
organizational expenses will remain a liability of the fund and will be
gradually reduced in equal installments over a period not to exceed 60 months
from the date the fund commenced investment operations on October 10, 1997.
Distributors will pay from its own or its affiliates' assets all sales
commissions to selected Securities Dealers for sales of Common Shares.
Consequently, sales commissions do not reduce the proceeds of the offering
available to the fund for investment. No market currently exists for Common
Shares. It is not currently anticipated that a secondary market will develop for
Common Shares. The fund, the manager and Distributors do not intend to make a
secondary market in Common Shares or to list Common Shares on any securities
exchange or for quotation on any over-the-counter market. Common Shares are not
readily marketable. As a consequence, you should consider Common Shares to be an
illiquid investment. This means that you may not be able to freely sell your
Common Shares. Please see "Prospectus Summary - Special Considerations and Risk
Factors - Illiquidity" and "Periodic Offers By the Fund to Repurchase Common
Shares From Shareholders - Special Considerations of Repurchases."
To provide shareholders a means to sell their Common Shares at Net Asset Value,
the fund will make quarterly Tender Offers to repurchase Common Shares from
shareholders. Each Tender Offer will be for a specified percentage (between 5%
and 25%) of the fund's outstanding Common Shares set by the fund's Board. Common
Shares will be repurchased at the Net Asset Value determined as of the close of
business (1:00 p.m., Pacific time) on the day the Tender Offer ends or within a
maximum of fourteen days after the Tender Offer ends as described in "Periodic
Offers By the Fund to Repurchase Common Shares From Shareholders." Each Tender
Offer will last for a period between six weeks and three weeks. Shareholders
will be notified in writing at the beginning of each Tender Offer. A Tender
Offer is expected to end near the end of December 1998, and every three months
after the end of December 1998. Please see "Periodic Offers By the Fund to
Repurchase Common Shares From Shareholders."
TABLE OF CONTENTS
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
Prospectus Summary ............................................... 5
Information About the Fund ....................................... 17
Use of Proceeds From Sales of Common Shares ...................... 17
What Kinds of Securities Does the Fund Purchase? ................. 17
Other Investment Policies ........................................ 28
What Are the Risks of Investing in the Fund? ..................... 31
Who Manages the Fund? ............................................ 36
Portfolio Transactions By the Fund ............................... 38
Investment Performance Information ............................... 39
How to Buy Common Shares ......................................... 39
Periodic Offers By the Fund to
Repurchase Common Shares From Shareholders ....................... 43
Early Withdrawal Charge .......................................... 47
Exchanges ........................................................ 50
Dividends and Distributions to Shareholders ...................... 52
How Taxation Affects the Fund and Its Shareholders ............... 54
Description of Common Shares ..................................... 57
Transaction Procedures and Special Requirements .................. 59
Services to Help You Manage Your Account ......................... 62
What If I Have Questions About My Account? ....................... 63
Additional General Information ................................... 64
Table of Contents of
Statement of Additional Information .............................. 64
Useful Terms and Definitions ..................................... 65
APPENDIX
Description of Ratings ........................................... 69
FRANKLIN
FLOATING RATE
TRUST
December 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our Useful Terms and Definitions
section at the end of the prospectus.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
FRANKLIN FLOATING RATE TRUST
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the fund's historical expenses for the fiscal year ended
July 31, 1998. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Sales Load (as a percentage of offering price).................. None
Dividend Reinvestment and Cash Purchase Plan Fees............... None
Early Withdrawal Charge Imposed on Repurchase of
Common Shares Held Less than Twelve Months
(as a percentage of tender proceeds exclusive of all
reinvestments and capital appreciation in the account).......... 1.00%++
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO COMMON SHARES)
Management Fees................................................. 0.80%*
Administration Fees............................................. 0.15%
Other Expenses.................................................. 0.81%
------
Total Annual Fund Operating Expenses ........................... 1.76%*
======
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++An Early Withdrawal Charge of 1% may apply to purchases of Common Shares if
you sell the Common Shares within twelve months. See "Early Withdrawal Charge."
*For the period ended July 31, 1998, the manager and FT Services had agreed in
advance to limit their respective management and administration fees. With this
reduction, management fees were 0.51%, there were no administration fees and
total annual fund operating expenses were 1.32%. The manager and FT Services are
continuing to limit their fees, but may end this arrangement at any time upon
notice to the Board.
Other Expenses are estimated based on historical amounts for the fiscal year
ended July 31, 1998. For a more detailed discussion of these fees, charges and
expenses, you should refer to the appropriate sections of this prospectus.
C. EXAMPLE
Assume the fund's annual return is 5%, operating expenses are as
described above, and you sell your Common Shares after the number of
years shown. These are projected amounts you would pay for each $1,000
that you invest in Common Shares.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------
Assuming no tender of Common
Shares for repurchase by the
fund............................. $18 $55 $95 $207
Assuming tender and repurchase
of Common Shares by the fund
on last day of period and, for the
one-year period, imposition of
the Early Withdrawal Charge ..... $28
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The audit
report covering the period shown below is incorporated by reference in the SAI
and appears in the fund's Annual Report to Shareholders for the fiscal year
ended July 31, 1998. The Annual Report to Shareholders also includes more
information about the fund's performance. For a free copy, please call Fund
Information.
OCTOBER 10, 1997*
TO JULY 31, 1998
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $10.00
----------
Income from investment operations:
Net investment income ............................ 0.48
Net realized and unrealized gains ................ 0.04
----------
Total from investment operations .................. 10.52
----------
Less distributions from net investment income ..... (0.48)
----------
Net asset value, end of period .................... $10.04
----------
Total return** .................................... 5.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $168,537
Ratios to average net assets:
Expenses ......................................... 1.32%***
Expenses excluding waiver and payments by affiliate 1.76%***
Net investment income............................. 6.06%***
Portfolio turnover rate............................ 45.32%
*Commencement of operations.
**Total return does not reflect the Early Withdrawal Charge and is not
annualized.
***Annualized
PROSPECTUS SUMMARY
THIS SECTION SUMMARIZES INFORMATION THAT IS DISCUSSED LATER IN THIS PROSPECTUS.
YOU SHOULD CAREFULLY CONSIDER THE MORE DETAILED INFORMATION. FOR A MORE COMPLETE
DISCUSSION OF RISKS OF INVESTING IN THE FUND, SEE "WHAT ARE THE RISKS OF
INVESTING IN THE FUND?"
THE FUND The fund is a continuously offered, closed-end management investment
company. It was organized as a Delaware business trust on May 20, 1997, and is
registered with the SEC. The fund's principal business is investing its assets
by purchasing and selling securities on an ongoing basis, as described in this
prospectus. The fund does not issue redeemable shares (shares that you may
redeem at any time). The fund is a non-diversified investment company. This
means the fund is not limited in the amount of assets that it may invest in any
single issuer of securities except to the extent any adverse tax consequences
would arise. See "Information About the Fund."
CONTINUOUS OFFERING The fund began offering its Common Shares on October 10,
1997. The fund engages in a continuous offering of Common Shares, at a price
equal to the Net Asset Value per share next determined after a purchase order is
received. No front-end sales charge is imposed on Common Shares.
The minimum initial purchase of Common Shares is $1,000 and the minimum
subsequent investment is $50. The fund reserves the right to waive or modify the
minimum investment requirements at any time. Any purchase order may be rejected
by Distributors or the fund. Distributors or the fund also may suspend the
continuous offering of Common Shares at any time.
No market presently exists for Common Shares and it is not currently anticipated
that a secondary market will develop for Common Shares. 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. Common Shares are not
readily marketable. The fund intends to make quarterly Tender Offers to
repurchase Common Shares from shareholders. The fund imposes a 1% Early
Withdrawal Charge on the repurchase proceeds of Common Shares purchased after
March 31, 1998, that are held for less than twelve months. Certain waivers of
this charge may apply. See "How to Buy Common Shares" and "Early Withdrawal
Charge."
INVESTMENT GOAL AND POLICIES The fund's investment goal 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 with Floating Interest Rates, as described below.
Corporate Loans are loans made to corporations. In return, the corporation pays
interest and principal to the Lenders. Corporate Loans include Participation
Interests in Corporate Loans or Assignments of Corporate Loans, as more fully
described below. Corporate Debt Securities, as more fully described below, are
investments by securityholders in obligations issued by corporations. In
exchange for their investment in the corporation, securityholders receive income
from the corporation and the return of their investments in the corporation.
The Corporate Loans and Corporate Debt Securities will, in most instances, be
secured by collateral, as more fully described below, which has been pledged by
the corporation to the Lenders or securityholders. This means that the
corporation has entered into a written promise to deliver, or has actually
delivered, to the Lenders or securityholders property that will legally become
the property of the Lenders or securityholders in case the corporation Defaults
in paying interest or principal.
In most instances, the Corporate Loans and Corporate Debt Securities will hold
the most senior position in the capitalization structure of the corporation.
This means that, in case the corporation becomes insolvent, the Lenders or
securityholders will be paid before other creditors of the corporation from the
assets of the corporation. The fund's investment manager uses its credit
analysis to select Corporate Loans and Corporate Debt Securities that are
suitable investments for the fund.
The fund's investments may be either unrated or rated by one or more NRSROs,
which are independent rating organizations such as S&P or Moody's. These
organizations rate obligations by grading the company issuing the obligations
based upon its financial soundness. If the fund is going to invest in an
obligation that is unrated, the manager will determine its quality. The
Corporate Loans and Corporate Debt Securities in which the fund invests
generally are currently not rated by any NRSRO.
The fund will invest at least 65% of its total assets in Corporate Loans and
Corporate Debt Securities that are rated B or higher by an NRSRO or, if unrated,
determined to be of comparable quality by the manager. The fund may invest up to
35% of its total assets in Corporate Loans and Corporate Debt Securities that
are rated less than B by an NRSRO or, if unrated, determined to be of comparable
quality by the manager. However, the fund will make such an investment only
after the manager determines that the investment is suitable for the fund based
on the manager's independent credit analysis. Generally, this means that the
manager has determined that the likelihood that the corporation will meet its
obligations is acceptable. See "What Kinds of Securities Does the Fund Purchase?
- - The Manager's Credit Analysis."
Lists of these ratings are shown in the Appendix to this prospectus. Generally,
the lower the rating category, the more risky is the investment. Debt securities
rated BBB or lower by S&P or Moody's are considered to be high yield, high risk
investments, commonly known as "junk bonds."
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
primarily invests are not junk bonds. They have features that junk bonds
generally do not have. Corporate Loans and Corporate Debt Securities are senior
obligations of the Borrower and are secured by collateral. They generally are
subject to certain restrictive covenants in favor of the Lenders or
securityholders that invest in the Corporate Loans or Corporate Debt Securities.
For more information about restrictive covenants, see the section in the SAI
entitled "How Does the Fund Invest Its Assets? - Restrictive Covenants."
Under normal market conditions, the fund will invest at least 65% of its total
assets in Corporate Loans and Corporate Debt Securities of U.S. companies,
foreign entities and U.S. subsidiaries of foreign entities that have Floating
Interest Rates. Floating Interest Rates are: (i) variable interest rates which
adjust to a base interest rate, such as LIBOR or the CD Rate on set dates; or
(ii) interest rates that float at a margin above a generally recognized base
lending interest rate such as the Prime Rate of a designated U.S. bank.
Corporate Loans and Corporate Debt Securities with Floating Interest Rates may
have the additional feature of converting into a fixed rate instrument after
certain periods of time or under certain circumstances. Upon conversion of any
such Corporate Loans or Corporate Debt Securities to fixed rate instruments, the
fund will rebalance its investments to meet the 65% level described above, as
promptly as is reasonable.
OTHER DEBT OBLIGATIONS. Under normal market conditions, the fund may invest up
to 35% of its total assets in certain other types of debt obligations, as
described below, or in cash. The fund may invest in Unsecured Corporate Loans
and Unsecured Corporate Debt Securities. This means that the Corporate Loans and
Corporate Debt Securities are not backed by collateral. Thus, if a Borrower
Defaults on an Unsecured Corporate Loan or Unsecured Corporate Debt Security, it
is unlikely that the fund would be able to recover the full amount of the
principal and interest due. The manager will determine that the Borrowers in
such transactions are creditworthy, under the same analysis that the manager
uses for Corporate Loans and Corporate Debt Securities. The fund may also invest
in secured or unsecured short-term debt obligations. These include commercial
paper, CDs, or bankers' acceptances. These short-term debt obligations will be
rated within the four highest rating categories assigned by an NRSRO, or, if
unrated, determined to be of comparable quality by the manager. The fund may
also invest in fixed rate obligations of U.S. companies or U.S. subsidiaries of
foreign companies. The manager will determine that the companies issuing these
obligations are creditworthy. When the fund invests in fixed rate obligations,
it may also enter into an interest rate swap in order to limit the exposure of
such obligations against fluctuations in interest rates. See "Other Investment
Policies - Interest Rate and Hedging Transactions."
MATURITIES. The fund has no restrictions on portfolio maturity. The fund
anticipates, however, 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. This means that the Borrower is required to fully repay the
obligation within that time period. The fund also anticipates that the 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 the Borrowers may
choose to pay off such obligations early. Such obligations usually permit the
Borrower to elect to prepay. Also, prepayment is likely because such Corporate
Loans provide that the Lenders will have priority in prepayment in case of sales
of assets of the Borrowers.
MORE ABOUT CORPORATE LOANS AND CORPORATE DEBT SECURITIES
Before the fund invests in a Corporate Loan or Corporate Debt Security, the
manager will analyze whether the Borrower can make the required payments on the
Corporate Loan or Corporate Debt Security.
A Corporate Loan in which the fund may invest typically is structured by a group
of Lenders. This means that the Lenders participate in the negotiations with the
Borrower and in the drafting of the terms of the Corporate Loan. The group of
Lenders often consists of commercial banks, thrift institutions, insurance
companies, finance companies or other financial institutions. The fund will not
act as the sole negotiator or sole structuror for a Corporate Loan. One or more
of the Lenders usually administers the Loan on behalf of all the Lenders. This
Lender is referred to as the Agent Bank. For more information about the
activities of an Agent Bank, see "Description of Participation Interests and
Assignments."
The fund may invest in a Corporate Loan in one of three ways. It may make a
direct investment in the Corporate Loan by participating as one of the Lenders.
It may purchase a Participation Interest or it may purchase an Assignment.
Participation Interests are interests issued by a Lender or other financial
institution which represent a fractional interest in a Corporate Loan. The fund
may acquire Participation Interests from a Lender or other holders of
Participation Interests. Holders of Participation Interests are referred to as
Participants. An Assignment represents a portion of a Corporate Loan previously
attributable to a different Lender. Unlike a Participation Interest, the fund
will generally become a Lender for the purposes of the relevant loan agreement
by purchasing an Assignment.
It can be advantageous to the fund to make a direct investment in a Corporate
Loan as one of the Lenders. Such an investment is typically made at par. This
means that the fund receives a return at the full interest rate for the
Corporate Loan. On the other hand, when the fund invests in a Participation
Interest or Assignment, it will normally pay a fee or forego a portion of the
interest payment. Consequently, the fund's return on such an investment may be
lower than it would have been if the fund had made a direct investment in the
underlying Corporate Loan. However, the fund often may not be able to invest in
Corporate Loans other than through Participation Interests or Assignments,
because of the reduced direct investment opportunities in Corporate Loans that
may exist.
If the fund purchases an Assignment from a Lender, the fund will generally have
direct contractual rights against the Borrower 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 typically will have established a direct contractual
relationship with the seller of the Participation Interest, but not with the
Borrower. Consequently, the fund is subject to the credit risk of the Lender or
Participant who sold the Participation Interest to the fund, in addition to the
usual credit risk of the Borrower. Therefore, when the fund invests in Corporate
Loans through the purchase of Participation Interests, the manager must consider
the creditworthiness of the Agent Bank and any Lenders and Participants
interposed between the fund and a Borrower. These parties are referred to as
Intermediate Participants. At the time of investment, the Intermediate
Participant's outstanding debt obligations must be investment grade. That is,
they must be rated in the four highest rating categories assigned by an NRSRO,
such as BBB, A-3 or higher by S&P or Baa, P-3 or higher by Moody's. If unrated,
the manager must determine that the obligations are of comparable quality. See
"What Kinds of Securities Does the Fund Purchase?"
Corporate Debt Securities typically are in the form of notes or bonds. They may
be issued in a public or private offering in the securities markets. Corporate
Debt Securities will have terms similar to Corporate Loans, but will not be in
the form of Participation Interests or Assignments. Unlike Corporate Loans,
Corporate Debt Securities often are part of a large issue of securities which
are held by a large group of investors.
The terms of each secured Corporate Loan and Corporate Debt Security require
that collateral have a fair market value at least equal to 100% of the amount of
such Corporate Loan or Corporate Debt Security. The manager generally will
determine the value of the collateral by customary valuation techniques that it
considers appropriate. However, the value of the collateral may decline
following the fund's investment. Also, collateral may be difficult to sell and
there are other risks which may cause the collateral to be insufficient in the
event of a Default. Consequently, the fund might not receive payments to which
it is entitled. See "Prospectus Summary - Special Considerations and Risk
Factors - Credit Risks Associated with Corporate Loans and Corporate Debt
Securities - Nonpayment of Scheduled Interest or Principal Payments."
The collateral may consist of various types of assets or interests including
intangible assets. It may include working capital assets, such as accounts
receivable or inventory, or tangible fixed assets, such as real property,
buildings and equipment. It may include intangible assets, such as trademarks,
copyrights and patent rights, or security interests in securities of
subsidiaries or affiliates. The company's owners may provide additional
security.
A significant portion of the fund's Corporate Loans and Corporate Debt
Securities (which may be as much as 100% of the fund's total assets) may be
issued in highly leveraged transactions. Such Corporate Loans and Corporate Debt
Securities are subject to greater credit risks, including, but not limited to,
the Default or bankruptcy of the Borrower. See "Prospectus Summary - Special
Considerations and Risk Factors - Credit Risks Associated with Corporate Loans
and Corporate Debt Securities" and "What Are the Risks of Investing in the Fund?
- - Credit Risks" and " - Collateral Impairment."
INVESTMENT MANAGER Franklin Advisers, Inc. manages the fund's assets and makes
all investment decisions. The manager provides similar services to other funds.
The manager is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Together, the manager
and its affiliates manage over $208 billion in assets. See "Who Manages the
Fund?"
ADMINISTRATOR FT Services provides administrative services and facilities for
the fund. FT Services prepares and maintains the fund's books, records, and tax
and financial reports, and monitors compliance with regulatory requirements. See
"Who Manages the Fund?"
SHAREHOLDER SERVICING AND TRANSFER AGENT Investor Services is the fund's
shareholder servicing and transfer agent. Investor Services provides services to
the holders of Common Shares and acts as the fund's transfer agent and
dividend-paying agent. See "Who Manages the Fund?"
FEES AND EXPENSES Under its management agreement, the fund is obligated to pay
the manager a monthly management fee at an annual rate of 0.80% of the average
daily net assets of the fund. The management fee, while higher than the fees
paid by other investment companies, is comparable to the fees paid by other
closed-end investment companies with investment goals and policies similar to
the fund's. FT Services and Investor Services are also entitled to receive fees
from the fund. See "Who Manages the Fund?"
DISTRIBUTIONS The fund declares daily and pays monthly dividends from the fund's
net investment income. Capital gains, if any, will be distributed annually,
usually in December. Dividend payments are not guaranteed, are subject to the
Board's discretion and may vary with each payment. THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THE FUND.
You may elect to have distributions automatically reinvested in additional
Common Shares. See "Dividends and Distributions to Shareholders" and "How
Taxation Affects the Fund and Its Shareholders."
PERIODIC OFFERS TO REPURCHASE COMMON SHARES FROM SHAREHOLDERS The fund does not
intend to list Common Shares on any securities exchange or arrange for their
quotation on any over-the-counter market. Because a secondary market for Common
Shares likely will not develop, the fund has adopted a fundamental policy to
offer each quarter to repurchase a portion of the Common Shares outstanding. In
response to each Tender Offer, shareholders may choose to tender their Common
Shares to the fund for repurchase. Tender Offers occur at a price per share
equal to the Net Asset Value per share of the Common Shares determined as of the
close of business (1:00 p.m. Pacific time) on the day the Tender Offer ends or
within a maximum of fourteen days after the Tender Offer ends as described in
"Periodic Offers By the Fund to Repurchase Common Shares From Shareholders."
Each Tender Offer will last for a period between six weeks and three weeks.
Shareholders will be notified in writing at the beginning of each Tender Offer.
Common Shares purchased after March 31, 1998, that have been held for less than
twelve months and that are repurchased by the fund in a Tender Offer will be
subject to an Early Withdrawal Charge of 1%. The Early Withdrawal Charge will be
imposed against the lesser of the then current Net Asset Value or the original
purchase price of the tendered Common Shares. Certain waivers of this charge may
apply. See "Periodic Offers By the Fund to Repurchase Common Shares From
Shareholders" and "Early Withdrawal Charge."
SPECIAL CONSIDERATIONS AND RISK FACTORS
FOREIGN INVESTMENTS. The fund may invest in Corporate Loans and Corporate Debt
Securities that are made to, or issued by, foreign borrowers or U.S.
subsidiaries of foreign Borrowers. The manager will evaluate the
creditworthiness of foreign U.S. Borrowers by using the same analysis that it
uses for U.S. Borrowers. The fund may also invest in Corporate Loans to and
Corporate Debt Securities issued by U.S. Borrowers that have significant
non-U.S. dollar-denominated revenues. However, the fund will only invest in
loans or securities that are U.S. dollar-denominated or otherwise provide for
payment in U.S. dollars. Where Corporate Loans or Corporate Debt Securities are
not denominated in U.S. dollars, the fund may arrange for payment in U.S.
dollars by entering into a foreign currency swap. See "What Kinds of Securities
Does the Fund Purchase? - Foreign Currency Swaps."
These obligations may involve risks not typically involved in domestic
investment. The political, economic and social structures of some countries in
which the fund invests may be less stable and more volatile than those in the
U.S. The risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation of assets, restrictions on
removal of currency or other assets, nationalization of assets, punitive taxes
or other actions that restrict the purchase or sale of assets or result in a
loss of assets. There may be less publicly available information about a foreign
company or government than about a U.S. company or public entity. Certain
countries' financial markets and services are less developed than those in the
U.S. or other major economies. As a result, they may not have uniform
accounting, auditing and financial reporting standards and may have less
government supervision of financial markets. In addition, the fund may have more
difficulty pursuing legal remedies and enforcing judgments in foreign countries.
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 Corporate Loans and Corporate Debt Securities
with Floating Interest Rates and, to a lesser extent, short-term fixed-rate
instruments, the manager expects the value of Common Shares to fluctuate less as
a result of interest rate changes than would a portfolio of medium or long-term
fixed-rate obligations.
However, some Floating Interest Rates reset only periodically. This means that
there are periods during which the interest rate does not change. During such
periods, prevailing interest rates and the interest rates on some obligations
with Floating Interest Rates held by the fund (including the variable interest
rates on nominal amounts in the fund's interest rate swap transactions) will not
move precisely in the same direction or amount, i.e., there will be an imperfect
correlation between these rates. These imperfect correlations may cause the Net
Asset Value of Common Shares to fluctuate. Also, a decline in the Net Asset
Value could result from a Borrower Defaulting on a Corporate Loan or Corporate
Debt Security and from changes in the creditworthiness of a Borrower. In the
case of Corporate Loans, a decline in the Net Asset Value may also result from
changes in the creditworthiness of Intermediate Participants interposed between
the fund and the Borrowers.
ILLIQUIDITY. An investment in Common Shares of the fund should be considered
Illiquid. The fund does not intend to list its Common Shares for trading on any
securities exchange. The fund expects that there will be no secondary market for
Common Shares. The fund is designed primarily for long-term investors. It should
not be considered a vehicle for short-term trading purposes, given its lack of a
secondary market and its Early Withdrawal Charge. See "Early Withdrawal Charge."
Under certain limited circumstances, the fund may suspend or postpone a
quarterly Tender Offer for the repurchase of Common Shares from the fund's
shareholders. (The fund must meet certain regulatory requirements and must give
notice to shareholders in order to suspend or postpone a Tender Offer.) In that
event, shareholders will likely be unable to sell their Common Shares. The fund,
the manager and Distributors are prohibited from making a market in Common
Shares as long as the fund continues to publicly offer Common Shares.
Even if a secondary market for Common Shares develops, the shares of closed-end
funds, such as the fund, frequently trade at a discount from (a price below)
their Net Asset Value in the secondary market. This means that the market price
of the Common Shares will probably be less than the Net Asset Value, should a
secondary market develop. It is unlikely that Common Shares would trade at a
premium to (a price above) Net Asset Value should a secondary market for Common
Shares develop. A premium is unlikely since investors may purchase Common Shares
at Net Asset Value from the fund.
NON-DIVERSIFICATION. The fund is non-diversified under the 1940 Act. This means
that there is no limit on the amount of assets that the fund may invest in the
securities of any one issuer except to the extent any adverse tax consequences
would arise.
Since the fund may invest a large portion of its assets in the obligations of a
limited number of issuers, the value of Common Shares may fluctuate more widely,
and the fund may present greater risk, than other investments. Also, the fund
may be more susceptible than a more widely diversified fund to any single
economic, political or regulatory event. However, the fund does not currently
intend to invest more than 15% of its assets in the obligations of any single
Borrower. The manager has taken measures which it believes significantly reduce
the fund's exposure to such risk. See "What Kinds of Securities Does the Fund
Purchase? - The Fund's Non-Diversified Classification."
LIMITED AVAILABILITY OF CORPORATE LOANS, PARTICIPATION INTERESTS, ASSIGNMENTS
AND CORPORATE DEBT SECURITIES. Direct investments in Corporate Loans and, to a
lesser degree, investments in Participation Interests or Assignments have only
limited availability. There is a risk that the fund may not be able to invest
65% or more of its total assets in Corporate Loans, Participation Interests,
Assignments and Corporate Debt Securities, as described above. The limited
availability of these investments may be due to a number of factors. There may
be more willing purchasers of direct Corporate Loans compared to the available
loans. Direct Lenders may also allocate only a small number of Corporate Loans
to new investors, such as the fund. Also, the Lenders or the Agent Bank may have
an incentive to market the less desirable Corporate Loans, Participation
Interests or Assignments to investors such as the fund while retaining the more
attractive investments for themselves. This reduces the availability of the more
desirable investments.
The fund intends to invest the net proceeds from the sale of Common Shares in
accordance with the fund's investment goal and policies as soon as practicable,
based on market conditions, as described above. During periods when the fund is
experiencing a large inflow of assets, there is a risk that the assets may not
be promptly and effectively invested. Finally, the fund has no current intention
of investing more than 20% of its assets in the obligations of Borrowers in any
single industry. However, the fund regards the issuer of a Corporate Loan to
include the Agent Bank and any Intermediate Participant, as well as the
Borrower. This means that the fund will invest more than 25% of its total assets
in the securities of the following issuers as a group: commercial banks, thrift
institutions, insurance companies and finance companies. The limited
availability of Corporate Loans, Participation Interests, Assignments and
Corporate Debt Securities may reduce the fund's ability to readily invest 20% or
less of its assets in the obligations of Borrowers in any single industry. See
"Other Investment Policies - Non-Concentration in a Single Industry." 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 goal.
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 fund is subject to
the risk that the scheduled interest or principal payments on Corporate Loans,
Corporate Debt Securities and other debt obligations in its portfolio will not
be paid. The fund may own Corporate Loans and Corporate Debt Securities of a
Borrower that is on the verge of bankruptcy. The fund may also purchase
Corporate Loans and Corporate Debt Securities that are issued in connection with
a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code. The fund
will purchase these obligations only if they hold a senior position in the
Borrower's capitalization structure. Also, the manager will determine that such
obligations are a suitable investment by the fund.
In the event that a nonpayment occurs, the value of that debt obligation may
decline. In turn, the Net Asset Value of the Common Shares may decline. The
terms of the Corporate Loans and Corporate Debt Securities require that
collateral be maintained at a value at least equal to 100% of the amount of such
Corporate Loan or Corporate Debt Security. However, the value of the collateral
may decline after the fund invests in the Corporate Loan or Corporate Debt
Security. If this happens, there is a risk that the value of the collateral may
not be sufficient to cover the amount owed to the fund.
In the event that a Borrower Defaults, the fund's access to the collateral may
be limited by bankruptcy and other insolvency laws. There is also the risk that
the collateral may be difficult to liquidate. In fact, a majority of the
collateral may be Illiquid. As a result, the fund might not receive payments to
which it is entitled.
The manager will determine the value of the collateral by customary valuation
techniques that it considers appropriate. These valuation techniques may include
reference to financial statements of the Borrower, an independent appraisal, or
obtaining the market value of such collateral (e.g., cash or securities) if it
is readily ascertainable. The value assigned to the collateral by the manager
may be higher than the value at which the Borrower values the collateral on the
Borrower's books. The Agent Bank may rely on independent appraisals as to the
value of specific collateral. The Agent Bank, however, may not obtain an
independent appraisal in all cases. Borrowers are required to comply with the
terms of the Corporate Loans and Corporate Debt Securities, including various
restrictive covenants with respect to such Corporate Loans or Corporate Debt
Securities. Acceleration in the repayment of such Corporate Loans or Corporate
Debt Securities may result in the breach of such terms or covenants. For more
information about restrictive covenants, see the section in the SAI entitled
"How Does the Fund Invest Its Assets? - Restrictive Covenants."
CREDIT RISKS, DEFAULT AND BANKRUPTCY. A significant portion of the fund's
Corporate Loans and Corporate Debt Securities may be issued in connection with
highly leveraged transactions. Such transactions include leveraged buyout loans,
leveraged recapitalization loans, and other types of acquisition financing, as
further described below. These obligations are subject to greater credit risks
than other Corporate Loans and Corporate Debt Securities. These credit risks
include a greater possibility that the Borrower may Default or go into
bankruptcy. In addition, collateral securing the loan may be found invalid or
may be used to pay other outstanding obligations of the Borrower, under
applicable law. The fund may also have more difficulty selling highly leveraged
Corporate Loans and Corporate Debt Securities than other Corporate Loans and
Corporate Debt Securities.
PREPAYMENTS. Borrowers may pay back principal before the scheduled due date.
Borrowers may find it advantageous to prepay principal due to a decline in
interest rates or an excess in cash flow. Such prepayments may require the fund
to replace a Corporate Loan, Corporate Debt Security or other investment with a
lower yielding security. This may adversely affect the Net Asset Value of Common
Shares.
COMMITMENTS OF THE FUND TO MAKE ADDITIONAL PAYMENTS TO BORROWERS. Corporate
Loans may be structured to include both term loans and revolving credit
facilities. Unlike term loans, revolving credit facilities would require the
fund to loan additional amounts at the demand of the Borrower. Where the fund
purchases a Participation Interest, the Intermediate Participant may have the
obligation to make such future advances to the Borrower. The fund currently
intends to limit investments in such Corporate Loans or Participation Interests
to amounts that would not require commitments for future advances to exceed 20%
of the fund's total assets. In addition, the fund intends to set aside in a
separate account amounts that are earmarked to meet such future advances. These
amounts will be invested in high quality, short-term, liquid instruments.
ILLIQUIDITY OF CORPORATE LOANS AND CORPORATE DEBT SECURITIES. Some or all of the
Corporate Loans and Corporate Debt Securities in which the fund may invest will
be considered to be Illiquid. Highly leveraged Corporate Loans and Corporate
Debt Securities also may be less liquid than other Corporate Loans and Corporate
Debt Securities. In the event that the fund voluntarily or involuntarily
liquidates these assets, it may not get the full value of the assets. The fund
may have difficulty disposing of Illiquid portfolio securities. This may make it
difficult for the fund to raise proceeds necessary to repurchase Common Shares
in a Tender Offer. The Board will consider liquidity when it determines the
percentage of the fund's outstanding Common Shares that the fund will offer to
repurchase in a Tender Offer. The Board will also consider the liquidity of the
fund's portfolio securities when it determines whether to suspend or postpone a
Tender Offer. See "How Are Common Shares Valued?" in the SAI for information on
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 331/3% of its total assets (measured by adding the amount borrowed to the
fund's other assets). However, the fund will only borrow money 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
or making Tender Offers for Common Shares.
Leverage creates certain risks for holders of Common Shares. During periods when
the fund is using leverage, the Net Asset Value of Common Shares may be more
volatile. Under certain conditions, leverage could result in a lower rate of
return to holders of Common Shares than if the fund were not leveraged. When the
fund borrows money, the lender will have the right to receive scheduled interest
and principal payments. The lender's right to such payments will be senior to
those of the holders of Common Shares. The terms of any such borrowings may
limit certain activities of the fund, including the payment of dividends to
holders of Common Shares. Furthermore, the lenders may be granted certain voting
rights if the fund Defaults in the payment of interest or repayment of
principal. Subject to its ability to liquidate its relatively Illiquid portfolio
securities, the fund intends to repay the borrowings in the event that the
borrowings would impair the fund's status as a regulated investment company
under the Code. Interest payments and fees paid by the fund on any borrowings
will reduce the amount of income it has available to pay as dividends to the
fund's shareholders.
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 swaps 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 Declaration of Trust contains terms that limit the
ability of other entities to acquire control of the fund or to change the Board.
These provisions may prevent you from selling your Common Shares at a premium
because a third party will be discouraged from attempting to obtain control of
the fund. See "Description of Common Shares - Certain Anti-Takeover Provisions
of the Declaration of Trust."
INFORMATION ABOUT THE FUND
The fund is a continuously offered, closed-end management investment company.
The fund was organized as a Delaware business trust on May 20, 1997, and is
registered with the SEC. The fund began offering its Common Shares and began
investment operations on October 10, 1997. The fund engages in a continuous
offering of Common Shares through Distributors.
USE OF PROCEEDS FROM SALES OF COMMON SHARES
The net proceeds from the sale of Common Shares are invested in accordance with
the fund's investment goal and policies as soon as practicable. The fund's
immediate ability to pursue its investment goal will depend on economic and
market conditions, including the availability of Corporate Loans and Corporate
Debt Securities. If the manager determines that market conditions are not
favorable, the manager will initially invest the proceeds in short-term debt
obligations or instruments which the fund may normally purchase. Investments in
these short-term investments will reduce the fund's yield. See "Prospectus
Summary - Special Considerations and Risk Factors - Limited Availability of
Corporate Loans, Participation Interests, Assignments and Corporate Debt
Securities" and "What Kinds of Securities Does the Fund Purchase?"
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
The fund's investment goal 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. The manager uses its
credit analysis to select Corporate Loans and Corporate Debt Securities that are
suitable for investment by the fund. This is a fundamental policy of the fund.
This means that it may not be changed without a vote of a majority of the
outstanding shares of the fund. There can be no assurance that the investment
goal of the fund will be achieved.
Under normal conditions, the fund will invest at least 65% of its total assets
in Corporate Loans and Corporate Debt Securities made to, or issued by,
Borrowers that are U.S. companies, foreign borrowers and U.S. subsidiaries of
foreign borrowers and that have Floating Interest Rates. Floating Interest Rates
are: (i) variable rates which adjust to a base rate, such as LIBOR or the CD
Rate on set dates, typically every 30 days but not to exceed one year; (ii)
interest rates that vary at a set margin above a generally recognized base
lending interest such as the Prime Rate of a designated U.S. bank; or (iii) one
of the foregoing interest rates and are convertible to fixed rate instruments.
Upon conversion of any such loans or securities to fixed rate instruments, the
fund will as promptly as is reasonable rebalance its investments to meet the 65%
level described above. The fund may not meet the 65% level during periods
pending investment of the proceeds from the offering of the fund's Common
Shares. It also may not meet the 65% level during temporary defensive periods
when the manager believes that suitable Corporate Loans and Corporate Debt
Securities are not available or prevailing market or economic conditions
warrant.
At least 65% of the fund's total assets will be invested in Corporate Loans or
Corporate Debt Securities that are rated B or higher by an NRSRO or, if unrated,
determined to be of comparable quality by the manager. The fund may, however,
invest up to 35% of its total assets in Corporate Loans or Corporate Debt
Securities that are rated less than B by an NRSRO or, if unrated, determined to
be of comparable quality by the manager. The fund will make such an investment
only after the manager determines that the investment is suitable for the fund
based on the manager's independent credit analysis. See "The Manager's Credit
Analysis."
A list of the ratings categories of S&P and Moody's is presented in the
Appendix. Generally, the lower the rating category, the more risky is the
investment. Debt securities rated BBB or lower by S&P or Moody's are considered
to be high yield, high risk investments, commonly known as "junk bonds."
Under normal conditions, the fund may invest up to 35% of its total assets in
certain other types of debt obligations, as described below, or in cash. The
fund may invest in Unsecured Corporate Loans and Unsecured Corporate Debt
Securities. This means that the Corporate Loans and Corporate Debt Securities
are not backed by collateral. The manager will only make such investments if it
determines that the Borrowers in such transactions are creditworthy, under the
same analysis that the manager uses for Corporate Loans and Corporate Debt
Securities. The fund may also invest in secured or unsecured short-term debt
obligations. These include U.S. government securities, U.S. government agency
securities (some of which may not be backed by the full faith and credit of the
United States), bank money market instruments (such as CDs), corporate and
commercial obligations (such as commercial paper and medium-term notes) and
repurchase agreements. None of these short-term debt obligations are required to
be backed by collateral. However, short-term debt obligations purchased by the
fund will be (or counterparties associated therewith will be) investment grade.
This means that they will be 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 by the
manager. The fund may also invest in fixed rate obligations of U.S. companies,
foreign companies or U.S. subsidiaries of foreign companies. The manager will
determine that the companies issuing these obligations are creditworthy. When
the fund invests in fixed rate obligations, it may also enter into an interest
rate swap in order to limit the exposure of such obligations against
fluctuations in interest rates.
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 the manager, suitable Corporate Loans and Corporate Debt
Securities are not available 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, the fund also may acquire Warrants and other
Equity Securities. The fund will only acquire such Warrants and Equity
Securities to the extent that they are acquired in connection with or incidental
to the fund's investment activities.
MATURITIES The fund has no restrictions on portfolio maturity. The fund
anticipates 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. This means that the Borrower is required to fully repay the obligation
within that time period. The fund also anticipates that the Corporate Loans and
Corporate Debt Securities will have an average expected life of three to five
years.
The expected average life of the Corporate Loans and Corporate Debt Securities
is less than their stated maturity because it is anticipated that some Borrowers
will pay off their obligations early. Corporate Loans usually will require the
Borrower to prepay the Corporate Loan if the Borrower has excess cash flow.
Also, Corporate Loans usually 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, cannot be predicted
with accuracy. General business conditions, the financial condition of the
Borrower and competitive conditions among Lenders are all factors that affect
prepayments.
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. Corporate Loans are not typically
available to individual investors. In managing the fund, the manager provides
the fund and its shareholders with professional credit analysis. The fund also
relieves the investor of the burdensome administrative details involved in
managing a portfolio of such investments. 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
operational costs.
RISKS FROM FLUCTUATIONS IN GENERAL INTEREST RATES Changes in interest rates in
the national and international markets generally affect the market value of
fixed-income securities and debt obligations. In turn, the Net Asset Value of
the shares of an investment company which invests primarily in fixed-income
securities fluctuates. When interest rates decline, the value of a fixed-income
portfolio can be expected to decline. However, the manager expects the fund's
Net Asset Value to be relatively stable during normal market conditions, because
the fund's investments will consist primarily of: (i) Corporate Loans and
Corporate Debt Securities with Floating Interest Rates; (ii) fixed rate
Corporate Loans and Corporate Debt Securities hedged by interest rate swap
transactions; and (iii) short-term instruments. Because the fund will invest
primarily in these instruments, the manager expects the Net Asset Value of the
fund to fluctuate less as a result of interest rate changes than would a
portfolio comprised mostly of medium or long-term fixed-rate obligations.
However, some Floating Interest Rates reset only periodically. This means that
there are periods during which the interest rate does not change. During such
periods, prevailing interest rates and the interest rates on some obligations
with Floating Interest Rates held by the fund (including the interest rates on
nominal amounts in the fund's interest rate swap transactions) will not move
precisely in the same direction or amount, in other words, there will be an
imperfect correlation between these rates. These imperfect correlations may
cause the fund's Net Asset Value to fluctuate. 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 non-diversified under the
1940 Act. This means that there is no limit on the amount of assets that the
fund may invest in the securities of any one issuer. However, under the Code,
the fund will limit its investments so that, at the close of each quarter of its
taxable year: (i) not more than 25% of its total assets will be invested in the
securities (including Corporate Loans but excluding U.S. government securities
or the securities of other regulated investment companies) of a single issuer,
and (ii) with respect to 50% of its total assets, not more than 5% of the fund's
assets will be invested in the securities of any one issuer and will not consist
of more than 10% of any single issuer's outstanding voting securities.
To the extent the fund invests a large portion of its assets in the securities
of a small number of issuers, the fund's Net Asset Value may fluctuate more than
if the fund were a diversified company. Also, the fund may be more susceptible
than a more widely diversified company to any single economic, political or
regulatory event or to changes in the financial condition or in the market's
assessment of a single issuer. However, the fund does not intend to invest more
than 15% of its total assets in the obligations of any single Borrower. For
purposes of the diversification requirements, the term issuer includes both the
Borrower involved in a Corporate Loan and a single Lender selling a
Participation Interest to the fund. In addition, it also includes any
Intermediate Participants interpositioned between the Lender and the fund with
respect to a Participation Interest.
HIGHLY LEVERAGED TRANSACTIONS The Corporate Loans and Corporate Debt Securities
in which the fund invests primarily consist of capital restructurings. This
means that a Borrower has undertaken the obligations in order to finance the
growth of the Borrower's business through product development or marketing, or
to finance changes in the way the Borrower utilizes its assets and invested or
borrowed financial resources. Corporate Loans and Corporate Debt Securities may
also include senior obligations of a Borrower issued in connection with a
restructuring pursuant to Chapter 11 of the U.S. Bankruptcy Code, provided that
such senior obligations are determined by the manager upon its credit analysis
to be a suitable investment by the fund. 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 highly leveraged transactions. This means that
the Borrower is assuming large amounts of debt in order to have large amounts of
financial resources to attempt to achieve its business objectives. Such business
objectives may include: management's taking over control of a company (leveraged
buyout); reorganizing the assets and liabilities of a company (leveraged
recapitalization); or acquiring another company. 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 Investing in the Fund? -
Credit Risk" 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 at the Borrower's demand. Such
Corporate Loans may also include receivables purchase facilities, which are
similar to revolving credit facilities secured by a Borrower's receivables.
FOREIGN BORROWERS The fund may invest in Corporate Loans and Corporate Debt
Securities which are made to, or issued by, foreign Borrowers and U.S.
subsidiaries of foreign Borrowers. For purposes of this prospectus, Corporate
Loans and Corporate Debt Securities of foreign Borrowers include such loans or
debt securities that have one or more of the following characteristics: (1) the
principal trading market of the loan or security is in a foreign country; (2) at
least 50% of the revenue of the Borrower is generated from goods produced or
sold, investments made, or services performed in a foreign country; (3) the
Borrower is organized under the laws of a foreign country; or (4) at least 50%
of the assets of the Borrower are situated in a foreign country. The fund
normally invests primarily in U.S. Borrowers, but may invest up to 65% of its
assets in foreign Borrowers in developed foreign countries. The fund may from
time to time invest in foreign Borrowers in emerging market countries, but
currently does not intend to invest more than 35% of its assets in foreign
Borrowers in emerging market countries. The fund considers a country to be an
emerging market country if it is defined as a country with an emerging or
developing economy by any one of the following: the International Bank for
Reconstruction and Development (commonly known as the World Bank), the
International Finance Corporation, or the United Nations or its agencies or
authorities.
The manager will evaluate the creditworthiness of foreign Borrowers and U.S.
subsidiaries of foreign Borrowers by using the same analysis as it uses for U.S.
Borrowers.
The fund will invest in Corporate Loans and Corporate Debt Securities of foreign
Borrowers and U.S. subsidiaries of foreign Borrowers, provided that the loans
and securities are U.S. dollar-denominated, or the fund uses a foreign currency
swap for payments in U.S. dollars. U.S. dollar-denominated loans and securities
are loans and securities for which the fund pays in U.S. dollars and the
Borrower pays principal, interest, dividends or distributions in U.S. dollars.
The fund may invest in a Corporate Loan or Corporate Debt Security that is not
denominated in U.S. dollars if the fund arranges for payments in U.S. dollars by
entering into a foreign currency swap. See "Foreign Currency Swaps."
Loans to, and securities issued by, foreign Borrowers and U.S. subsidiaries of
foreign Borrowers may involve risks not typically involved in domestic
investments and loans to, and securities issued by, foreign Borrowers and U.S.
subsidiaries of foreign Borrowers in emerging market countries involve
additional risks. See "What Are the Risks of Investing in the Fund? - Foreign
Investments."
THE MANAGER'S CREDIT ANALYSIS The manager generally will determine the value of
the collateral backing a Corporate Loan or Corporate Debt Security by customary
valuation techniques that it considers appropriate. Such valuation techniques
may include reference to financial statements of the Borrower, independent
appraisal, or obtaining the market value of such collateral (e.g., cash or
securities) if it is readily ascertainable. The value assigned to the collateral
by the manager may be higher than the value at which the Borrower values the
collateral on the Borrower's books. The Agent Bank may rely on independent
appraisals as to the value of specific collateral. The Agent Bank, however, may
not obtain an independent appraisal in all cases. However, there are risks that
the collateral may not be sufficient in the event that a Borrower or issuer
Defaults in paying interest or principal. See "What Are the Risks of Investing
in the Fund? - Collateral Impairment."
The collateral may consist of various types of assets or interests. It may
include working capital assets, such as accounts receivable or inventory.
Inventory is the goods a company has in stock, including finished goods, goods
in the process of being manufactured and the supplies used in the process of
manufacturing. Accounts receivable are the monies due to a company for
merchandise or securities that it has sold, or for the services it has provided.
It may also include tangible fixed assets, such as real property, buildings and
equipment or intangible assets, such as trademarks, copyrights and patent
rights, or securities of subsidiaries or affiliates. Where the Borrower is a
privately held company, the company's owners may provide additional security.
They may do this by giving personal guarantees of performance or by agreeing to
transfer other securities that they own to the Lenders in the event that the
obligations are not repaid. In addition, the fund may invest in Corporate Loans
which are fully collateralized by assets of such shareholders or owners, rather
than by assets of the Borrower. However, such guarantees will be fully secured.
The fund will invest in a Corporate Loan or Corporate Debt Security only if the
manager judges that the Borrower can meet the scheduled payments on the
obligation. In addition, the manager will consider other factors it believes are
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 the Interest Coverage Ratio and Leverage Ratio. The manager also will
consider the nature of the industry in which the Borrower is engaged, the nature
of the Borrower's assets and the general quality of the Borrower. The Board will
review and approve factors used by the manager. The Corporate Loans and
Corporate Debt Securities in which the fund invests generally are not rated by
an NRSRO.
When the manager selects Corporate Loans and Corporate Debt Securities for
investment by the fund, it primarily considers the creditworthiness of the
Borrower. The manager will not base its selection upon the quality ratings of
other debt obligations of a Borrower. These other debt obligations are often
subordinated to the Corporate Loans or Corporate Debt Securities. Instead, the
manager will perform its own independent credit analysis of the Borrower, and of
the collateral structure for the Corporate Loan or Corporate Debt Security. In
making its analysis, the manager 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.
After the fund invests in a Corporate Loan and Corporate Debt Security, the
manager will continue to evaluate the Corporate Loan or Corporate Debt Security
on an ongoing basis.
DESCRIPTION OF FLOATING INTEREST RATES The rate of interest payable on Corporate
Loans or Corporate Debt Securities with Floating Interest Rates 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 lenders loaning money to companies,
so-called 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 at regular intervals
ranging between 30 days and one year.
Certain of the Floating Interest 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. The fund may attempt to limit the exposure 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.
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 available from 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. For more information about this trend, see the section in
the SAI entitled "How Does the Fund Invest Its Assets? - Description of Floating
or Variable Interest Rates."
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 the
fund 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.
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 fund
with another party of the right to receive foreign currency (paid under a
Corporate Loan or Corporate Dept Security) for the right to receive U.S.
dollars. The fund will enter into a foreign currency swap only if, at the time
of entering into the transaction, the counterparty's outstanding debt
obligations are investment grade. This means they are rated BBB or A-3 or higher
by S&P or Baa or P-3 or higher by Moody's, or determined by the manager to be of
comparable quality. The amounts of U.S. dollar payments to be received by the
fund and the foreign currency payments to be received by the counterparty are
fixed at the time the swap arrangement is entered into. This locks in the fund's
right to receive payments under a Corporate Loan or Corporate Debt Security in a
predetermined amount of U.S. dollars. In this way, the swap protects the fund
from the fluctuations in exchange rates. For more information about foreign
currency swaps, see the section in the SAI entitled "How Does the Fund Invest
Its Assets? - Foreign Currency Swaps."
DESCRIPTION OF PARTICIPATION INTERESTS AND ASSIGNMENTS The fund may invest in a
Corporate Loan in one of three ways: (1) a direct investment in the Corporate
Loan by the fund serving as one of the Lenders; (2) Participation Interests; or
(3) an Assignment. Participation Interests are interests issued by a Lender or
other financial institution which represent a fractional interest in a Corporate
Loan. The fund may acquire Participation Interests from a Lender or other
holders of Participation Interests. Holders of Participation Interests are
referred to as Participants. (For a general description of Lenders and Agent
Banks, see "Prospectus Summary - More About Corporate Loans and Corporate Debt
Securities.") An Assignment represents a portion of a Corporate Loan. Unlike a
Participation Interest, the fund will generally become a "Lender" for the
purposes of the terms of the Corporate Loan by purchasing an Assignment. It can
be most advantageous to the fund to make a direct investment in a Corporate Loan
as one of the Lenders. Such an investment is typically made at par. This means
that the fund receives a return at the full interest rate for the Corporate
Loan. On the other hand, when the fund invests in a Participation Interest or
Assignment, it will normally pay a fee or forego a portion of the interest
payment. Consequently, the fund's return on the investment may not be as great
as it would have been if the fund had made a direct investment in the underlying
Corporate Loan.
The opportunities for direct investments in Corporate Loans are currently
limited. The opportunities for investment through Participation Interests or
Assignments are greater. The fund often may not be able to invest in Corporate
Loans other than through Participation Interests or Assignments. There is a risk
that the fund may not be able to invest 65% or more of its total assets as
described above due to the limited supply of direct investments in Corporate
Loans and, to a lesser degree, of investments in Participation Interests or
Assignments.
The SEC is currently considering a proposal that would require that any
investment company, such as the fund, whose name implies that the investment
company invests primarily in a given type of security must invest no less than
80% of its total assets in that type of security, under normal market
conditions. The current requirement is that no less than 65% of an investment
company's total assets must be invested in that type of security. If the SEC
adopts this proposal, the fund will be required to increase, from 65% to 80%,
the amount of its total assets invested in Corporate Loans and Corporate Debt
Securities. Due to the limited availability of these types of investments, there
is a risk that the fund may not be able to meet such a high level of investment
in Corporate Loans and Corporate Debt Securities, as discussed above.
The Lenders or the Agent Bank may have an incentive to market the less desirable
Corporate Loans, Participation Interests or Assignments to investors such as the
fund while retaining the more desirable investments for their own inventory.
This reduces the availability of the more desirable investments. See "Prospectus
Summary - Special Considerations and Risk Factors - Limited Availability of
Corporate Loans, Participation Interests, Assignments and Corporate Debt
Securities."
The terms of the Participation Interests are privately negotiated between the
fund and the seller. Typically, the fund will not have established any direct
contractual relationship with the Borrower. The fund will be required to rely on
the Lender or the Participant that sold the Participation Interest for the
enforcement of the fund's rights against the Borrower. It also will have to rely
on that party for the receipt and processing of payments due to the fund under
the Corporate Loans. Consequently, the fund is subject to the credit risk of
both the Lender or Participant, in addition to the usual credit risk of the
Borrower. Lenders and Participants interposed between the fund and a Borrower,
together with Agent Banks, are referred to as Intermediate Participants.
On the other hand, if the fund purchases an Assignment from a Lender, the fund
will step into the shoes of the original Lender and will have direct contractual
rights against the Borrower. An Assignment from a Lender gives the fund the
right to receive payments directly from the Borrower and to enforce its rights
as a Lender directly against the Borrower.
In the event the Borrower fails to pay principal and interest when due, the fund
may have to assert rights against the Borrower through an Intermediate
Participant. This may subject the fund 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
Interest, the fund may be regarded as a creditor of the Intermediate Participant
rather than of the Borrower. This means that the fund does not have any direct
contractual rights against the Borrower. Also, in the event of the insolvency of
the Lender selling the Participation Interest, the fund may not have any
exclusive or senior claim with respect to the Lender's interest in the Corporate
Loan, or in the collateral securing the Corporate Loan. Consequently, the fund
may not benefit directly from the collateral supporting the underlying Corporate
Loan. There is a 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 that a Borrower becomes bankrupt or insolvent, the
Borrower may attempt to assert certain legal defenses 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 manager's judgment.
The Agent Bank is a Lender that administers the Corporate Loan. The Agent Bank
typically is responsible for collecting principal, interest and fee payments
from the Borrower. The Agent Bank then distributes these payments to all Lenders
which are parties to the Corporate Loan. The fund will not act as an Agent Bank.
It generally will rely on the Agent Bank or an Intermediate Participant to
collect its portion of the payments. The fund will also rely on the Agent Bank
to take appropriate actions against a Borrower that is not making payments as
scheduled. Typically, the Agent Bank is given broad discretion in enforcing the
terms of the Corporate Loan, and is required 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 at the
start of Corporate Loans and other fees paid on a continuing basis.
There is a risk that an Agent Bank may have financial difficulty. An Agent Bank
could even declare bankruptcy, or have a receiver, conservator, or similar
official appointed for it by a regulatory authority. If this happens, assets
held by the Agent Bank under the Corporate Loan should remain available to
holders of Corporate Loans, including the fund. However, a regulatory authority
or court may determine that assets held by the Agent Bank for the benefit of the
fund are subject to the claims of the Agent Bank's general or secured creditors.
The fund might incur costs and delays in realizing payment on a Corporate Loan
or might suffer a loss of principal or interest. Similar risks arise in
situations involving Intermediate Participants, as described above.
Intermediate Participants may have an obligation to make future advances to the
Borrower at the demand of the Borrower in connection with what are known as
revolving credit facilities and may have certain other obligations pursuant to
the terms of Corporate Loans. The fund will set aside in a separate account with
its custodian bank amounts that are earmarked to meet such future obligations.
These amounts will be invested in high quality, short-term, liquid instruments.
Because the fund will maintain sufficient amounts in separate accounts for such
contingent obligations, the manager believes that such obligations do not
constitute senior securities under the 1940 Act as interpreted by the SEC. The
fund will not invest in Corporate Loans that would require the fund to make
future advances that exceed in the aggregate for all such Corporate Loans 20% of
the fund's total assets. The fund also will not invest in Corporate Loans that
would cause the fund to fail to meet the diversification requirements previously
described.
OTHER INVESTMENT POLICIES
The fund has adopted certain other policies set forth below:
NON-CONCENTRATION IN A SINGLE INDUSTRY The fund does not currently intend to
invest more than 20% of its assets in the obligations of Borrowers in any single
industry. 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, the fund
regards the issuer of a Corporate Loan to include the Agent Bank and any
Intermediate Participant, as well as the Borrower. This means that the fund will
invest more than 25% of its total assets in the securities of the following
issuers as a group: commercial banks, thrift institutions, insurance companies
and finance companies. These types of issuers frequently act as an Agent Bank or
Intermediate Participant. As a result, the fund is subject to certain risks
associated with such institutions, both individually and as a group. See "What
Are the Risks of Investing in the Fund? - Financial Institutions."
LEVERAGE The fund is authorized to borrow money in amounts of up to 331/3% of
the value of its total assets at the time of the borrowings. The fund's
borrowings create an opportunity for greater total return to the fund and,
ultimately, the fund's shareholders, but, at the same time, increase exposure to
losses. In addition, interest payments and fees paid by the fund on any
borrowings may offset or exceed the return earned on the borrowed funds. The
fund does not currently intend to borrow funds to make additional investments.
The fund may issue one or more series of preferred shares, but it does not
presently intend to do so. See "What Are the Risks of Investing in the Fund? -
Effects of Leverage."
REPURCHASE AGREEMENTS The fund may enter into repurchase agreements with respect
to its permitted investments. The fund currently intends to do so only with
financial institutions, such as broker-dealers and banks, which are deemed
creditworthy by the manager. 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 bank or broker-dealer must transfer to the
fund's account collateral consisting of 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. 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. There are
certain risks associated with repurchase transactions which are described in the
SAI section entitled "How Does the Fund Invest Its Assets? - Repurchase
Agreements."
LENDING OF FUND SECURITIES The fund may from time to time lend its portfolio
securities to qualified securities dealers or other institutional investors.
However, the fund will limit such loans to a total value of all securities on
loan not exceeding 331/3% of its total assets. This limitation is a fundamental
policy, which means it may not be changed without the approval of the holders of
a majority of the fund's Common Shares. For each loan, the fund must receive in
return collateral with an initial market value of at least 102% of the market
value of the securities loaned, including any accrued interest. The value of the
collateral and loaned securities is determined daily so that the fund has
collateral coverage of at least 100%. The collateral will consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit.
The fund receives a premium for lending its portfolio securities or, if cash
collateral is received by the fund, it is invested in short-term money market
securities, and the fund retains a portion of the yield paid on the investment.
However, 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. The fund also could suffer a loss
to the extent that the value of the collateral falls below the market value of
the borrowed securities. For more information about the lending of the fund's
securities see the section in the SAI entitled "How Does the Fund Invest Its
Assets? - Securities Lending."
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The fund may purchase and sell
interests in Corporate Loans and Corporate Debt Securities and other debt
securities on a when-issued and delayed delivery basis. There is no limit on the
amount of assets which the fund may invest in when-issued securities. A
when-issued obligation refers to an obligation whose price is fixed at the time
the commitment to purchase is made, but has not been issued. Delayed delivery
refers to the delivery of securities later than the customary time for delivery
of securities. The fund will generally make commitments to purchase interests or
securities on a when-issued basis with the intention of acquiring the interests
or securities. For more information about when-issued and delayed delivery
transactions see the section in the SAI entitled "How Does the Fund Invest Its
Assets? - When-Issued and Delayed Delivery Transactions."
INTEREST RATE AND HEDGING TRANSACTIONS The fund may enter into interest rate
swaps in order to limit the exposure 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 or rights to pay or receive interest, such as an exchange of fixed
rate payments for Floating Interest Rate payments. For example, if the fund
holds a Corporate Loan or Corporate Debt 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.
Thus, if interest rates rise, the increased interest received by the fund would
offset a decline in the value of the Corporate Loan or Corporate Debt Security.
On the other hand, if interest rates fall, the fund's benefit from falling
interest rates would be decreased.
To the extent that the fund enters into these transactions for hedging purposes,
the manager believes that such obligations do not constitute senior securities
under the 1940 Act. Accordingly, the fund will not include hedging transactions
in its limitation on borrowing.
Except as noted above, there is no limit on the amount of interest rate hedging
transactions that may be entered into by the fund. The risk of loss with respect
to interest rate hedges is limited to the net amount of interest payments that
the fund is obligated to make. 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 is entitled to receive. The fund will only enter into an
interest rate swap after the manager has evaluated the creditworthiness of the
other party to the swap. The risks associated with interest rate swaps are
further described in the SAI under the title "How Does the Fund Invest Its
Assets? - Interest Rate Swaps."
TAX CONSIDERATIONS The fund's investments in foreign currency and other complex
securities are subject to special tax rules that may affect the amount, timing
or character of the income earned by the fund and distributed to you. The fund
may also be subject to withholding taxes on earnings from certain of its foreign
securities. These special tax rules are discussed in the "Additional Information
on Distributions and Taxes" section of the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
ILLIQUID SECURITIES The fund does not limit the amount of its investments that
are not readily marketable or are subject to restrictions on resale. Corporate
Loans and Corporate Debt Securities in which the fund invests are, at present,
not readily marketable and may be subject to significant restrictions on resale.
They do not have the liquidity of conventional investment grade debt securities
and may be considered Illiquid. As the market for Corporate Loans and Corporate
Debt Securities matures, the manager expects that liquidity will improve.
In the event that the fund voluntarily or involuntarily liquidates these assets,
it may not get the full value of the assets. The fund may have difficulty
disposing of Illiquid portfolio securities. This may make it difficult for the
fund to raise proceeds to repurchase Common Shares in a Tender Offer. See "How
Are Common Shares Valued?" in the SAI for information regarding valuation of
Illiquid Corporate Loans and Corporate Debt Securities.
FINANCIAL INSTITUTIONS As discussed above, the fund will invest more than 25% of
its total assets in the securities of the following issuers as a group:
commercial banks, thrift institutions, insurance companies and finance
companies. As a result, the fund is subject to certain risks associated with
these institutions, both individually and as a group.
Banking and thrift institutions are subject to extensive governmental
regulations. These regulations may limit both the amounts and types of loans and
other financial commitments which the institutions may make and the interest
rates and fees which the institutions may charge. The profitability of these
institutions largely depends upon the availability and cost of capital funds.
Their profits have recently fluctuated significantly as a result of volatile
interest rate levels. In addition, general economic conditions influence the
operations of these institutions. Financial institutions are exposed to credit
losses which result when borrowers suffer financial difficulties.
Insurance companies are also affected by economic and financial conditions and
are subject to extensive government regulation, including rate regulation.
Property and casualty companies may be exposed to material risks, including
reserve inadequacy, latent health exposure and inability to collect from their
reinsurance carriers.
These industries are currently undergoing rapid change as existing distinctions
between different businesses become blurred. Recent business combinations have
included insurance, finance and securities brokerage under single ownership.
Congress will likely continue to reconsider the federal laws generally
separating commercial and investment banking, and could change or eliminate the
laws separating these types of banking.
EFFECTS OF LEVERAGE The fund is authorized to borrow money in an amount up to
331/3% of its total assets (after giving effect to the amount borrowed).
However, the fund will only borrow money 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 or making Tender
Offers for Common Shares. See "Periodic Offers By the Fund to Repurchase Common
Shares From Shareholders."
The fund also may issue one or more series of preferred shares, although it has
no current intention to do so. There is a risk that the costs of borrowing or
issuing additional classes of securities may exceed the income and appreciation,
if any, on assets acquired with the borrowed funds or offering proceeds. If this
occurs, the use of leverage will reduce the investment performance of the fund
compared with what it would have been without leverage. The costs associated
with such borrowings or offerings include interest payments, fees and dividends.
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. Also, it may limit the fund's
freedom to pay dividends on Common Shares or to engage in other activities.
Leverage creates certain risks for holders of Common Shares. Leveraging by the
fund creates an opportunity for greater total return but, at the same time,
increases exposure to losses. The Net Asset Value of Common Shares may be more
volatile than if the fund were not leveraged. These risks may be reduced through
the use of borrowings and preferred stock that have Floating Interest Rates.
The fund's willingness to borrow money for investment purposes, and the amount
it will borrow, will depend on many factors. The most important factors are
investment outlook, market conditions and interest rates. Successful use of a
leveraging strategy depends on the manager's 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. If the Borrower fails to pay scheduled
interest or principal on a Corporate Loan or Corporate Debt Security, the income
of the fund or the value of its investments may be adversely affected. In turn,
this may reduce the amount of dividends or the Net Asset Value of the fund's
Common Shares. The fund's receipt of principal and interest payments on a
Corporate Loan or a Corporate Debt Security also depends upon the
creditworthiness of any Intermediate Participant. To reduce credit risk, the
manager actively manages the fund as described above.
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. See "What
Kinds of Securities Does the Fund Purchase? - The Manager's Credit Analysis."
These credit risks include an increased possibility that the Borrower may
Default on the Corporate Loan or Corporate Debt Security, or may go into
bankruptcy. The fund may have more difficulty selling highly leveraged Corporate
Loans and Corporate Debt Securities than other Corporate Loans and Corporate
Debt Securities because they are less liquid. The value of such Corporate Loans
and Corporate Debt Securities is more volatile in response to interest rate
fluctuations. The Corporate Loans and Corporate Debt Securities in which the
fund invests generally are not rated by any NRSRO.
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. However, many Borrowers will have non-investment grade subordinated
debt. During periods of deteriorating economic conditions, a Borrower may have
difficulty making its payments under such bonds and other subordinated debt
obligations. These difficulties may damage the Borrower's credit rating or its
ability to obtain financing for short-term cash flow needs. This 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 with the
consent of the Agent Bank and Lenders or under the terms of a loan agreement as
the creditworthiness of the Borrower improves.
There are risks which may cause the collateral to be insufficient in the event
that a Borrower Defaults on a Corporate Loan or Corporate Debt Security.
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 Corporate Loan or Corporate Debt Security, the value of the
collateral may decline subsequent to the fund's investment in the Corporate Loan
or Corporate Debt Security. In most credit agreements there is no formal
requirement to pledge additional collateral.
There is also the risk that the collateral may be difficult to liquidate. In
fact, a majority of the collateral may be Illiquid. Consequently, the fund might
not receive payments to which it is entitled. This may result in a decline in
the value of the investment and, in turn, a decline in the Net Asset Value of
the fund's Common Shares.
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.
If a Borrower becomes involved in bankruptcy proceedings, the fund's access to
the collateral may be limited by bankruptcy and other laws. This risk is
increased when a Corporate Loan or Corporate Debt Security is made in connection
with a highly leveraged transaction. In the event that a court decides that the
fund's access to the collateral is limited or void, it is unlikely that the fund
would be able to recover the full amount of the principal and interest due to
it. The risks of collateral impairment are further described in the SAI in the
section entitled "What Are the Risks of Investing in the Fund? - Collateral
Impairment."
FOREIGN INVESTMENTS As noted above, the fund may invest in Corporate Loans and
Corporate Debt Securities that are made to, or issued by, foreign Borrowers and
U.S. subsidiaries of foreign Borrowers, if the Borrower passes the same
creditworthiness analysis that the manager uses for U.S. Borrowers and the loans
and securities are U.S. dollar-denominated, or the fund uses a foreign currency
swap for payments in U.S. dollars. These obligations may involve risks not
typically involved in domestic investments and the risks can be significantly
magnified for investments in foreign countries that are emerging market
countries.
CURRENCY FLUCTUATIONS. To the extent the fund uses foreign currency swaps for
Corporate Loans or Corporate Debt Securities, transactions in foreign securities
may be conducted in local currencies. In these transactions U.S. dollars must
often be exchanged for another currency when an obligation is bought or sold or
a dividend is paid. Likewise, security price quotations and total return
information reflect conversion into U.S. dollars. Fluctuations in foreign
exchange rates can significantly increase or decrease the U.S. dollar value of a
foreign investment, boosting or offsetting its local market return. Currency
risk cannot be eliminated entirely.
INCREASED COSTS. It is more expensive for the fund to purchase and sell
Corporate Loans and Corporate Debt Securities in foreign markets than in the
U.S. markets. Investment companies, such as the fund, offer an efficient way for
individuals to invest abroad, but the overall expense ratios of international
investment companies are usually higher than the overall expense ratios of
investment companies that invest in U.S. obligations.
POLITICAL AND ECONOMIC FACTORS. The economies, markets, and political structures
of a number of the countries in which the fund can invest do not compare
favorably with the U.S. and other mature economies in terms of wealth and
stability. Therefore, investments in these countries will entail greater risk
and may be subject to erratic and abrupt price movements. This is especially
true for emerging market countries.
LEGAL, REGULATORY, AND OPERATIONAL. Certain foreign countries may impose
restrictions on foreign investors, such as the fund. These restrictions may take
the form of prior governmental approval, limits on the amount and type of
obligations held by foreigners, limits on the types of companies in which
foreigners may invest, exchange controls and other actions that restrict the
purchase or sale of assets or result in a loss of assets. Diplomatic
developments could affect the fund's investments in these countries. In 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.
Certain foreign countries lack uniform accounting, auditing, and financial
reporting standards, have less governmental supervision of financial markets
than in the U.S., do not honor legal rights enjoyed in the U.S., and have
settlement practices, such as delays, which could subject the fund to risks not
customary in the U.S. Information about foreign Borrowers may differ from that
available for 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
markets for Corporate Loans and Corporate Debt Securities in foreign countries
have substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than in the United States.
PRICING. Corporate Loans and Corporate Debt Securities may be purchased or sold
on days (such as Saturdays) when the fund does not account for their prices in
calculating its Net Asset Value. As a result, the fund's Net Asset Value may
change significantly on days when shareholders cannot purchase Common Shares, or
for repurchases of Common Shares, between the date on which a shareholder
tenders Common Shares for repurchase by the fund and the date on which the
repurchase price of the Common Shares is determined. See "Periodic Offers By the
Fund to Repurchase Common Shares From Shareholders."
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares.
RISK OF DECLINE IN NAV DUE TO REPURCHASES The NAV may decline as a result of the
fund's sales of portfolio securities to finance a repurchase offer. The fund may
be required to sell portfolio securities to raise cash to finance a Repurchase
Offer, which may cause the market prices of the fund's portfolio securities, and
hence the fund's NAV, to decline. If such a decline occurs, the fund cannot
predict its magnitude or whether such a decline would be temporary or continue
until or beyond the Repurchase Pricing Date. Because the price per share to be
paid in the Repurchase Offer will depend upon the NAV per share as determined on
the actual pricing date, the consideration received by tendering shareholders
would be reduced if the decline continued until the actual pricing date. In
addition, the sale of portfolio securities will increase the fund's transaction
expenses, and the fund may receive proceeds from the sale of portfolio
securities that are less than their valuations by the fund. Accordingly, because
of the Repurchase Offer, the fund's NAV per share may decline more than it
otherwise might, thereby reducing the amount of proceeds received by tendering
shareholders and the NAV per share for non-tendering shareholders.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS In the event that short-term
interest rates increase or other market conditions change, the fund's leverage
could adversely affect holders of Common Shares, as noted above. If such changes
occur or are anticipated, the fund may attempt to shorten the average maturity
of its investment portfolio. This would tend to decrease the negative impact of
leverage on holders of Common Shares. To do this, the fund would purchase
securities with generally shorter maturities.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company the fund is invested in is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see "Year 2000 Problem" under "Who Manages the Fund?" for more information.
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 MANAGER. Franklin Advisers, Inc. manages the fund's assets and makes
its investment decisions. The manager also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
the manager and its affiliates manage over $208 billion in assets. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the fund's
Code of Ethics.
PORTFOLIO MANAGER.
Chauncey F. Lufkin
Senior Vice President of Franklin Advisers, Inc.
Mr. Lufkin is a Vice President of the fund and has been the portfolio manager of
the fund since its inception. Mr. Lufkin has been 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 National
Bank (now Bank of America).
MANAGEMENT FEES. During the fiscal year ended July 31, 1998, management fees
before any advance waiver, totaled 0.80% and operating expenses, before any
advance, waiver totaled 1.76% of the average net assets of the fund. Under an
agreement by the manager to limit its fees, the fund paid management fees
totaling 0.51% and operating expenses totaling 1.32%. The manager is continuing
to limit its fees, but may end this arrangement at any time upon notice to the
Board.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the fund. During the fiscal year ended July 31, 1998,
administration fees, before any advance waiver totaled 0.15%. Under an agreement
by FT Services to limit its fees, the fund paid no administration fees. Please
see "Investment Management and Other Services" in the SAI for more information.
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.
The fund may also reimburse Investor Services for certain out-of-pocket
expenses.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
PORTFOLIO TRANSACTIONS BY THE FUND
The manager tries to obtain the best execution on all transactions. If the
manager believes more than one broker or dealer can provide the best execution,
it may consider research and related services and the sale of Common Shares, as
well as shares of other funds in the Franklin Templeton Group of Funds, when
selecting a broker or dealer.
The fund engages in trading when the manager 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 goal, 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 annual portfolio turnover rate is not expected to exceed 100%. The
rate may vary greatly from year to year and will not be a limiting factor when
the manager 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 the manager believes it is appropriate to do so. Sales
will be made without regard to the length of time the security may have been
held. Large Common Share repurchases by the fund during the quarterly or
discretionary Tender Offers may require the fund to liquidate portions of its
securities holdings for cash to repurchase the Common Shares. The liquidation of
such holdings may result in a higher than expected annual portfolio turnover
rate. A 100% annual 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.
Please see "How Does the Fund Buy Securities for Its Portfolio?" in the SAI for
more information.
INVESTMENT PERFORMANCE INFORMATION
From time to time, the fund advertises its performance. Performance information
may include its current yield, current distribution rate or total return for
specific time periods.
The current yield of the fund shows the income generated by an investment in the
fund over a stated period. The current distribution rate shows the dividends or
distributions paid to the fund's shareholders. This rate is usually computed by
annualizing the monthly distribution paid per share during a certain period and
dividing that amount by the current maximum offering price. Total return is the
change in value of an investment over a given period. Total return assumes any
dividends and capital gains are reinvested.
Performance figures will reflect the imposition of the Early Withdrawal Charge
but additional performance figures that are calculated without reflecting the
Early Withdrawal Charge may be presented.
Performance figures are always based on the fund's past performance and do not
guarantee future results. The fund's yield and distribution rate are expected to
fluctuate. Total return will also vary, depending on market conditions, the
Corporate Loans, Corporate Debt Securities and other securities that the fund
owns, the fund's operating expenses and the amount of capital gains or losses
during the period. For a more detailed description of how the fund calculates
its performance figures, please see "How Does the Fund Measure Performance?" in
the SAI.
HOW TO BUY COMMON SHARES
CONTINUOUS OFFERING
The fund continuously offers Common Shares through Distributors and other
Securities Dealers that have entered into dealer agreements with Distributors.
The fund or Distributors may suspend the continuous offering of Common Shares at
any time without prior notice. Similarly, the fund or Distributors may resume
the offering at any time. If there is a suspension of the offering of Common
Shares, shareholders who reinvest their distributions in additional Common
Shares will be permitted to continue to make those reinvestments.
During the continuous offering, the fund offers Common Shares at the public
offering price, which is the Net Asset Value per share next determined after
Distributors receives your purchase order and payment. As of November 6, 1998,
the Net Asset Value per share for Common Shares was $9.91. For purchase orders
and payments received by Distributors or Securities Dealers prior to the close
of business on the NYSE (generally, 1:00 p.m., Pacific time) (including orders
received after the close of business on the previous business day), the offering
price will be the Net Asset Value determined as of the close of business on the
NYSE on that day. For purchases by wire, if the purchase order is received by
1:00 p.m., Pacific time, and the bank receives the wired payment by 3:00 p.m.,
Pacific time, on the same day, the offering price will be the Net Asset Value
determined as of the close of business on the NYSE on that day. If Distributors
or a Securities Dealer receives your purchase order and payment after the close
of business on the NYSE, the order is considered received on the next business
day. Any order may be rejected by Distributors or the fund.
In the course of a Tender Offer, Distributors or an affiliate may inadvertently
acquire a small amount (expected to be less than 5%) of Common Shares which it
may wish to resell. The Common Shares repurchased in these circumstances will
not be subject to any investment restriction, and the Common Shares may be
resold. This inadvertent acquisition would result from the administrative
complexities that arise because a Tender Offer is confined to a specific
percentage of the outstanding Common Shares, and the Common Shares tendered by
shareholders during a particular Tender Offer may exceed the percentage limit of
that Tender Offer. In that situation, the fund is required to repurchase Common
Shares on a pro rata basis, as described below. See "Periodic Offers By the Fund
to Repurchase Common Shares From Shareholders."
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open an account........................................ $1,000
o To open a custodial account for a minor
(an UGMA/UTMA account).................................... $ 100
o To open an account with an automatic
investment plan........................................... $ 50
o To add to an account...................................... $ 50
We reserve the right to change the amount of these minimums for certain
purchases. We also reserve the right to refuse any order to buy Common Shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges
now, you can avoid the delay and inconvenience of having to send an
additional application to add privileges later. It is important that we
receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check
made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call the Floating Rate Team or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You need
a new wire control number every time you wire money
into your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.
2. For an initial investment you must also return your
signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds
and reports the receipt of wired funds to the fund by
3:00 p.m. Pacific time, we will credit the purchase to
your account that day. If we receive your call after
1:00 p.m. or the bank receives the wire after 3:00 p.m.,
we will credit the purchase to your account the
following business day.
- --------------------------------------------------------------------------------
THROUGH Call your investment representative
YOUR DEALER
- --------------------------------------------------------------------------------
MAY I BUY COMMON SHARES IN CONNECTION WITH RETIREMENT PLANS?
Retirement plan investors should be aware of the following features of the fund
which may impact their decision as to whether the fund is an appropriate
investment for a retirement plan. Common Shares are not liquid; unlike open-end
mutual fund shares, they are not redeemable on each day that the fund is open
for business; and unlike traditional closed-end funds, Common Shares of the fund
do not trade on any exchange and thus cannot readily be sold. Although the fund
has adopted policies to provide quarterly Tender Offers, these Tender Offers may
not provide shareholders with the degree of liquidity they desire or may require
for tax purposes. Additionally, even during a Tender Offer shareholders may not
be able to have all of the Common Shares they wish to tender be repurchased by
the fund. If the number of Common Shares tendered by all shareholders exceeds
the repurchase amount authorized by the Board, the fund may not be able to
repurchase all Common Shares submitted and thus may repurchase Common Shares on
a pro rata basis. The fund also imposes an Early Withdrawal Charge on the
proceeds payable to shareholders from the fund's repurchase of Common Shares
tendered by shareholders within 12 months of their purchase. Certain waivers to
this Early Withdrawal Charge are discussed below.
The features described above could result in a retirement plan paying an Early
Withdrawal Charge and/or not being able to comply with mandatory distribution
requirements. Accordingly, retirement plan investors may wish to limit the
percentage of plan assets, for example, to 10%, that is invested in the fund.
The fund does not monitor retirement plan requirements for any investor. Please
consult your legal, tax or retirement plan specialist before choosing a
retirement plan or electing to invest in the fund through a retirement plan.
Your investment representative or advisor can help you make investment decisions
within your plan.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for purchases of Common Shares. The payments are subject to the
sole discretion of Distributors, and are paid by Distributors or one of its
affiliates and not by the fund or its shareholders.
1. For purchases of Common Shares - 1.00% of the dollar amount of Common
Shares sold by the Securities Dealer. This payment consists of 0.75% of
sales commission and 0.25% of service fee (for the first year's services).
For purchases of $3 million or more where the Securities Dealer has waived
this payment, the Common Shares purchased will qualify for a waiver of the
Early Withdrawal Charge. In these circumstances Distributors, at its
discretion, may pay Securities Dealers up to 0.50%, paid over the initial
six months of investment, of the dollar amount invested.
2. Purchases by trust companies and bank trust departments, and Eligible
Governmental Authorities - up to 0.25% of the amount invested
A Securities Dealer may receive only one of these payments for each qualifying
purchase. For Securities Dealers who receive payments described in paragraph 1
above, if Common Shares remain outstanding for at least twelve months from the
date of their original purchase, Distributors will, beginning in the thirteenth
month, compensate the Securities Dealer quarterly at an annual rate of 0.50% of
the value of the Common Shares sold by the Securities Dealer and remaining
outstanding.
Broker-dealers or others who have entered into an agreement with Distributors
for clients participating in comprehensive fee programs will not receive the
payment described in paragraph 1 above for Common Shares sold. Beginning
immediately after the Common Shares are purchased, they will, however, be
eligible to receive quarterly payments at an annual rate of 0.50% of the value
of the Common Shares sold and remaining outstanding.
The total compensation paid to selected Securities Dealers and Distributors,
including, but not limited to, the compensation paid at the time of purchase,
the quarterly payments mentioned above and the Early Withdrawal Charge will not
amount to more than 8.00% of the initial gross proceeds of the offering and will
comply with the National Association of Securities Dealers, Inc. Conduct Rule
regarding sales charges of open-end investment companies.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
PERIODIC OFFERS BY THE FUND TO
REPURCHASE COMMON SHARES FROM SHAREHOLDERS
The fund is not aware of any currently existing secondary market for Common
Shares and does not anticipate that a secondary market will develop for Common
Shares. A secondary market is a market, exchange facility or system for quoting
bid and asking prices where securities such as the Common Shares can be readily
bought and sold among holders of the securities after they are initially
distributed. Without a secondary market, Common Shares are not liquid, which
means that they are not readily marketable. However, the fund has taken action
to provide liquidity to shareholders. The fund has adopted share repurchase
policies as fundamental policies. This means the policies may not be changed
without the vote of the holders of a majority of the fund's outstanding voting
securities. These policies provide that each quarter, the fund intends to make a
Tender Offer to repurchase a portion of the outstanding Common Shares from
shareholders who request repurchases. The price of the repurchases of Common
Shares normally will be the Net Asset Value per share determined as of the close
of business (1:00 p.m. Pacific time) on the date the Tender Offer ends or within
a maximum of fourteen days after the Tender Offer ends as described below.
REPURCHASE PROCEDURES. At the beginning of each Tender Offer, the fund's
shareholders will be notified in writing about the Tender Offer, how they may
request that the fund repurchase their Common Shares and the deadline for
shareholders to provide their repurchase requests to Investor Services (the
"Repurchase Request Deadline"), which is the date the Tender Offer ends. The
time between the notification to the shareholders and the Repurchase Request
Deadline may vary from no more than six weeks to no less than three weeks. For
each Tender Offer the fund will establish the Repurchase Request Deadline based
on factors, such as market conditions, liquidity of the fund's assets and
shareholder servicing considerations. The repurchase price of the Common Shares
will be the Net Asset Value as of the close of the NYSE on the date on which the
repurchase price of the Common Shares will be determined (the "Repurchase
Pricing Date"). It is anticipated that normally the Repurchase Pricing Date will
be the same date as the Repurchase Request Deadline, and if so, the Repurchase
Request Deadline will be set for a time no later than the close of the NYSE on
such date. The fund has determined that the Repurchase Pricing Date may occur no
later than the fourteenth day after the Repurchase Request Deadline or the next
business day if the fourteenth day is not a business day. Within such fourteen
day period, the fund may use an earlier Repurchase Pricing Date under certain
circumstances.
The Board may establish other policies for repurchases of Common Shares that are
consistent with the 1940 Act and other pertinent laws. Once every two years, the
Board may, if it chooses, make an additional Tender Offer for repurchase of
Common Shares in addition to regular quarterly Tender Offers. Common Shares
tendered by shareholders by any Repurchase Request Deadline will be repurchased
subject to the aggregate repurchase amounts established for that Repurchase
Request Deadline. Repurchase proceeds will be paid to shareholders, in cash,
within seven days after each Repurchase Pricing Date. The end of the seven days
is referred to as the "Repurchase Payment Deadline."
REPURCHASE AMOUNTS. The Board, in its sole discretion, will determine the number
of Common Shares that the fund will offer to repurchase (the "Repurchase Offer
Amount") for a given Repurchase Request Deadline. The Repurchase Offer Amount
will be at least 5% and no more than 25% of the total number of Common Shares
outstanding on the Repurchase Request Deadline. A Tender Offer is expected to
end near the end of December 1998, and every three months after the end of
December 1998.
If shareholders tender more than the Repurchase Offer Amount for a given Tender
Offer, the fund may repurchase an additional amount of Common Shares of up to 2%
of the Common Shares outstanding on the Repurchase Request Deadline. If fund
shareholders tender more Common Shares than the fund decides to repurchase,
whether the Repurchase Offer Amount or the Repurchase Offer Amount plus the 2%
additional Common Shares, the fund will repurchase the Common Shares on a pro
rata basis, rounded down to the nearest full share. The fund may, however,
accept all Common Shares tendered by shareholders who own less than one hundred
Common Shares and who tender all their Common Shares, before accepting on a pro
rata basis Common Shares tendered by other shareholders.
NOTICES TO SHAREHOLDERS. Notice of each quarterly Tender Offer (and any
additional discretionary repurchase offers) will be given to each beneficial
owner of Common Shares between twenty-one and forty-two days before each
Repurchase Request Deadline. The notice will include detailed instructions on
how to tender Common Shares. The notice will state the Repurchase Offer Amount.
The notice will also identify the dates of the Repurchase Request Deadline,
latest Repurchase Pricing Date, and latest Repurchase Payment Deadline. The
notice will state that the NAV may fluctuate between the Repurchase Request
Deadline and the Repurchase Pricing Date, if such dates do not coincide, and the
possibility that the fund may use an earlier Repurchase Pricing Date than the
latest Repurchase Pricing Date under certain circumstances. The notice will
describe (i) the procedures for you to tender your Common Shares, (ii) the
procedures for the fund to repurchase Common Shares on a pro rata basis, (iii)
the circumstances in which the fund may suspend or postpone a Tender Offer, and
(iv) the procedures that will enable you to withdraw or modify your tenders of
Common Shares prior to the Repurchase Request Deadline.
REPURCHASE PRICE. The current Net Asset Value of the Common Shares is computed
daily and will be computed daily on the five business days before a Repurchase
Request Deadline. The Board has determined that the time at which the Net Asset
Value will be computed will be as of the close of the NYSE. You may call Fund
Information at 1-800/DIAL BEN to learn the Net Asset Value per share. The notice
of the repurchase offer will give the Net Asset Value per share as of a recent
date, and a toll-free number for information regarding the Tender Offer. During
the period from notification to shareholders of a Tender Offer until the
Repurchase Pricing Date, the fund will maintain liquid assets equal to 100% of
the Repurchase Offer Amount.
SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFER. The fund will not suspend or
postpone a Tender Offer except if a majority of the Board, including a majority
of the Board members who are not "interested persons" of the fund, as defined in
the 1940 Act (the "Independent Trustees"), vote to do so. In addition, the fund
will delay a Tender Offer only if certain regulatory requirements described in
the notice of the Tender Offer are met. You will receive notice of any
suspension or postponement and a notice of any renewed repurchase offer after a
suspension or postponement.
SPECIAL CONSIDERATIONS OF REPURCHASES. As required by the 1940 Act, a majority
of the Board consists of Independent Trustees. In addition, the Independent
Trustees will select and nominate any additional Independent Trustees.
The fund may decide in the future to borrow money to finance the repurchase of
Common Shares through Tender Offers. Any borrowings will comply with the fund's
investment restrictions on borrowing. See "What Are the Risks of Investing in
the Fund? - Effects of Leverage" above, and "Investment Restrictions" in the
SAI.
Because there likely will not be a secondary market for Common Shares, quarterly
and any additional discretionary Tender Offers will provide the only source of
liquidity for shareholders. If a secondary market were to develop for Common
Shares, however, the market price per share of the Common Shares could, at
times, vary from the Net Asset Value per share. A number of factors could cause
these differences, including relative demand and supply of Common Shares and the
performance of the fund. Tender Offers for Common Shares at Net Asset Value
would be expected to reduce any spread or gap that might develop between Net
Asset Value and market price. However, there is no guarantee that these actions
would cause Common Shares to trade at a market price that equals or approximates
Net Asset Value per share.
Although the Board believes that Tender Offers will generally benefit
shareholders, the fund's repurchase of Common Shares will decrease the fund's
total assets. The fund's expense ratio may also increase as a result of Tender
Offers (assuming the repurchases are not offset by the issuance of additional
Common Shares). Such Tender Offers may also result in less investment
flexibility for the fund depending on the number of Common Shares repurchased
and the success of the fund's continuous offering of Common Shares. In addition,
if the fund decides in the future to borrow money for the purpose of financing a
Tender Offer, interest on the borrowings will reduce the fund's net investment
income. It is the Board's announced policy (which the Board may change) not to
repurchase Common Shares in a Tender Offer over the minimum amount required by
the fund's fundamental policies regarding Tender Offers if the Board determines
that the repurchase is not in the fund's best interest.
Repurchases through Tender Offers may significantly reduce the asset coverage of
any borrowings or outstanding senior securities. The fund may not repurchase
Common Shares if the repurchases result in its asset coverage levels falling
below the levels required by the 1940 Act. As a result, in order to repurchase
all Common Shares tendered, the fund may have to repay all or part of its
outstanding borrowings or redeem all or part of its outstanding senior
securities to maintain the required asset coverage. See "What Are the Risks of
Investing in the Fund? - Effects of Leverage." Also, the size of any particular
Tender Offer may be limited (beyond the minimum amount required for the fund's
fundamental policies) for the reasons discussed above or as a result of
liquidity concerns.
To complete a Tender Offer for the repurchase of Common Shares, the fund may be
required to sell portfolio securities. This may cause the fund to realize gains
or losses at a time when the manager would otherwise not do so.
The Board will consider other means of providing liquidity for shareholders if
Tender Offers are ineffective in enabling the fund to repurchase the amount of
Common Shares tendered by shareholders. These actions may include an evaluation
of any secondary market that may exist for Common Shares, and a determination of
whether that market provides liquidity for shareholders. If the Board determines
that a secondary market (if any) failed to provide liquidity for shareholders,
the Board intends to consider all available options to provide liquidity. One
possibility that the Board may consider is listing the Common Shares on a major
domestic stock exchange or arranging for the quotation of Common Shares on an
over-the-counter market. Alternatively, the fund might repurchase Common Shares
periodically in open-market or private transactions, provided the fund can do so
on favorable investment terms. The Board will cause the fund to take any action
the Board deems necessary or appropriate to provide liquidity for the
shareholders in light of the specific facts and circumstances.
The fund's repurchase of tendered Common Shares is a taxable event. See "How
Taxation Affects the Fund and Its Shareholders." The fund will pay all costs and
expenses associated with the making of any Tender Offer. An Early Withdrawal
Charge will be imposed on certain Common Shares that are purchased after March
31, 1998, that have been held for less than twelve months and are accepted for
repurchase pursuant to a Tender Offer, subject to certain waivers. See "Early
Withdrawal Charge" below.
In accordance with applicable rules of the SEC in effect at the time of the
offer, the fund may also make other offers to repurchase shares that it has
issued.
EARLY WITHDRAWAL CHARGE
The Early Withdrawal Charge will be imposed on the proceeds payable to
shareholders from the fund's repurchase of certain Common Shares tendered by
shareholders in a Tender Offer. Tendered Common Shares that were purchased by
the shareholder after March 31, 1998, and held by the shareholder for less than
twelve months are subject to the Early Withdrawal Charge. The Early Withdrawal
Charge will not be imposed on Common Shares that were acquired through the
reinvestment of distributions, or Common Shares that were purchased more than
one year prior to repurchase by the fund in a Tender Offer. The Early Withdrawal
Charge is paid to Distributors and is imposed to recover offering and
distribution expenses incurred by Distributors. The Early Withdrawal Charge is
1% of the Net Asset Value of the tendered Common Shares on the Repurchase
Pricing Date or the Net Asset Value of the Common Shares at the time of
purchase, whichever is less.
In determining whether an Early Withdrawal Charge is payable, the fund will
repurchase Common Shares in the following order: first, Common Shares that have
been held more than twelve months or that are otherwise exempt from imposition
of the Early Withdrawal Charge; and second, if there are not enough of these
Common Shares to meet your request, Common Shares subject to the Early
Withdrawal Charge in the order they were purchased.
WAIVERS OF THE EARLY WITHDRAWAL CHARGE. The Early Withdrawal Charge may be
waived under certain circumstances. Certain distributions, payments or
redemption proceeds that you receive and use to buy Common Shares of the fund
will exempt those Common Shares from the Early Withdrawal Charge if you invest
them in those Common Shares within 365 days of their repurchase or redemption
date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund
(Class I, Advisor or Class Z only), or from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
3. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund (Class I, Advisor or Class Z only) if you were originally subject
to an initial or Contingent Deferred Sales Charge at the time of
purchase or qualified to purchased shares at Net Asset Value and you
reinvest the money in Common Shares. If the proceeds are from the
redemption of Class I shares, you must have held the originally
purchased Class I shares for 12 consecutive months or more. This waiver
does not apply to exchanges.
The Early Withdrawal Charge will not be waived if the shares were subject to an
Early Withdrawal Charge or a Contingent Deferred Sales Charge when they were
repurchased or redeemed. We will, however, credit your account in Common Shares,
at the current Net Asset Value, in proportion to the amount reinvested for any
Early Withdrawal Charge or Contingent Deferred Sales Charge paid in connection
with the earlier repurchase or redemption, but barring any other applicable
waivers, your Common Shares will be subject to the Early Withdrawal Charge if
you tender them for repurchase and the repurchase occurs within twelve months.
If you immediately placed your repurchase or redemption proceeds in a Franklin
Bank CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any rollover.
Also, various individuals and institutions may buy Common Shares of the fund
without being subject to the Early Withdrawal Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
We also waive the Early Withdrawal Charge for:
o Account Fees
o Redemptions following the death of the shareholder or beneficial owner
o Purchases of $3 million or more if the Securities Dealer of record received
a payment from Distributors of 0.50% or less in connection with the
purchase.
If you qualify for a waiver from the Early Withdrawal Charge, please fill in the
applicable blank on the repurchase offer/request form you receive as
notification of the Tender Offer or, if your Common Shares are held in street
name or nominee name, include a written statement with your instructions to the
broker, dealer or other institution holding such Common Shares for you regarding
the Tender Offer, explaining which privilege described above applies. If you do
not fill in the applicable blank or include this statement, the fund cannot
guarantee you will receive the waiver.
You can receive a credit for the Early Withdrawal Charge you paid, if within 365
days of receiving payment from the fund's repurchase of your Common Shares, you
reinvest in the fund. If you paid an Early Withdrawal Charge on the repurchased
Common Shares, your fund account will be credited in Common Shares, at the
current Net Asset Value, in proportion to the amount you reinvest, for such
Early Withdrawal Charge. However, the Common Shares that you purchase through
such reinvestment will be considered, for purposes of the applicability of any
Early Withdrawal Charge, to have a purchase date corresponding to the
reinvestment date.
EXCHANGES
We offer a wide variety of funds. If you would like, you can move your
investment in Common Shares from your fund account to an existing or new account
in another Franklin Templeton Fund (an "exchange"). Because it is technically a
sale and a purchase of shares, an exchange is a taxable transaction. You may
request an exchange into another Franklin Templeton Fund in conjunction with
submitting your Common Shares for repurchase by the fund during a quarterly or
discretionary Tender Offer. YOU MAY EXCHANGE YOUR COMMON SHARES FOR SHARES OF
ANOTHER FRANKLIN TEMPLETON FUND ONLY IN CONJUNCTION WITH TENDER OFFERS, AND ONLY
IF YOU HAVE HELD THE COMMON SHARES THAT YOU WISH TO EXCHANGE FOR TWELVE MONTHS.
SHAREHOLDERS OF ANOTHER FRANKLIN TEMPLETON FUND MAY, HOWEVER, EXCHANGE THEIR
SHARES FOR COMMON SHARES OF THE FUND ON A CONTINUOUS BASIS EACH BUSINESS DAY.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal and
policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
Exchanges will be completed at Net Asset Value. Shareholders in Class I shares
of other Franklin Templeton Funds may exchange their shares for Common Shares.
We will not assess a Contingent Deferred Sales Charge at the time you exchange
shares of such other funds. Any such shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will be subject to the Early
Withdrawal Charge for any remaining time such shares would have been subject to
the Contingent Deferred Sales Charge up to one year after the original purchase.
Appropriate written instructions, signed by all account owners, must accompany
your exchange request. When you submit your repurchase request during a Tender
Offer, please be sure to fill in the applicable blank on the repurchase
offer/request form you receive as in your notification of the Tender Offer, or
if your Common Shares are held in street name or nominee name, include a written
request with your instructions to the broker, dealer or other institution
holding such Common Shares for you regarding the Tender Offer.
You must also include any outstanding share certificates for the Common Shares
you want to exchange.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may exchange your Common Shares only for Class I shares of another
Franklin Templeton Fund.
o You must have owned the Common Shares that you wish to exchange into
another Franklin Templeton Fund for twelve months before you may exchange
shares (unless those Common Shares were purchased by an exchange from a
Class I Franklin Templeton Fund).
o YOU MAY EXCHANGE YOUR COMMON SHARES ONLY IN CONJUNCTION WITH A TENDER
OFFER.
o You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your Common Shares.
o The accounts must be identically registered. You may, however, exchange
Common Shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the fund does not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange Common Shares.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The fund declares dividends from its net investment income. The fund's net
investment income is reduced by interest on the fund's borrowings, and dividends
or interest on any senior securities issued by the fund. Dividends are declared
daily (on business days) and paid monthly to holders of Common Shares. Capital
gains, if any, are distributed at least annually to shareholders, usually in
December. Common Shares accrue dividends as long as they are issued and
outstanding (i.e., from the date the Net Asset Value is determined for the
purchase order for the Common Shares to the Repurchase Pricing Date of the
Tender Offer in which the Common Shares are accepted for repurchase by the
fund).
Under the 1940 Act, the fund may not incur indebtedness unless the fund has
asset coverage of at least 300% of the aggregate outstanding indebtedness
immediately after the borrowing. Also, the fund may not declare any dividend or
other distribution on any class of its capital stock or purchase any of its
capital stock, unless the fund has, at the time of either the declaration or the
purchase, asset coverage of at least 300% of the aggregate indebtedness, after
deducting the amount of the distribution or purchase price, as applicable. This
latter limitation - and a limitation on the fund's ability to declare cash
dividends or other distributions on Common Shares while any shares of preferred
stock are outstanding - may impair the fund's ability to maintain its
qualification for taxation as a regulated investment company. See "What Are the
Risks of Investing in the Fund? - Effects of Leverage" and "How Taxation Affects
the Fund and Its Shareholders."
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the fund deducts a capital gain distribution
from its Net Asset Value, please keep in mind that you will receive a portion of
the price you paid back in the form of a taxable distribution.
Dividends and other distributions will be taxable to shareholders whether they
are reinvested in Common Shares or received in cash. See "How Taxation Affects
the Fund and Its Shareholders."
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL COMMON SHARES OF THE FUND - You may buy additional Common
Shares of the fund (without imposition of an Early Withdrawal Charge) by
reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional
Common 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. Please note that distributions may
only be directed to an existing account.
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 or savings account, you may need
a signature guarantee. If you send the money to a checking or savings
account, please see "Electronic Fund Transfers" under "Services to Help
You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN COMMON SHARES
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the reinvestment date
for us to process the new option. For Trust Company retirement plans, special
forms are required to receive distributions in cash.
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HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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<S> <C>
TAXATION OF THE FUND'S INVESTMENTS. The HOW DOES THE FUND EARN INCOME AND GAINS?
fund invests your money primarily in
loans, bonds and other securities that are The fund earns interest (the fund's
described in the section "What Kinds of "income") on its investments. When the
Securities Does the Fund Purchase?" fund sells a security for a price that is
Special tax rules may apply in determining higher than it paid, it has a gain. When
the income and gains that the fund earns the fund sells a security for a price
on its investments. These rules may, in that is lower than it paid, it has a
turn, affect the amount of distributions loss. If the fund has held the security
that the fund pays to you. These special for more than one year, the gain or loss
tax rules are discussed in the SAI. will be a long-term capital gain or loss.
If the fund has held the security for one
TAXATION OF THE FUND. As a regulated year or less, the gain or loss will be a
investment company, the fund generally short-term capital gain or loss. The
pays no federal income tax on the income fund's gains and losses are netted
and gains that it distributes to you. together, and, if the fund has a net gain
(the fund's "gains"), that gain will
generally be distributed to you.
-------------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from the
fund's investments in foreign bonds. These taxes will reduce the amount of the fund's
distributions to you.
TAXATION OF SHAREHOLDERS
-------------------------------------------
DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash or
in additional Common Shares of the fund, As a shareholder, you will receive your
are generally subject to income tax. The share of the fund's income and gains on
fund will send you a statement in January its investments in loans, bonds and other
of the current year that reflects the securities. The fund's income and short
amount of ordinary dividends, capital gain term capital gains are paid to you as
distributions and non-taxable ordinary dividends. The fund's long-term
distributions you received from the fund capital gains are paid to you as capital
in the prior year. This statement will gain distributions. If the fund pays you
include distributions declared in December an amount in excess of its income and
and paid to you in January of the current gains, this excess will generally be
year, but which are taxable as if paid on treated as a non-taxable distribution.
December 31 of the prior year. The IRS These amounts, taken together, are what
requires you to report these amounts on we call the fund's distributions to you.
your income tax return for the prior year.
-------------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally tax-deferred;
this means that you are not required to report fund distributions on your income tax
return when paid to your plan, but, rather, when your plan makes payments to you.
Special rules apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the fund's
distributions will qualify for the corporate dividends-received deduction.
-------------------------------------------
TENDER OFFERS AND EXCHANGES. A tender of WHAT IS A TENDER OFFER?
your Common Shares for repurchase or
exchange will be a taxable transaction for A tender of Common Shares for repurchase
federal income tax purposes. In general, is generally considered a sale by you to
the transaction will be treated as a sale the fund of some or all of your Common
or exchange of your Common Shares, if the Shares in the fund. The price per share
repurchase or exchange (a) completely you receive when you tender your Common
terminates your interest in the fund, (b) Shares for repurchase may be more or less
is a distribution that is "substantially than the price at which you purchased
disproportionate," or (c) is treated as a those Common Shares. An exchange of
distribution that is "not essentially Common Shares in the fund for shares of
equivalent to a dividend." A complete another Franklin Templeton Fund is
termination of a shareholder's interest generally treated as a sale by you to the
generally requires that the shareholder fund of your Common Shares and then a
dispose of all Common Shares directly purchase of shares of the other fund.
owned or attributed to him or her. A When you tender your Common Shares for
"substantially disproportionate" repurchase or exchange, you will
distribution generally requires a generally have a gain or loss, depending
reduction of more than 20% in the upon whether the repurchase proceeds are
shareholder's proportionate interest in more or less than your cost or other
the fund after all Common Shares are basis in the Common Shares. If, however,
tendered. A distribution "not essentially a tender of less than all of your Common
equivalent to a dividend" requires that Shares does not qualify for sale or
there be a "meaningful reduction" in the exchange treatment, the purchase proceeds
shareholder's interest, which should be may be treated as a deemed dividend
the case if the shareholder has a minimal distribution.
interest in the fund, exercises no control
over fund affairs, and suffers a reduction
in his or her proportionate interest.
-------------------------------------------
The fund intends to take the position that tendering shareholders will qualify for
sale or exchange treatment. If the transaction is treated as a sale or exchange for
tax purposes, any gain or loss recognized would be treated as a capital gain or loss
by shareholders that hold their Common Shares as a capital asset. The capital gain or
loss will be long-term if the Common Shares were held more than one year.
If you hold your Common Shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain distributions
received by you from the fund. All or a portion of any loss on the repurchase or
exchange of your Common Shares will be disallowed by the IRS if you purchase other
Common Shares in the fund within 30 days before or after your tender of Common Shares
for repurchase or exchange.
If the transaction is not treated as a sale or exchange, the amount received upon a
tender of Common Shares may consist in whole or in part of ordinary dividend income,
a return of capital or capital gain, depending on the fund's earnings and profits for
its taxable year and the shareholder's tax basis in the Common Shares. There is also
a risk that nontendering shareholders may be considered to have received a deemed
distribution that may be a taxable dividend in whole or in part.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from tender of your Common Shares for repurchase or
exchange. Common Shares of the fund held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to determine the
U.S. and non-U.S. tax consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from tender of your Common Shares of the fund for
repurchase or exchange will generally be subject to state and local income tax. The
holding of Common Shares of the fund may also be subject to state and local
intangibles taxes. You may wish to contact your tax advisor to determine the state
and local tax consequences of your investment in the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS repurchase proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
fund is required to withhold 31% of all certifications on your shareholder
taxable distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions), when you opened your account. However, if
and repurchase proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to close your place until the fund is instructed by the
account if you fail to provide a correct IRS that it is no longer required.
TIN, fail to provide the proper tax
certifications, or the IRS instructs the
fund to begin backup withholding on your
account.
-------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
</TABLE>
DESCRIPTION OF COMMON SHARES
The fund is authorized to issue an unlimited number of its shares of beneficial
interest, the Common Shares. The fund's Common Shares may be offered in multiple
classes. Although the Board does not presently intend to do so, it may classify
and reclassify any unissued Common Shares at any time. For example, the Board is
permitted to set or change the preferences, conversion or other rights, voting
powers, restrictions, dividend limitations or terms and conditions of repurchase
of the fund's Common Shares. The description of Common Shares and the discussion
under "Certain Anti-Takeover Provisions of the Declaration of Trust" below are
subject to the terms of the Trust's Declaration of Trust and Bylaws.
COMMON SHARES
Common Shares do not have preemptive, conversion, exchange or redemption rights.
Each Common Share has equal voting, dividend, distribution and liquidation
rights. Both the outstanding Common Shares (i.e., the Common Shares issued prior
to the date of this prospectus) and the Common Shares offered by this prospectus
(once they are issued) are fully paid and nonassessable. Shareholders are
entitled to one vote per share.
The fund has noncumulative voting rights. This gives holders of more than 50% of
the Common Shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining Common Shares voting will not be able
to elect anyone to the Board.
The Board has approved the offering of Common Shares that are being offered by
this prospectus. The 1940 Act requires that Common Shares be sold at a price
equal to the then-current Net Asset Value (not including underwriting discounts
and commissions, which do not apply to the Common Shares). There are exceptions
to this requirement, such as an offering to existing shareholders or if a
majority of the holders of the fund's outstanding securities approve it. Common
Shares will usually be held in book-entry form. However, a shareholder may
request physical share certificates by writing to the fund. See "Transaction
Procedures and Special Requirements - Share Certificates" below.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Declaration of Trust includes provisions that limit (i) the ability of other
entities or persons to acquire control of the fund and (ii) the fund's freedom
to engage in certain transactions. These terms may be regarded as
"anti-takeover" provisions. Under Delaware law and the Declaration of Trust, the
affirmative vote of the holders of at least a majority of the Common Shares
entitled to be cast is required to approve the fund's consolidation with another
business entity, a merger of the fund with or into another business trust, a
statutory share exchange and the dissolution of the fund. In addition, the
affirmative vote of the holders of at least 662/3% (which is higher than the
vote required under Delaware law or the 1940 Act) of the fund's outstanding
Common Shares is required generally to authorize any of the following
transactions:
o merger, consolidation or statutory share exchange of the fund with or into
any other business trust;
o issuance of any securities of the fund to any person or entity for cash;
o sale, lease or exchange of all or any substantial part of the fund's assets
to any entity or person (except assets having an aggregate market value of
less than $1,000,000); or
o sale, lease or exchange to the fund, in exchange for fund securities, of
any assets of any entity or person (except assets having an aggregate fair
market value of less than $1,000,000).
However, this type of vote is not required when, under certain conditions, the
Board approves the transaction. Although in certain cases involving merger,
consolidation or statutory share exchange, the affirmative vote of the holders
of a majority of the fund's outstanding Common Shares would nevertheless be
required. The Declaration of Trust is on file with the SEC and you may request a
copy from the SEC for a more detailed explanation of these terms.
The provisions of the Declaration of Trust described above and the fund's right
to make a Tender Offer for its Common Shares may deprive shareholders of
opportunities to sell their Common Shares at a premium over Net Asset Value.
This is because a third party will be discouraged from attempting to obtain
control of the fund by making a tender offer for shares of the Trust or similar
transaction. The overall impact of these provisions is to reduce the possibility
of a merger or of a shareholder that is the beneficial owner of more than 5% of
the outstanding shares of the fund assuming control of the fund either directly
or indirectly through affiliates. These terms, at the same time, present
advantages. The provisions likely will require 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 goal and
policies. The Board has considered these anti-takeover provisions and concluded
that they are in the best interest of the fund and its shareholders.
NET ASSET VALUE AND SHARES OUTSTANDING
The following table sets forth, since the commencement of the fund's investment
operations, for the quarterly periods ending on the dates set forth below, the
high and low Net Asset Value per share for Common Shares during the periods:
QUARTERLY PERIOD ENDING HIGH LOW
- ------------------------------------------------------------------
October 31, 1997 $10.02 $10.00
January 31, 1998 $10.03 $10.01
April 30, 1998 $10.05 $10.03
July 31, 1998 $10.06 $10.04
October 31, 1998 $10.04 $ 9.92
As of November 6, 1998, the Net Asset Value per share for Common Shares was
$9.91.
The following table sets forth certain information with respect to Common Shares
as of November 6, 1998:
<TABLE>
<CAPTION>
(4) AMOUNT OUTSTANDING
(3) AMOUNT HELD BY EXCLUSIVE OF AMOUNT
(1) TITLE OF CLASS (2) AMOUNT AUTHORIZED FUND FOR OWN ACCOUNT SHOWN UNDER (3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares of
beneficial interest Unlimited N/A 28,867,156.358
</TABLE>
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy Common Shares at the Net Asset Value per share. The Net Asset Value we
use when you buy Common Shares is the one next calculated after we receive your
purchase request in proper form. If you buy Common 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. The Net Asset Value we use when you tender Common
Shares for repurchase by the fund is the Net Asset Value per share determined as
of the close of the NYSE on the Repurchase Pricing Date.
Neither Distributors nor Securities 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 close of the NYSE, normally 1:00 p.m. Pacific
time.
To calculate Net Asset Value per share, the fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of Common Shares outstanding. The fund's assets are valued
as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of Common Shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Written instructions with respect to your tender of Common Shares in a Tender
Offer must be completed in the manner described, and on the appropriate forms
included, in the notification to shareholders of the Tender Offer.
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 Common 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 Common 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 the Common 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 Common Shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Common Shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the Common
Shares to the street or nominee name account of another Securities Dealer. Both
dealers must have an agreement with Distributors or we cannot process the
transfer. Contact your Securities Dealer to initiate the transfer. We will
process the transfer after we receive authorization in proper form from your
delivering Securities Dealer. Accounts may be transferred electronically through
the NSCC. For accounts registered in street or nominee name, we may take
instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept electronic instructions directly from your
dealer or representative, including instructions to exchange or redeem your
shares. Electronic instructions may be processed through established electronic
trading systems and programs used by the fund.
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
or savings account to the fund each month to buy additional Common 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 Net Asset Value of the fund's Common 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 calling
the Floating Rate Team.
CUMULATIVE QUANTITY DISCOUNTS
You may include the cost or current value (whichever is higher) of your Common
Shares when determining if you may buy Class I shares of another Franklin
Templeton Fund at a discount. You may also include the cost or current value
(whichever is higher) of your Common Shares towards the completion of a Letter
of Intent established in connection with the purchase of Class I shares of
another Franklin Templeton Fund at a discount.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the fund
sent directly to a checking or savings account. If the account is with a bank
that is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). The fund's code number
is 020.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying Common 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 Common
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 the manager 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)
- --------------------------------------------------------------------------------
Floating Rate Team 1-800/632-2350 6:00 a.m. to 5:00 p.m.
ext. 52320
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
ADDITIONAL GENERAL INFORMATION
LEGAL MATTERS. Certain legal matters in connection with the Common Shares
offered by this prospectus will be passed on for the fund by Stradley, Ronon,
Stevens & Young, LLP.
FURTHER INFORMATION. Further information concerning Common Shares and the fund
may be found in the fund's Registration Statement, filed electronically with the
SEC.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
How Does the Fund Invest Its Assets?................................... 2
What Are the Risks of Investing in the Fund?........................... 5
Investment Restrictions................................................ 5
Officers and Trustees.................................................. 6
Investment Management and Other Services............................... 10
How Does the Fund Buy Securities for Its Portfolio?.................... 11
How Do I Buy and Exchange Common Shares?............................... 12
How Are Common Shares Valued?.......................................... 13
Additional Information on Distributions and Taxes...................... 14
The Fund's Underwriter................................................. 17
How Does the Fund Measure Performance?................................. 18
Miscellaneous Information.............................................. 20
Financial Statements................................................... 21
Useful Terms and Definitions........................................... 21
USEFUL TERMS AND DEFINITIONS
1940 ACT - The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the fund.
AGENT BANK - A Lender that administers a Corporate Loan on behalf of all Lenders
on a Corporate Loan. The Agent Bank typically is responsible for the collection
of principal and interest and fee payments from the Borrower, and distributes
these payments to the other Lenders. The Agent Bank is usually responsible for
enforcing the terms of the Corporate Loan. The Agent Bank is compensated for
these services.
ASSIGNMENT - An interest in a portion of a Corporate Loan. The purchaser of an
Assignment steps into the shoes of the original Lender. An Assignment from a
Lender gives the fund the right to receive payments directly from the Borrower
and to enforce its rights as a Lender directly against the Borrower.
BOARD - The Board of Trustees of the Trust
BORROWER - A corporation that borrows money under a Corporate Loan or issues
Corporate Debt Securities. The Borrower is obligated to make interest and
principal payments to the Lender of a Corporate Loan or to the holder of a
Corporate Debt Security.
CD - Certificate of deposit
CD RATE - The interest rate currently available on certificates of deposit
CLASS I, CLASS II, ADVISOR CLASS AND CLASS Z - 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
COMMON SHARES - Shares of beneficial interest in the fund
CONTINGENT DEFERRED SALES CHARGE - A sales charge of 1% that may apply if you
sell Class I shares of a Franklin Templeton Fund within twelve months.
CORPORATE DEBT SECURITIES - Obligations issued by corporations in return for
investments by securityholders. In exchange for their investment in the
corporation, securityholders receive income from the corporation and the return
of their investments. The corporation typically pledges to the securityholders
collateral which will become the property of the securityholders in case the
corporation Defaults in paying interest or in repaying the amount of the
investments to securityholders.
CORPORATE LOAN - A loan made to a corporation. In return, the corporation makes
payments of interest and principal to the Lenders. The corporation typically
pledges collateral which becomes the property of the Lenders, in case the
corporation Defaults in paying interest or principal on the loan. Corporate
Loans include Participation Interests in Corporate Loans and Assignments of
Corporate Loans.
DECLARATION OF TRUST - The Agreement and Declaration of Trust of the Trust,
which is the basic charter document of the fund.
DEFAULT - Failure to pay an obligation that is owed. For example, a Borrower
that has Defaulted on a Corporate Loan has failed to make interest or principal
payments that were due to the Lender.
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."
EARLY WITHDRAWAL CHARGE - A charge of 1% that may apply to Common Shares
purchased after March 31, 1998, and that are repurchased by the fund in a Tender
Offer within twelve months of the purchase of the Common Shares. Certain waivers
of this charge may apply.
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
fund is a legally permissible investment.
EQUITY SECURITIES - Securities which entitle the holder to participate in a
company's general operating success or failure. Public trading for Equity
Securities is typically a stock exchange but trading can also take place between
broker-dealers. Equity Securities generally take the form of common stock or
preferred stock.
FLOATING INTEREST RATE(S) - One of the following: (i) a variable interest rate
which adjusts to a base interest rate, such as LIBOR or the CD Rate on set
dates; or (ii) an interest rate that floats at a margin above a generally
recognized base lending interest rate such as the Prime Rate of a designated
U.S. bank.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
ILLIQUID - Illiquid property or securities cannot be sold within seven days, in
the ordinary course of business, at approximately the valued price.
INTEREST COVERAGE RATIO - A ratio which is used to show how many times interest
has been earned. This is of use particularly to long-term lenders. It is the sum
of the pre-tax net income and interest expense, divided by the interest expense.
INTERMEDIATE PARTICIPANT - A Lender, Participant or Agent Bank interposed
between the fund and a Borrower, when the fund invests in a Corporate Loan
through a Participation Interest or an Assignment.
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LENDER - The party that loans money to a corporation under a Corporate Loan. A
Corporate Loan in which the fund may invest is often negotiated and structured
by a group of Lenders. The Lenders typically consist of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions. The fund acts as a Lender when it directly invests in a Corporate
Loan or when it purchases an Assignment.
LEVERAGE RATIO - A ratio of a company's debt to equity. This ratio is commonly
used by lenders to determine the amounts they are willing to lend to a borrower.
LIBOR - The London InterBank Offered Rate, the interest rate that the most
creditworthy international banks charge each other for large loans.
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.
NET ASSET VALUE (NAV) - The net asset value of an investment company is
determined by deducting the company's liabilities from the total assets of the
company. The net asset value per share is determined by dividing the net asset
value of the company by the number of shares outstanding.
NRSRO - a nationally recognized statistical rating organization, such as S&P or
Moody's
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
PARTICIPANT - A holder of a Participation Interest in a Corporate Loan
PARTICIPATION INTEREST - An interest which represents a fractional interest in a
Corporate Loan. The fund may acquire Participation Interests from a Lender or
other holders of Participation Interests.
PRIME RATE - The interest rate charged by leading U.S. banks on loans to their
most creditworthy customers
REPURCHASE PAYMENT DEADLINE - The date by which the fund must pay shareholders
for Common Shares repurchased in a Tender Offer, as stated in the shareholder
notification. The Repurchase Payment Deadline may be no later than seven days
after the Repurchase Pricing Date.
REPURCHASE PRICING DATE - The date on or after the Repurchase Request Deadline
on which the fund determines the Net Asset Value applicable to the repurchase of
Common Shares in a Tender Offer, as scheduled in the shareholder notification
or, under certain circumstances, an earlier date than the scheduled date, but
not earlier than the Repurchase Request Deadline. As set by fundamental policy
of the fund, the Repurchase Pricing Date must occur not later than the
fourteenth day after the Repurchase Request Deadline or the next business day,
if the fourteenth day is not a business day.
REPURCHASE REQUEST DEADLINE - The date by which Investor Services, on behalf of
the fund, must receive the shareholders' requests for repurchase of their Common
Shares in conjunction with a Tender Offer, as stated in the shareholder
notification.
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
TENDER OFFERS - The quarterly offers by the fund to repurchase a designated
percentage of the outstanding Common Shares owned by the fund's shareholders.
Once every two years the Board may determine in its sole discretion to have one
additional Tender Offer in addition to the regular quarterly Tender Offers.
TRUST - the Franklin Floating Rate Trust
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
UNSECURED CORPORATE LOANS AND UNSECURED CORPORATE DEBT SECURITIES - Corporate
Loans and Corporate Debt Securities that are not backed by collateral. Thus, if
a Borrower Defaults on an Unsecured Corporate Loan or Unsecured Corporate Debt
Security, it is unlikely that the fund would be able to recover the full amount
of the principal and interest due.
WARRANT - A security that gives the holder the right, but not the obligation, to
subscribe for newly created securities of the issuer or a related company at a
fixed price either at a certain date or during a set period.
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 high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
FLOATING RATE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
DECEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
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TABLE OF CONTENTS
How Does the Fund Invest Its Assets? .................................. 2
What Are the Risks
of Investing in the Fund? ............................................ 5
Investment Restrictions ............................................... 5
Officers and Trustees ................................................. 6
Investment Management
and Other Services ................................................... 10
How Does the Fund Buy
Securities for Its Portfolio? ........................................ 11
How Do I Buy
and Exchange Common Shares? .......................................... 12
How Are Common Shares Valued? ......................................... 13
Additional Information
on Distributions and Taxes ........................................... 14
The Fund's Underwriter ................................................ 17
How Does the Fund
Measure Performance? ................................................. 18
Miscellaneous Information ............................................. 20
Financial Statements .................................................. 21
Useful Terms and Definitions .......................................... 21
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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Franklin Floating Rate Trust is a non-diversified closed-end investment company.
Its goal 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 with Floating Interest Rates. Franklin
Advisers, Inc., the fund's investment manager, uses its credit analysis to
select suitable investments for the fund. The fund seeks to achieve its goal by
investing at least 65% of its total assets 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 the manager.
The Prospectus, dated December 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund. For
a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
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INVESTMENT COMPANY SHARES, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
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The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "What Kinds of Securities Does the Fund
Purchase?" in the Prospectus.
INVESTMENT GOAL AND POLICIES The fund's investment goal is described in the
Prospectus in the section entitled "What Kinds of Securities Does The Fund
Purchase?"
RESTRICTIVE COVENANTS The Borrower under a Corporate Loan and the issuer of a
Corporate Debt Security must comply with various restrictive covenants contained
in any Corporate Loan agreement between the Borrower and the lending syndicate
or in any trust indenture or comparable document in connection with a Corporate
Debt Security. A restrictive covenant is a promise by the Borrower to not take
certain actions which may impair the rights of Lenders. These 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, a covenant may
require 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. This means that 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 between 30 days and 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 interest rate fluctuations
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 available from 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. Because changes to this trend are inherently unpredictable,
the manager cannot predict whether or not the trend will continue.
FOREIGN CURRENCY SWAPS Foreign currency swaps involve the exchange by the fund
with another party of the right to receive the foreign currency (paid under a
Corporate Loan or Corporate Debt Security) for the right to receive U.S.
dollars. The fund will enter into a foreign currency swap only if, at the time
of entering into the transaction, the outstanding debt obligations of the
counterparty are investment grade. This means they are rated BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's, or determined by the manager
to be of comparable quality. The amounts of U.S. dollar payments to be received
by the fund and the foreign currency payments to be received by the counterparty
are fixed at the time the swap arrangement is entered into. This locks in the
fund's right to receive payments under the loan in a predetermined amount of
U.S. dollars. In this way, the swap protects the fund from fluctuations in
exchange rates.
If there is a counterparty default, the fund will have contractual remedies
pursuant to the swap arrangements. However, if a replacement swap arrangement is
unavailable or if the fund is unable to recover damages from the defaulting
counterparty, the fund's right to foreign currency payments under the loan will
be subject to fluctuations based upon changes in the applicable exchange rate.
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 for fluctuations in exchange rates
adverse to the counterparty. In the event of such a default or prepayment, the
fund will set aside in a segregated account an amount of cash or high-grade
liquid debt securities at least equal to the amount of compensation that must be
paid to the counterparty.
REPURCHASE AGREEMENTS The fund may enter into repurchase agreements with respect
to its permitted investments. The fund currently intends to do so only with
financial institutions such as broker-dealers and banks that are deemed
creditworthy by the manager. 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 account collateral consisting of 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. 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 1940
Act. 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 costs in liquidating the collateral. 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. Also, the
fund could experience a loss to the extent that the value of these securities
falls below the purchase price.
SECURITIES LENDING The fund may from time to time lend its portfolio securities
to qualified securities dealers or other institutional investors. However, the
fund will limit such loans to a value not exceeding 331/3% of its total assets.
This limitation is a fundamental policy, which means it may not be changed
without the approval of the holders of a majority of the fund's Common Shares.
For each loan, the fund must receive in return collateral with an initial market
value of at least 102% of the initial market value of the securities loaned,
including any accrued interest. The value of the collateral and loaned
securities is determined daily so that the fund has collateral coverage of at
least 100%. The collateral shall consist of cash, securities issued by the U.S.
government, its agencies or instrumentalities, or irrevocable letters of credit.
If cash collateral is received by the fund, it is invested in short-term money
market securities, and the fund retains a portion of the yield paid on such
investment. On the other hand, if securities are delivered to the fund as
collateral, the fund and the borrower negotiate a premium to be paid to the fund
for lending its portfolio securities. In either event, the total yield on the
fund is increased by loans of its securities. While a security is on loan, the
fund continues to receive all dividends or interest on the loaned security.
Also, 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 may be terminated 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. The fund also could suffer a loss
to the extent that the value of the collateral falls below the market value of
the borrowed securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS There is no limit on the amount of
assets in which the fund may invest on a when-issued basis. For a general
description of "when-issued" and "delayed delivery" transactions, see the
Prospectus.
No income accrues to the fund prior to the date the fund actually takes delivery
of the interests or securities. These interests and securities are subject to
market fluctuation before delivery to the fund. The value of the interests or
securities at delivery may be more or less than their purchase price. By the
time delivery occurs, better yields may be generally available than the yields
on the interests or securities obtained pursuant to such transactions.
In when-issued and delayed delivery transactions, the fund relies on the buyer
or seller, as the case may be, to complete the transaction. Therefore, if the
other party fails to complete the transaction the fund may miss an advantageous
price or yield. When the fund is the buyer in such a transaction, it will
maintain, in a separate account, an amount equal to the purchase price, until it
makes payment. This amount will be in the form of cash or other liquid assets.
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, however, find it advisable to sell them before the
settlement date. The fund will not engage in when-issued and delayed delivery
transactions for the purpose of investment leverage.
INTEREST RATE SWAPS The fund may enter into interest rate swaps in order to
limit the exposure 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 Debt
Security with an interest rate that is reset only once each year, it may swap
the right to receive interest at this fixed annual rate for the right to receive
interest at a rate that is reset every week. Thus, if interest rates rise, the
increased interest received by the fund would offset a decline in the value of
the Corporate Loan or Corporate Debt Security. On the other hand, if interest
rates fall, the fund's benefit from falling interest rates would be decreased.
To the extent that the fund enters into these transactions for hedging purposes,
the manager believes that such obligations do not constitute senior securities
under the 1940 Act. Accordingly, the fund will not include hedging transactions
in its limitation on borrowing. The fund usually will enter into interest rate
swaps on a net basis. This means that the fund will receive or pay, as the case
may be, only the difference between the two payments. The net amount of the
fund's obligations over its entitlements, if any, with respect to each interest
rate swap will be accrued on a daily basis. The fund will then set aside in a
segregated account an amount at least equal to the accrued net obligation. 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 fund will segregate an amount equal to the fund's full obligations.
The fund will not enter into any interest rate hedging transaction unless the
manager considers the credit quality of the unsecured senior debt or the
claims-paying ability of the other party to be investment grade. If there is a
default by the counterparty to such a transaction, bankruptcy and insolvency
laws could affect the fund's rights as a creditor. In recent years, the swap
market has grown substantially and many portions of the swap market have become
relatively liquid, in comparison with other similar instruments traded in the
interbank market. However, there can be no assurance that the fund will be able
to terminate an interest rate swap or be able 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 the manager 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 into which the fund may enter. The risk of loss on interest rate
hedges is limited to the net amount of interest payments that the fund is
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 swap
counterparty, 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 is entitled to
receive. Since interest rate transactions are individually negotiated, the
manager 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 RISKS OF INVESTING IN THE FUND?
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The following provides more detailed information about some of the fund's risks.
You should read it together with the section in the Prospectus entitled "What
Are the Risks of Investing in the Fund?"
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 with the
consent of the Agent Bank and Lenders or under the terms of a loan agreement as
the creditworthiness of the Borrower improves.
There are risks which may cause the collateral to be insufficient in the event
that a Borrower defaults on a loan. Although the terms of Corporate Loans and
Corporate Debt Securities require that 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. 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.
There is also the risk that the collateral may be difficult to liquidate. In
fact, a majority of the collateral may be Illiquid. Consequently, the fund might
not receive payments to which it is entitled. This may result in a decline in
the value of the investment and, in turn, a decline in the Net Asset Value of
the fund's Common Shares.
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 the 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 a pledge or replacement, will be
strictly limited for the protection of the holders of Corporate Loans.
If a Borrower becomes involved in bankruptcy proceedings, the fund's access to
the collateral may be limited by bankruptcy and other laws. A court may find
that the fund's interest in the collateral is invalid or it may find that other
creditors of the Borrower should be paid before the fund. Such action by a court
could be based on a number of legal theories. For example, faulty loan
documentation or faulty official filings could lead to an invalidation by a
court. Corporate Loans or Corporate Debt Securities made in connection with a
highly leveraged transaction are at increased risk. In the event that a court
reaches such a decision, 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.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Resources has created an interdepartmental team to handle all euro-related
changes to enable the Franklin Templeton Funds to process transactions
accurately and completely with minimal disruption to business activities. While
the implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
INVESTMENT RESTRICTIONS
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The fund has adopted the following restrictions as fundamental policies. Prior
to issuance of any preferred stock, these restrictions may not be changed
without the approval of a majority of the fund's outstanding Common Shares.
Under the 1940 Act, this 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.
Following 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 goal, policies and restrictions
that are substantially the same as the investment goal, 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 except to the extent that the fund's investment in
foreign currency swaps, when-issued and delayed delivery securities, interest
rate hedging transactions and Corporate Loans in connection with revolving
credit facilities may be deemed senior securities.
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 Participation Interests, 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 "What Kinds of Securities Does the Fund
Purchase? - Description of Participation Interests and Assignments" in the
Prospectus).
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 will not be considered a violation
of any of the foregoing restrictions, except that with respect to borrowing, if
the borrowing exceeds the fund's percentage restriction on borrowing, the fund
will reduce its borrowing within three days to no more than the percentage
restriction.
OFFICERS AND TRUSTEES
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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.
POSITIONS AND OFFICES PRINCIPAL OCCUPATION DURING
NAME, AGE AND ADDRESS WITH THE TRUST THE PAST FIVE YEARS
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Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman
of the Board
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. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President
and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission Systems,
Inc. (wireless communications); director or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems) and
General Partner, Peregrine Associates, which was the General Partner of
Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI World Com, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and
Principal
Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Chauncey F. Lufkin (41)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This member of the Board of Trustees is considered an "interested person" of
the fund and the manager under federal securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Board members who are not interested persons of the fund or the manager are not
currently paid by the fund although they may receive fees in the future. Board
members who serve on the audit committee of the Trust and other funds in the
Franklin Templeton Group of Funds receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the Trust. Members of a
committee are not compensated for any committee meeting held on the day of board
meeting. Noninterested trustees may also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds and may receive
fees from these funds for their services. The fees payable to noninterested
trustees by the Trust are subject to reductions resulting from fee caps limiting
the amount of fees payable to trustees who serve on other boards within the
Franklin Templeton Group of Funds. The following table provides the total fees
paid to noninterested trustees by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
RECEIVED FROM THE TEMPLETON GROUP
FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME GROUP OF FUNDS* EACH SERVES**
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Frank H. Abbott, III ................. $165,937 27
Harris J. Ashton ..................... $344,642 49
S. Joseph Fortunato .................. $361,562 51
Edith Holiday ........................ $ 72,875 25
Frank W.T. LaHaye .................... $141,433 27
Gordon S. Macklin .................... $337,292 49
*For the calendar year ended December 31, 1997.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director or trustee. No officer or Board
member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or Board members who are shareholders
of Resources may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such Board member. Investments in the name of
family members or entities controlled by a Board member constitute fund holdings
of such Board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a Board member's fund holdings existing on February
27, 1998 are valued as of such date with subsequent investments valued at cost.
As of November 6, 1998, the officers and Board members, as a group, owned of
record and beneficially approximately 61,302 Common Shares of the fund, or less
than 1% of the total outstanding shares of the fund. Many of the Board members
own shares in other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
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INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Franklin Advisers, Inc. The manager 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. The manager's activities are subject to the review
and supervision of the Board to whom the manager renders periodic reports of the
fund's investment activities. The manager and its officers, directors and
employees are covered by fidelity insurance for the protection of the fund.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager 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 the manager on behalf of the fund. Similarly,
with respect to the fund, the manager is not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that the
manager 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. The manager 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 the
manager and other access persons will be made in compliance with the fund's Code
of Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. The fund pays its own operating expenses. These expenses
include the manager's management fees; taxes, if any; custodian, legal and
auditing fees; the fees and expenses of Board members who are not members of,
affiliated with, or interested persons of the manager; fees of any personnel not
affiliated with the manager; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the fund's Net Asset Value; and
printing and other expenses that are not expressly assumed by the manager.
Under its management agreement, the fund is obligated to pay the manager a
management fee equal to an 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. For the fiscal period ended July 31, 1998, management fees,
before any advance waiver, would have totaled $445,016. Under an agreement by
the manager to limit its fees, for such fiscal period the fund paid management
fees totaling $282,909.
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 on 60 days' written notice to the manager, or by the manager on 60
days' written notice to the fund, and will automatically terminate in the event
of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the fund is obligated to 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
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. For the fiscal period ended July 31, 1998, administration fees,
before any advance waiver, would have totaled $83,313. Under an agreement by FT
Services to waive its fees, for such fiscal period the fund did not pay
administration fees.
SHAREHOLDER SERVICING AGENT. The fund may reimburse Investor Services for
certain out-of-pocket expenses, which may include payments by Investor Services
to entities, including affiliated entities, that provide sub-shareholder
services, recordkeeping and/or transfer agency services to beneficial owners of
the fund. The amount of reimbursements for these services may not exceed the fee
payable by the fund to Investor Services in connection with maintaining
shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal period
ended July 31, 1998, the auditor's services consisted of rendering an opinion on
the financial statements of the fund included in the Trust's Annual Report to
Shareholders for the fiscal period ended July 31, 1998.
HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?
- --------------------------------------------------------------------------------
The manager 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, the manager 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 the manager 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. The manager 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 the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the manager 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, the manager 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 the
fund's Common 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, Distributors 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 the manager 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 the manager 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 the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the fiscal period ended July 31, 1998, the fund paid no brokerage
commissions.
As of July 31, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY AND
EXCHANGE COMMON SHARES?
- --------------------------------------------------------------------------------
The fund continuously offers Common Shares through Securities Dealers who have
an agreement with Distributors.
Securities laws of states where the fund offers Common Shares may differ from
federal law. Banks and financial institutions that sell Common Shares of the
fund may be required by state law to register as Securities Dealers.
When you buy Common Shares, if you submit a check or a draft that is returned
unpaid to the fund we may impose a $10 charge against your account for each
returned item.
ADDITIONAL INFORMATION ON
EXCHANGING COMMON SHARES
As described in "Exchanges" in the Prospectus, the ability to exchange Common
Shares is subject to certain qualifications. If you request the exchange of the
total value of your account, accrued but unpaid income dividends and capital
gain distributions will be reinvested in the fund at the Net Asset Value on the
date of the exchange, and then the entire share balance will be exchanged into
the new fund. Backup withholding and information reporting may apply.
Information regarding the possible tax consequences of an exchange is included
in the tax section in this SAI and in the Prospectus.
If a substantial number of shareholders should tender their Common Shares in a
Tender Offer with a request for an exchange, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exists
immediately. Money initially invested in short-term money market instruments
will then be withdrawn and invested in portfolio securities in as orderly a
manner as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The tender of Common Shares to complete an exchange will be
effected at Net Asset Value as of the close of the NYSE on the Repurchase
Pricing Date of the repurchase Tender Offer if the request for exchange is
received in proper form prior to the close of the NYSE on the Repurchase Request
Deadline. The exchange of Common Shares is subject to certain restrictions. See
"Exchanges" in the Prospectus.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional Common Shares at Net Asset Value until we receive new instructions.
Distribution or repurchase checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy Common Shares of
the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy Common Shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the fund may reimburse Investor
Services an amount not to exceed the fee that the fund normally pays Investor
Services. These financial institutions may also charge a fee for their services
directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE COMMON SHARES VALUED?
- --------------------------------------------------------------------------------
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purposes of determining the Net Asset Value of Common Shares, the fund's
cash and uninvested assets plus the value of the securities and any other assets
(including interest accumulated but not yet received) held by the fund minus all
liabilities (including accrued expenses) is divided by the total number of
Common Shares outstanding at such time. Expenses, including the fees payable to
the manager, are accrued daily.
The manager, subject to guidelines adopted and periodically reviewed by the
Board, values Corporate Loans and Corporate Debt Securities, for which there are
no readily available market quotations, at fair value, which approximates market
value. In valuing a Corporate Loan or Corporate Debt Security, the manager
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, and (iv) the period until next interest rate reset and maturity. The
manager 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, the manager may not rely solely on
such valuations in valuing the Corporate Loans for the fund's account.
In addition, in valuing the Corporate Loan and Corporate Debt Securities held by
the fund, the manager may also consider available prices or quotations, if any,
provided by banks, dealers or pricing services which may represent the prices at
which secondary market transactions in the Corporate Loans and Corporate Debt
Securities have or could have occurred. Because the secondary market in
Corporate Loans and Corporate Debt Securities has not fully developed, the
manager currently may not rely solely on such prices or quotations. To the
extent that an active secondary market in Corporate Loans and Corporate Debt
Securities develops to a reliable degree, or exists in similar loans or
instruments, the manager may rely to an increasing extent on such prices and
quotations. When the manager relies on such prices and quotations, it values
Corporate Loans and Corporate Debt Securities at the mean between the bid and
asked price as provided by available pricing sources.
Non-loan 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, non-loan
portfolio securities are valued at the last sale price on the exchange that is
the primary market for such securities, or the mean between the bid and the
asked 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.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally in
the form of interest, original issue, market and acquisition discount, and other
income derived from its investments. This income, less expenses incurred in the
operation of the fund, constitute its net investment income from which dividends
may be paid to you. Any distributions by the fund from such income will be
taxable to you as ordinary income, whether you take them in cash or in
additional Common Shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Gains from securities sold by the fund that are held for more than one year will
be taxable at a maximum rate of 20% for individual investors in the 28% or
higher federal income tax brackets; at a maximum rate of 10% for individual
investors in the 15% federal income tax bracket.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets; 8% for individuals
in the 15% federal income tax bracket. For individuals in the 15% bracket,
qualified 5-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individuals who are subject to tax
at higher rates, qualified 5-year gains are net gains on securities which are
purchased after December 31, 2000 and are held for more than 5 years. Taxpayers
subject to tax at the higher rates may also make an election for shares held on
January 1, 2001 to recognize gain on their shares in order to qualify such
shares as qualified 5-year property.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt instruments are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Common Shares of the fund for a full year, you may have designated and
distributed to you as ordinary income or capital gain a percentage of income
that is not equal to the actual amount of such income earned during the period
of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the fund
must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
TENDER OFFERS OF FUND SHARES. A tender of your Common Shares for repurchase and
exchanges of your Common Shares for shares in another Franklin Templeton Fund
are taxable transactions for federal and state income tax purposes. In general,
the tax law requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the repurchase proceeds you receive in
exchange for your Common Shares, subject to the rules described below. If you
hold your Common Shares as a capital asset, the gain or loss that you realize
will be capital gain or loss, and will be long-term for federal income tax
purposes if you have held your Common Shares for more than one year at the time
of repurchase or exchange. Any loss incurred on the repurchase or exchange of
Common Shares held for six months or less will be treated as a long-term capital
loss to the extent of any long-term capital gains distributed to you by the fund
on those Common Shares. All or a portion of any loss that you realize upon the
repurchase or exchange of your Common Shares will be disallowed to the extent
that you purchase other Common Shares in the fund (through reinvestment of
dividends or otherwise) within 30 days before or after you tender your Common
Shares for repurchase or exchange. Any loss disallowed under these rules will be
added to your tax basis in the new Common Shares you purchase.
If, however, you tender for repurchase or exchange less than all of your Common
Shares in the fund, other rules may apply. In general, a tender or exchange of
less than all of your Common Shares in the fund will not qualify for sale or
exchange treatment unless either (i) you reduce by more than 20% (measured
before and after the Tender Offer) your percent ownership in the fund, or (ii)
the receipt by you of the repurchase proceeds is not essentially equivalent to a
dividend under a facts and circumstances test. Under attribution rules, you may
be considered to own stock owned by certain members of your family and others in
making these determinations. If a repurchase or exchange does not qualify for
sale or exchange treatment, the repurchase proceeds will be taxable to you as an
ordinary dividend to the extent of the fund's earnings and profits.
Distributions in excess of earnings and profits will be a nontaxable
distribution to the extent of, and will be applied against and reduce, your
basis in your Common Shares. Distributions in excess of earnings and profits and
basis will be taxable as capital gain distributions.
There is also a risk that nontendering shareholders may be considered to have
received a deemed dividend distribution in the event that repurchase proceeds
paid to shareholders participating in a Tender Offer do not qualify for sale or
exchange treatment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that because the fund's income is derived primarily from interest
rather than dividends, no portion of its distributions will generally be
eligible for the dividends-received deduction. None of the dividends paid by the
fund for the most recent fiscal year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the fund.
If the fund's section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, the fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your fund shares will be treated as capital gain to you.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the fund may elect to
accrue market discount on a current basis, in which case the fund will be
required to distribute any such accrued discount. If the fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Common Shares of the fund.
THE FUND'S UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of Common Shares of the fund. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 60 days'
written notice.
Distributors pays the expenses of the distribution of Common Shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer Common Shares to the public. The fund pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
Distributors received underwriting commissions totaling $2,476 for the fiscal
period ended July 31, 1998. This entire amount was received in connection with
repurchases of Common Shares.
Pursuant to the fund's representations to the NASD regarding compensation to
Distributors and Securities Dealers, the fund has established procedures to
monitor such compensation on a share by share basis to ensure that the total of
such compensation does not exceed the limits described in the fund's Prospectus.
HOW DOES THE FUND MEASURE PERFORMANCE?
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
An explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over specified periods that would
equate an initial hypothetical $1,000 investment to its ending repurchase value.
The calculation assumes the maximum front-end sales charge (in this case, no
charge) is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes that all shares in the account are repurchased by the fund at Net Asset
Value at the end of each period and that all applicable charges and fees are
deducted. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect. As of the fiscal period ended July 31, 1998, the
fund had less than a year of operations and, consequently, had no average annual
total return.
These figures will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending repurchase value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
specified period. The fund's cumulative total return for the period from
inception (October 10, 1997) through July 31, 1998, was 4.33%.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the maximum offering price per share on the last day of
the period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period.
The fund's yield for the 30-day period ended July 31, 1998, was 7.03%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(A-B + 1) - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share during a certain period and dividing that amount by the
current maximum offering price. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gains, and is calculated over a different
period of time. The fund's current distribution rate for the 30-day period ended
July 31, 1998, was 6.81%.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Resources is the parent company of the investment
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may discuss
certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) LIBOR - The London Interbank Offered Rate - the interest rate that the most
creditworthy international banks dealing in Eurodollars charge each other for
large loans.
b) Federal Funds Rate - the interest rate charged by banks with excess reserves
at a Federal Reserve district bank to banks needing overnight loans to meet
reserve requirements.
c) Discount Rate - the interest rate charged by the Federal Reserve to member
banks for loans, using government securities or eligible paper as collateral.
This number provides a floor for interest rates since banks set their loan rates
at a notch above the discount rate.
d) The Goldman Sachs/Loan Pricing Corporation Liquid Leveraged Loan Index - a
performance benchmark for the leveraged loan market. The index is a liquid
issues index, designed to measure the performance of a diversified portfolio of
the most actively traded issues in the performing loan sectors of the leveraged
loan market.
e) The NationsBanc Capital Markets, Inc. Leveraged Loan Index - measures the
total return and volatility of syndicated loans. The index captures a broad
cross section of the leveraged loan market. The index includes syndicated loans
issued by either below-investment grade or non-rated companies of at least $100
million dollars that are actively traded on the secondary market.
f) Dow Jones(R) Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
g) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
h) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
i) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
j) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
k) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
l) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
m) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
n) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
p) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Smith Barney, Merrill Lynch,
Lehman Brothers, Payden & Rygel, Goldman Sachs, Standard and Poor's, Handy and
Harmon and Bloomberg L.P.
q) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
r) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
s) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
t) IBC/Donoghue's Money Fund Report(R) - industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
u) Bank Rate Monitor - a weekly publication that reports various bank
investments such as CD rates, average savings account rates and average loan
rates.
v) Salomon Smith Barney Bond Market Roundup - a weekly publication that reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and reserve
aggregates.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, if any, as well as the value of Common Shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of Common Shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years and
now services more than 3 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $208 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its CUSIP
number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike. As
noted in the Prospectus, Common Shares of the fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
From time to time, the number of Common Shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding Common Sares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
The Information Services & Technology division of Resources established a Year
2000 Project Team in 1996. This team has already begun making necessary software
changes to help the computer systems that service the fund and their
shareholders to be Year 2000 compliant. After completing these modifications,
comprehensive tests are conducted in one of Resources' U.S. test labs to verify
their effectiveness. Resources continues to seek reasonable assurances from all
major hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is beginning to develop a contingency
plan, including identification of those mission critical systems for which it is
practical to develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially identifying only those mission critical systems or
supplies of electricity or long distance voice and data lines are limited.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal period ended July 31, 1998, including the auditor's
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
- ------------------------------------------------------------------------------
1940 ACT - Investment Company Act of 1940, as amended. The 1940 Act governs the
operations of the fund.
1933 ACT - Securities Act of 1933, as amended
AGENT BANK - A Lender that administers a Corporate Loan on behalf of all Lenders
on a Corporate Loan. The Agent Bank typically is responsible for the collection
of principal and interest and fee payments from the Borrower, and distributes
these payments to the other Lenders. The Agent Bank is usually responsible for
enforcing the terms of the Corporate Loan. The Agent Bank is compensated for
these services.
ASSIGNMENT - An interest in a portion of a Corporate Loan. The purchaser of an
Assignment steps into the shoes of the original Lender. An Assignment from a
Lender gives the fund the right to receive payments directly from the Borrower
and to enforce its rights as a Lender directly against the Borrower.
BOARD - The Board of Trustees of the Trust
BORROWER - A corporation that borrows money under a Corporate Loan or issues
Corporate Debt Securities. The Borrower is obligated to make interest and
principal payments to the Lender of a Corporate Loan or to the holder of a
Corporate Debt Security.
CD - Certificate of deposit
CD RATE - The interest rate currently available on certificates of deposit
CODE - Internal Revenue Code of 1986, as amended
COMMON SHARES - Shares of beneficial interest in the fund
CONTINGENT DEFERRED SALES CHARGE - A sales charge of 1% that may apply if you
sell Class I shares in a Franklin Templeton Fund within twelve months.
CORPORATE DEBT SECURITIES - Obligations issued by corporations in return for
investments by securityholders. In exchange for their investment in the
corporation, securityholders receive income from the corporation and the return
of their investments. The corporation typically pledges to the securityholders
collateral which will become the property of the securityholders in case the
corporation defaults in paying interest or in repaying the amount of the
investments to securityholders.
CORPORATE LOAN - A loan made to a corporation. In return, the corporation makes
payments of interest and principal to the Lenders. The corporation typically
pledges collateral which becomes the property of the Lenders, in case the
corporation defaults in paying interest or principal on the loan. Corporate
Loans include Participation Interests in Corporate Loans and Assignments of
Corporate Loans.
DECLARATION OF TRUST - The Agreement and Declaration of Trust of the Trust,
which is the basic charter document of the Trust
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. This SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
EARLY WITHDRAWAL CHARGE - A charge of 1% that may apply to Common Shares
purchased after March 31, 1998, and that are repurchased by the fund in a Tender
Offer within twelve months of the purchase of the Common Shares. Certain waivers
of this charge may apply.
FLOATING INTEREST RATE - One of the following: (i) a variable interest rate
which adjusts to a base interest rate, such as LIBOR or the CD Rate on set
dates; or (ii) an interest rate that floats at a margin above a generally
recognized base lending interest rate such as the Prime Rate of a designated
U.S. bank.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
ILLIQUID - Illiquid property or securities cannot be sold within seven days, in
the ordinary course of business, at approximately the valued price.
INTERMEDIATE PARTICIPANT - A Lender, Participant or Agent Bank interposed
between the fund and a Borrower, when the fund invests in a Corporate Loan
through a Participation Interest or an Assignment
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LENDER - The party that loans money to a corporation under a Corporate Loan. A
Corporate Loan in which the fund may invest is often negotiated and structured
by a group of Lenders. The Lenders typically consist of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions. The fund acts as a Lender when it directly invests in a Corporate
Loan or when it purchases an Assignment.
LIBOR - The London InterBank Offered Rate, the interest rate that the most
creditworthy international banks charge each other for large loans.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The net asset value of an investment company is
determined by deducting the company's liabilities from the total assets of the
company. The net asset value per share is determined by dividing the net asset
value of the company by the number of shares outstanding.
NRSRO - a nationally recognized statistical rating organization, such as S&P or
Moody's
NYSE - New York Stock Exchange
PARTICIPANT - A holder of a Participation Interest in a Corporate Loan
PARTICIPATION INTEREST - An interest which represents a fractional interest in a
Corporate Loan. The fund may acquire Participation Interests from a Lender or
other holders of Participation Interests.
PRIME RATE - The interest rate charged by leading U.S. banks on loans to their
most creditworthy customers
PROSPECTUS - The prospectus for the fund dated December 1, 1998, which we may
amend from time to time
REPURCHASE REQUEST DEADLINE - The date by which Investor Services, on behalf of
the fund, must receive the shareholders' request for repurchase of their Common
Shares in conjunction with a Tender Offer, as stated in the shareholder
notification.
REPURCHASE PAYMENT DEADLINE - The date by which the fund must pay shareholders
for Common Shares repurchased in a Tender Offer, as stated in the shareholder
notification. The Repurchase Payment Deadline may be no later than seven days
after the Repurchase Pricing Date.
REPURCHASE PRICING DATE - The date after the Repurchase Request Deadline on
which the fund determines the Net Asset Value applicable to the repurchase of
Common Shares in a Tender Offer, as stated in the shareholder notification or,
under certain circumstances, an earlier date than the scheduled date, but not
earlier than the Repurchase Request Deadline. As set by fundamental policy of
the fund, the Repurchase Pricing Date must occur not later than the fourteenth
day after the Repurchase Request Deadline or the next business day, if the
fourteenth day is not a business day.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TENDER OFFERS - The quarterly offers by the fund to repurchase a designated
percentage of the outstanding Common Shares owned by the fund's shareholders.
Once every two years the Board may determine in its sole discretion to have one
additional Tender Offer in addition to the regular quarterly Tender Offers.
UNSECURED CORPORATE LOANS AND UNSECURED CORPORATE DEBT SECURITIES - Corporate
Loans and Corporate Debt Securities that are not backed by collateral. Thus, if
a Borrower Defaults on an Unsecured Corporate Loan or Unsecured Corporate Debt
Security, it is unlikely that the fund would be able to recover the full amount
of the principal and interest due.
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN FLOATING RATE TRUST
FORM N-2
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Included in Part A: Financial Highlights
Included in Part B:
a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated July 31, 1998
as filed with the SEC on Form N-30D on September 30, 1998:
(i) Financial Highlights
(ii) Statement of Investments, July 31, 1998
(iii) Statement of Assets and Liabilities - July 31, 1998
(iv) Statement of Operations - for the period October
10, 1997 (effective date) to July 31, 1998
(v) Statements of Changes in Net Assets - for the
period October 10, 1997 (effective date) to July
31, 1998
(vi) Statement of Cash Flows - for the period October
10, 1997 (effective date) to July 31, 1998
(vii) Reconciliation of Net Investment Income to Net Cash
Provided by Operating Activities - for the period
October 10, 1997 (effective date) to July 31, 1998
(viii) Notes to Financial Statements
(ix) Independent Auditor's Report
(2) Exhibits:
The following exhibits are incorporated by reference herein, except
exhibits (a)(i), (h)(i), (h)(ii), (n)(i) and (27)(i) which are
attached herewith.
(A) (i) Agreement and Declaration of Trust dated May
13, 1997
(ii) Certificate of Trust dated May 13, 1997
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: December 8, 1997
(B) (i) By-Laws
Filing: 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) (i) Investment Advisory Agreement between
Registrant and Franklin Advisers, Inc. dated
September 16, 1997
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: March 6, 1998
(ii) Fund Administration Agreement between Registrant and
Franklin Templeton Services, Inc. dated September 16,
1997
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: March 6, 1998
(H) (i) Amended Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated July 1, 1998
(ii) Form of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
(I) Not Applicable
(J) (i) Master Custody Agreement dated February 16, 1996
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: March 6, 1998
(ii) Amendment dated May 7, 1997 to Master Custody
Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: March 6, 1998
(iii) Amendment dated February 27, 1998 to Master Custody
Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: September 30, 1998
(iv) Foreign Custody Manager Agreement between Registrant
and Bank of New York made as of July 30, 1998,
effective as of February 27, 1998
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: September 30, 1998
(K) Not Applicable
(L) (i) Opinion and Consent of Counsel dated September
25, 1998
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: September 30, 1998
(M) Not Applicable
(N) (i) Consent of Independent Auditor
(O) Not Applicable
(P) (i) Letter of Investment Intent dated September 16,
1997
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-2
File No. 333-30131
Filing Date: March 6, 1998
(Q) Not Applicable
(R) Not Applicable
(S) (i) Power of Attorney dated June 16, 1998
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: September 30, 1998
(ii) Certificate of Secretary dated June 16, 1998
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: September 30, 1998
(27) (i) Financial Data Schedule for Franklin Floating
Rate Trust
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses already incurred and expected to be
incurred in connection with the cumulative offering described in this
Registration Statement. The amounts for the fiscal year ended July 31, 1998, are
actual amounts that the registrant has paid. The amounts for the current fiscal
year are based on actual amounts paid to date combined with estimates that are
reasonably expected to be incurred in distributing the offering described in the
prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR CURRENT
ENDED 7/31/98 FISCAL YEAR TOTAL
---------------------------------------------------------
<S> <C> <C> <C>
SEC/NASD/Blue Sky fees $121,275 $141,234 $262,509
Printing and Engraving Expenses 9,313 10,010 19,323
Legal Fees 115,211 14,783 129,994
Audit Fees 20,000 43,500 63,500
Accounting/Transfer Agent Fees 163,116 804,000 967,116
Mailing Expenses 1,689 7,982 9,671
- ------------------------------------------------------------------------------------------------
Total $1,452,113
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
3,700 record holders as of August 31, 1998
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 investment adviser also serve as
officers and/or directors for (1) the investment adviser's corporate parent,
Franklin Resources, Inc., 777 Mariners Island Blvd., San Mateo, CA 94404 and/or
(2) other investment companies in the Franklin Templeton Group of Funds. In
addition, Mr. Charles B. Johnson was formerly a director of General Host
Corporation, Metro Center, One Station Place, Stamford, CT 06904-2045. For
additional information please see Schedules A and D of Form ADV of the
Registrant's investment adviser (SEC File 801-26292) incorporated herein by
reference, which sets forth the officers and directors of the Registrant's
investment adviser 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 declines more than 10% from
its net asset value 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 Securities Act of 1933, as amended
(the "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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
486(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, and the State of California, on the 24th
day of November, 1998.
FRANKLIN FLOATING RATE TRUST
(Registrant)
By: RUPERT H. JOHNSON, JR.*
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
RUPERT H. JOHNSON, JR.* Trustee & Principal November 24, 1998
Rupert H. Johnson, Jr. Executive Officer
MARTIN L. FLANAGAN* Principal Financial November 24, 1998
Martin L. Flanagan Officer
DIOMEDES LOO-TAM* Principal Accounting November 24, 1998
Diomedes Loo-Tam Officer
FRANK H. ABBOTT, III* Trustee November 24, 1998
Frank H. Abbott, III
HARRIS J. ASHTON* Trustee November 24, 1998
Harris J. Ashton
S. JOSEPH FORTUNATO* Trustee November 24, 1998
S. Joseph Fortunato
EDITH E. HOLIDAY* Trustee November 24, 1998
Edith E. Holiday
CHARLES B. JOHNSON* Trustee & Chairman November 24, 1998
Charles B. Johnson of the Board
FRANK W. T. LAHAYE* Trustee November 24, 1998
Frank W. T. LaHaye
GORDON S. MACKLIN* Trustee November 24, 1998
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-99.2(a)(i) Agreement and Declaration Attached
of Trust dated May 13, 1997
EX-99.2(A)(ii) Certificate of Trust dated May 13, 1997 *
EX-99.2(B)(i) By-Laws *
EX-99.2(G)(i) Investment Advisory Agreement between *
Registrant and Franklin Advisers, Inc.
dated September 16, 1997
EX-99.2(G)(ii) Fund Administration Agreement between *
Registrant and Franklin Templeton
Services, Inc. dated September 16, 1997
EX-99.2(H)(i) Amended Distribution Agreement between Attached
Registrant and Franklin/Templeton
Distributors, Inc. dated July 1, 1998
EX-99.2(H)(ii) Form of Dealer Agreements Attached
between Franklin/Templeton
Distributors, Inc. and
Securities Dealers
EX-99.2(J)(i) Master Custody Agreement dated *
February 16, 1996
EX-99.2(J)(ii) Amendment dated May 7, 1997 *
to Master Custody Agreement
between Registrant and Bank
of New York dated February
16, 1996
EX-99.2(J)(iii) Amendment dated February 27, *
1998 to Master Custody
Agreement between Registrant
and Bank of New York dated
February 16, 1996
EX-99.2(J)(iv) Foreign Master Custody *
Agreement between Registrant
and Bank of New York made as
of July 30, 1998, effective
as of February 27, 1998
EX-99.2(L)(i) Opinion and Consent *
of Counsel dated September 25, 1998
EX-99.2(N)(i) Consent of Independent Attached
Auditor
EX-99.2(P)(i) Letter of Investment *
Intent dated September
16, 1997
EX-99.2(S)(i) Power of Attorney dated *
June 16, 1998
EX-99.2(S)(ii) Certificate of Secretary *
dated June 16, 1998
EX-99.27(i) Financial Data Schedule for Attached
Franklin Floating Rate Trust
*Incorporated by Reference
Effective as of
_________, 1997
AGREEMENT AND DECLARATION OF TRUST
of
FRANKLIN FLOATING RATE TRUST
a Delaware Business Trust
Principal Place of Business:
777 Mariners Island Boulevard
San Mateo, California 94403-7777
TABLE OF CONTENTS
Page
ARTICLE I....................................................................1
Name and Definitions...................................................1
Section 1. Name.................................................1
Section 2. Definitions..........................................1
(a) Trust...........................................1
(b) Trust Property..................................1
(c) Trustees........................................1
(d) Shares..........................................2
(e) Shareholder.....................................2
(f) Person..........................................2
(g) 1940 Act........................................2
(h) Commission and Principal
Underwriter....................................2
(i) Declaration of Trust............................2
(j) By-Laws.........................................2
(k) Interested Person...............................2
(1) Investment Manager..............................2
(m) Series..........................................2
ARTICLE II...................................................................3
Purpose of Trust.......................................................3
ARTICLE III..................................................................3
Shares.................................................................3
Section 1. Division of Beneficial Interest......................3
Section 2. Ownership of Shares..................................4
Section 3. Investments in the Trust.............................4
Section 4. Status of Shares and Limitation of
Personal Liability.................................4
Section 5. Power of Board of Trustees to Change
Provisions Relating to Shares......................5
Section 6. Establishment and Designation of
Shares.............................................5
(a) Assets Held with Respect to a Particular Series......5
(b) Liabilities Held with Respect to a Particular Series.6
(c) Dividends, Distributions, Redemptions, and Repurchases
7
(d) Voting...............................................7
(e) Equality.............................................7
(f) Fractions............................................7
(g) Exchange Privilege...................................8
(h) Combination of Series................................8
(i) Elimination of Series................................8
Section 7. Indemnification of Shareholders......................8
ARTICLE IV...................................................................8
The Board of Trustees..................................................8
Section 1. Number, Election and Tenure..........................8
Section 2. Effect of Death, Resignation, etc. of
a Trustee..........................................9
Section 3. Powers...............................................9
Section 4. Payment of Expenses by the Trust....................13
Section 5. Payment of Expenses by Shareholders.................13
Section 6. Ownership of Assets of the Trust....................14
Section 7. Service Contracts...................................14
ARTICLE V...................................................................16
Shareholders' Voting Powers and Meetings..............................16
Section 1. Voting Powers.......................................16
Section 2. Meetings............................................16
Section 3. Quorum and Required Vote............................16
Section 4. Action by Written Consent...........................17
Section 5. Record Dates........................................17
Section 6. Additional Provisions...............................17
ARTICLE VI..................................................................18
Net Asset Value, Distributions, and Redemptions.......................18
......Section 1. Determination of Net Asset Value, Net
Income, and Distributions.........................18
ARTICLE VII.................................................................18
Compensation and Limitation of Liability of Trustees..................18
Section 1. Compensation........................................18
Section 2. Indemnification and Limitation of
Liability.........................................18
Section 3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety.........................19
Section 4. Insurance...........................................19
ARTICLE VIII................................................................19
Miscellaneous.........................................................19
......Section 1. Liability of Third Persons Dealing
with Trustees.....................................19
Section 2. Termination of Trust or Series......................19
Section 3. Merger and Consolidation............................20
Section 4. Amendments..........................................20
Section 5. Filing of Copies, References, Headings..............21
Section 6. Applicable Law......................................21
Section 7. Provisions in Conflict with Law or
Regulations.......................................21
Section 8. Business Trust Only.................................22
Section 9. Use of the name "Franklin"..........................22
ARTICLE IX..................................................................22
Certain Transactions..................................................22
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN FLOATING RATE TRUST
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder
for the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate of
Trust be filed with the office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same
upon the following terms and conditions for the PRO RATA benefit of the
holders of Shares in this Trust.
ARTICLE I.
Name and Definitions
SECTION 1. NAME. This trust shall be known as "Franklin
Floating Rate Trust" and the Trustees shall conduct the business of the Trust
under that name or any other name as they may from time to time determine.
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust established by
this Agreement and Declaration of Trust, as amended from time to time;
(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the
account of the Trust, including without limitation the rights referenced in
Article VIII, Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this Agreement
and Declaration of Trust, so long as they continue in office in accordance
with the terms hereof, and all other persons who may from time to time be
duly elected or appointed to serve on the Board of Trustees in accordance
with the provisions hereof, and reference herein to a Trustee or the Trustees
shall refer to such person or persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and
includes fractions of Shares as well as whole Shares;
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other
entities, whether or not legal entities, and governments and agencies and
political subdivisions thereof, whether domestic or foreign;
(g) The 1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall have the
respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of
the 1940 Act;
(i) "Declaration of Trust" shall mean this Agreement and Declaration
of Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust as amended from
time to time and incorporated herein by reference;
(k) The term "Interested Person" has the meaning given it in Section
2(a)(19) of the 1940 Act;
(l) "Investment Manager" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV,
Section 7(a) hereof;
(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III and
shall mean an entity such as that described in Section 18(f)(2) of the 1940
Act, and subject to Rule 18f-2 thereunder.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the
business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities.
ARTICLE III.
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial
interest in the Trust shall at all times be divided into an unlimited number
of Shares, with a par value of $ .01 per Share. The Trustees may authorize
the division of Shares into separate Series and the division of Series into
separate classes of Shares. The different Series shall be established and
designated, and the variations in the relative rights and preferences as
between the different Series shall be fixed and determined, by the Trustees.
If only one or no Series (or classes) shall be established, the Shares shall
have the rights and preferences provided for herein and in Article III,
Section 6, hereof to the extent relevant and not otherwise provided for
herein, and all references to Series (and classes) shall be construed (as the
context may require) to refer to the Trust.
Subject to the provisions of Section 6 of this Article III, each
Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends, when, if
and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. No Shares shall have any priority or preference over any
other Share of the same Series with respect to dividends or distributions
upon termination of the Trust or of such Series made pursuant to Article
VIII, Section 2 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular (class of a) Series from the
assets held with respect to such Series according to the number of Shares of
such (class of such) Series held of record by such Shareholder on the record
date for any dividend or distribution or on the date of termination, as the
case may be. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust or
any Series. The Trustees may from time to time divide or combine the Shares
of any particular Series into a greater or lesser number of Shares of that
Series without thereby materially changing the proportionate beneficial
interest of the Shares of that Series in the assets held with respect to that
Series or materially affecting the rights of Shares of any other Series.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall
be recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each
Series (or class). No certificates certifying the ownership of Shares shall
be issued except as the Board of Trustees may otherwise determine from time
to time. The Trustees may make such rules as they consider appropriate for
the transfer of Shares of each Series (or class) and similar matters. The
record books of the Trust as kept by the Trust or any transfer or similar
agent, as the case may be, shall be conclusive as to who are the Shareholders
of each Series (or class) and as to the number of Shares of each Series (or
class) held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. Investments may be
accepted by the Trust from such Persons, at such times, on such terms, and
for such consideration as the Trustees from time to time may authorize. Each
investment shall be credited to the individual Shareholder's account in the
form of full and fractional Shares of the Trust, of such Series (or class) as
the purchaser shall select, at the net asset value per Share next determined
for such Series (or class) after receipt of the investment; provided,
however, that the Trustees may, in their sole discretion, impose a sales
charge upon investments in the Trust.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL
Liability. Shares shall be deemed to be personal property giving only the
rights provided in this instrument. Every Shareholder by virtue of having
become a Shareholder shall be held to have expressly assented and agreed to
the terms hereof and to have become a party hereto. The death of a
Shareholder during the existence of the Trust shall not operate to terminate
the Trust, nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against the Trust or
the Trustees, but entitles such representative only to the rights of said
deceased Shareholder under this Trust. Ownership of Shares shall not entitle
the Shareholder to any title in or to the whole or any part of the Trust
Property or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders as
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholders,
nor, except as specifically provided herein, to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other than such as
the Shareholder may at any time personally agree to pay.
SECTION 5. POWER OF BOARD OF TRUSTEES TO CHANGE PROVISIONS
RELATING TO SHARES. Notwithstanding any other provisions of this Declaration
of Trust and without limiting the power of the Board of Trustees to amend the
Declaration of Trust as provided elsewhere herein, the Board of Trustees
shall have the power to amend this Declaration of Trust, at any time and from
time to time, in such manner as the Board of Trustees may determine in their
sole discretion, without the need for Shareholder action, so as to add to,
delete, replace or otherwise modify any provisions relating to the Shares
contained in this Declaration of Trust, provided that before adopting any
such amendment without Shareholder approval the Board of Trustees shall
determine that it is consistent with the fair and equitable treatment of all
Shareholders or that Shareholder approval is not otherwise required by the
1940 Act or other applicable law. If Shares have been issued, Shareholder
approval shall be required to adopt any amendments to this Declaration of
Trust which would adversely affect to a material degree the rights and
preferences of the Shares of any Series (or class) or to increase or decrease
the par value of the Shares of any Series (or class).
Subject to the foregoing Paragraph, the Board of Trustees may
amend the Declaration of Trust to amend any of the provisions set forth in
paragraphs (a) through (i) of Section 6 of this Article III.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SHARES. The
establishment and designation of any Series (or class) of Shares shall be
effective upon the resolution by a majority of the then Trustees, adopting a
resolution which sets forth such establishment and designation and the
relative rights and preferences of such Series (or class). Each such
resolution shall be incorporated herein by reference upon adoption.
Shares of each Series (or class) established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such
Series, shall have the following relative rights and preferences:
(a) ASSETS HELD WITH RESPECT TO A PARTICULAR SERIES. All
consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof
from whatever source derived, including, without limitation, any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds
or payments derived from any reinvestment of such proceeds in whatever form
the same may be, shall irrevocably be held with respect to that Series for
all purposes, subject only to the rights of creditors, and shall be so
recorded upon the books of account of the Trust. Such consideration, assets,
income, earnings, profits and proceeds thereof, from whatever source derived,
including, without limitation, any proceeds derived from the sale, exchange
or liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets held with respect to" that Series. In the event that
there are any assets, income, earnings, profits and proceeds thereof, funds
or payments which are not readily identifiable as assets held with respect to
any particular Series (collectively "General Assets"), the Trustees shall
allocate such General Assets to, between or among any one or more of the
Series in such manner and on such basis as the Trustees, in their sole
discretion, deem fair and equitable, and any General Asset so allocated to a
particular Series shall be held with respect to that Series. Each such
allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) LIABILITIES HELD WITH RESPECT TO A PARTICULAR
Series. The assets of the Trust held with respect to each particular Series
shall be charged against the liabilities of the Trust held with respect to
that Series and all expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as being held with respect to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the
Series in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs,
charges, and reserves so charged to a Series are herein referred to as
"liabilities held with respect to" that Series. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
Persons who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated to any
particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such
credit, claim, or contract. In the absence of an express contractual
agreement so limiting the claims of such creditors, claimants and contract
providers, each creditor, claimant and contract provider will be deemed
nevertheless to have impliedly agreed to such limitation unless an express
provision to the contrary has been incorporated in the written contract or
other document establishing the claimant relationship.
(c) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS, AND
Repurchases. Notwithstanding any other provisions of this Declaration of
Trust, including, without limitation, Article VI, no dividend or distribution
including, without limitation, any distribution paid upon termination of the
Trust or of any Series (or class) with respect to, nor any redemption or
repurchase of, the Shares of any Series (or class) shall be effected by the
Trust other than from the assets held with respect to such Series, nor,
except as specifically provided in Section 7 of this Article III, shall any
Shareholder of any particular Series otherwise have any right or claim
against the assets held with respect to any other Series except to the extent
that such Shareholder has such a right or claim hereunder as a Shareholder of
such other Series. The Trustees shall have full discretion, to the extent
not inconsistent with the 1940 Act, to determine which items shall be treated
as income and which items as capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders.
(d) VOTING. All Shares of the Trust entitled to vote on
a matter shall vote separately by Series (and, if applicable, by class): that
is, the Shareholders of each Series (or class) shall have the right to
approve or disapprove matters affecting the Trust and each respective series
(or class) as if the Series (or classes) were separate companies. There are,
however, two exceptions to voting by separate Series (or classes). First, if
the 1940 Act or the Declaration of Trust requires all Shares of the Trust to
be voted in the aggregate without differentiation between the separate Series
(or classes), then all the Trust's Shares shall be entitled to vote on a
one-vote-per-Share basis. Second, if any matter affects only the interests
of some but not all Series (or classes), then only the Shareholders of such
affected Series (or classes) shall be entitled to vote on the matter.
(e) EQUALITY. All the Shares of each particular Series
shall represent an equal proportionate undivided interest in the assets held
with respect to that Series (subject to the liabilities held with respect to
that Series and such rights and preferences as may have been established and
designated with respect to classes of Shares within such Series), and each
Share of any particular Series shall be equal to each other Share of that
Series.
(f) FRACTIONS. Any fractional Share of a Series shall
carry proportionately all the rights and obligations of a whole share of that
Series, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) EXCHANGE PRIVILEGE. The Trustees shall have the
authority to provide that the holders of Shares of any Series shall have the
right to exchange said Shares for Shares of one or more other Series of
Shares in accordance with such requirements and procedures as may be
established by the Trustees.
(h) COMBINATION OF SERIES. The Trustees shall have the
authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities
held with respect to any two or more series into assets and liabilities held
with respect to a single series.
(i) ELIMINATION OF SERIES. At any time that there are no
Shares outstanding of any particular Series (or class) previously established
and designated, the Trustees may by resolution of a majority of the then
Trustees abolish that Series (or class) and rescind the establishment and
designation thereof.
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder
or former 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 Trust against all loss and
expense arising from such claim or demand.
ARTICLE IV.
The Board of Trustees
SECTION 1. NUMBER, ELECTION AND TENURE. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a
written instrument signed, or by resolution approved at a duly constituted
meeting, by a majority of the Board of Trustees, provided, however, that the
number of Trustees shall in no event be less than one (1) nor more than
fifteen (15). The Board of Trustees, by action of a majority of the then
Trustees at a duly constituted meeting, may fill vacancies in the Board of
Trustees or remove Trustees with or without cause. Each Trustee shall serve
during the continued lifetime of the Trust until he or she dies, resigns, is
declared bankrupt or incompetent by a court of appropriate jurisdiction, or
is removed, or, if sooner, until the next meeting of Shareholders called for
the purpose of electing Trustees and until the election and qualification of
his or her successor. Any Trustee may resign at any time by written
instrument signed by him and delivered to any officer of the Trust or to a
meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to
damages on account of such removal. The Shareholders may fix the number of
Trustees and elect Trustees at any meeting of Shareholders called by the
Trustees for that purpose. Any Trustee may be removed at any meeting of
Shareholders by a vote of two-thirds of the outstanding Shares of the Trust.
A meeting of Shareholders for the purpose of electing or removing one or more
Trustees may be called (i) by the Trustees upon their own vote or (ii) upon
the demand of Shareholders owning 10% or more of the Shares of the Trust in
the aggregate.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The
death, declination, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration
of Trust. Whenever a vacancy in the Board of Trustees shall occur, until
such vacancy is filled as provided in Article IV, Section 1, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by this
Declaration of Trust. As conclusive evidence of such vacancy, a written
instrument certifying the existence of such vacancy may be executed by an
officer of the Trust or by a majority of the Board of Trustees. In the event
of the death, declination, resignation, retirement, removal, or incapacity of
all the then Trustees within a short period of time and without the
opportunity for at least one Trustee being able to appoint additional
Trustees to fill vacancies, the Trust's Investment Manager(s) are empowered
to appoint new Trustees subject to the provisions of Section 16(a) of the
1940 Act.
SECTION 3. POWERS. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board
of Trustees, and such Board shall have all powers necessary or convenient to
carry out that responsibility including the power to engage in securities
transactions of all kinds on behalf of the Trust. Trustees in all instances
shall act as principals, and are and shall be free from the control of the
Shareholders. The Trustees shall have full power and authority to do any and
all acts and to make and execute any and all contracts and instruments that
they may consider necessary or appropriate in connection with the
administration of the Trust. Without limiting the foregoing, the Trustees
may: adopt By-Laws not inconsistent with this Declaration of Trust providing
for the regulation and management of the affairs of the Trust and may amend
and repeal them to the extent that such By-Laws do not reserve that right to
the Shareholders; fill vacancies in or remove from their number, and may
elect and remove such officers and appoint and terminate such agents as they
consider appropriate; appoint from their own number and establish and
terminate one or more committees consisting of two or more Trustees which may
exercise the powers and authority of the Board of Trustees to the extent that
the Trustees determine; employ one or more custodians of the assets of the
Trust and may authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for the central
handling of securities or with a Federal Reserve Bank, retain a transfer
agent or a shareholder servicing agent, or both; provide for the issuance and
distribution of Shares by the Trust directly or through one or more Principal
Underwriters or otherwise; redeem, repurchase and transfer Shares pursuant to
applicable law; set record dates for the determination of Shareholders with
respect to various matters; declare and pay dividends and distributions to
Shareholders of each Series from the assets of such Series; establish from
time to time, in accordance with the provisions of Article III, Section 6
hereof, any Series (or class) of Shares, each such Series (or class) to
operate as a separate and distinct investment medium and with separately
defined investment objectives and policies and distinct investment purpose;
and in general delegate such authority as they consider desirable to any
officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian, transfer or shareholder
servicing agent, or Principal Underwriter. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. Unless
otherwise specified or required by law, any action by the Board of Trustees
shall be deemed effective if approved or taken by a majority of the Trustees
then in office. Any action required or permitted to be taken at any meeting
of the Board of Trustees, or any committee thereof, may be taken without a
meeting if all members of the Board of Trustees or committee (as the case may
be) consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of the Board of Trustees, or committee.
Without limiting the foregoing, the Trust shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition
or delivery of fixed income or other securities, and securities of every
nature and kind, including, without limitation, all types of bonds,
debentures, stocks, preferred stocks, negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of deposit
or indebtedness, commercial paper, repurchase agreements, bankers'
acceptances, and other securities of any kind, issued, created guaranteed, or
sponsored by any and all Persons, including, without limitation, states,
territories, and possessions of the United States and the District of
Columbia and any political subdivision, agency, or instrumentality thereof,
any foreign government or any political subdivision of the U.S. Government or
any foreign government, or any international instrumentality, or by any bank
or savings institution, or by any corporation or organization organized under
the laws of the United States or of any state, territory, or possession
thereof, or by any corporation or organization organized under any foreign
law, or in "when issued" contracts for any such securities, to change the
investments of the assets of the Trust; and to exercise any and all rights,
powers, and privileges of ownership or interest in respect of any and all
such investments of every kind and description, including, without
limitation, the right to consent and otherwise act with respect thereto, with
power to designate one or more Persons, to exercise any of said rights,
powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property
rights relating to any or all of the assets of the Trust or any Series,
subject to any requirements of the 1940 Act;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to
execute and deliver proxies or powers of attorney to such person or persons
as the Trustees shall deem proper, granting to such person or persons such
power and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
that it is trust property, whether in bearer, unregistered or other
negotiable form, or in its own name or in the name of a custodian or
subcustodian or a nominee or nominees or otherwise or to authorize the
custodian or a subcustodian or a nominee or nominees to deposit the same in a
securities depository, subject in each case to proper safeguards according to
the usual practice of investment companies or any rules or regulations
applicable thereto;
(f) To consent to, or participate in, any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to
pay calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of
the expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such
insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring
the assets of the Trust or payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters, or independent contractors of the Trust, individually against
all claims and liabilities of every nature arising by reason of holding
Shares, holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such Person
as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust
would have the power to indemnify such Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive
and benefit plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and
agents of the Trust.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall
not be required to obtain any court order to deal with any assets of the
Trust or take any other action hereunder.
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust or Series (or class), or partly out of the principal and partly out of
income, and to charge or allocate the same to, between or among such one or
more of the Series (or class) that may be established or designated pursuant
to Article III, Section 6, as they deem fair, all expenses, fees, charges,
taxes and liabilities incurred or arising in connection with the Trust or
Series (or class), or in connection with the management thereof, including,
but not limited to, the Trustees' compensation and such expenses and charges
for the services of the Trust's officers, employees, investment adviser or
manager, principal underwriter, auditors, counsel, custodian, transfer agent,
Shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or
proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly,
in advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by
the Trustees, by setting off such charges due from such Shareholder from
declared but unpaid dividends owed such Shareholder and/or by reducing the
number of Shares in the account of such Shareholder by that number of full
and/or fractional Shares which represents the outstanding amount of such
charges due from such Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of
the assets of the Trust shall at all times be considered as vested in the
Trust, except that the Trustees shall have power to cause legal title to any
Trust Property to be held by or in the name of one or more of the Trustees,
or in the name of the Trust, or in the name of any other Person as nominee,
on such terms as the Trustees may determine. The right, title and interest
of the Trustees in the Trust Property shall vest automatically in each Person
who may hereafter become a Trustee. Upon the resignation, removal or death of
a Trustee he or she shall automatically cease to have any right, title or
interest in any of the Trust Property, and the right, title and interest of
such Trustee in the Trust Property shall vest automatically in the remaining
Trustees. Such vesting and cessation of title shall be effective whether or
not conveyancing documents have been executed and delivered.
SECTION 7. SERVICE CONTRACTS.
(a) Subject to such requirements and restrictions as nay be set
forth in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any corporation,
trust, association or other organization; and any such contract may contain
such other terms as the Trustees may determine, including without limitation,
authority for the Investment Manager or administrator to determine from time
to time without prior consultation with the Trustees what investments shall
be purchased, held, sold or exchanged and what portion, if any, of the assets
of the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to
such party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter
for the Shares of one or more of the Series (or classes) or other securities
to be issued by the Trust. Every such contract shall comply with such
requirements and restrictions as may be set forth in the By-Laws; and any
such contract may contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series.
Every such contract shall comply with such requirements and restrictions as
may be set forth in the By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any tine and from
time to time, to contract with any entity to provide such other services to
the Trust or one or more of the Series, as the Trustees determine to be in
the best interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, Manager, adviser, Principal Underwriter, distributor,
or affiliate or agent of or for any corporation, trust,
association, or other organization, or for any parent or
affiliate of any organization with which an advisory, management
or administration contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter be
made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory, management or administration
contract or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other type of service contract
may have been or may hereafter be made also has an advisory,
management or administration contract, or principal underwriter's
or distributor's contract, or transfer, shareholder servicing or
other service contract with one or more other corporations,
trust, associations, or other organizations, or has other
business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing
the same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
ARTICLE V.
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. Subject to the provisions of Article
III, Section 6(d), the Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, and
(ii) with respect to such additional matters relating to the Trust as may be
required by this Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote and
each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may
be voted in person or by proxy. A proxy with respect to Shares held in the
name of two or more persons shall be valid if executed by any one of them
unless at or prior to exercise of the proxy the Trust receives a specific
written notice to the contrary from any one of them. A proxy purporting to
be executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger.
SECTION 2. MEETINGS. Meetings of the Shareholders may be called
by the Trustees for the purpose of electing Trustees as provided in Article
IV, Section 1, and for such other purposes as may be prescribed by law, by
this Declaration of Trust or by the By-Laws. Meetings of the Shareholders
may also be called by the Trustees from time to tine for the purpose of
taking action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by
the Trustees. Written notice of any meeting of Shareholders shall be given
or caused to be given by the Trustees in accordance with the By-Laws.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger
quorum is required by applicable law, by the By-Laws or by this Declaration
of Trust, forty percent (40%) of the Shares entitled to vote shall constitute
a quorum at a Shareholders' meeting. When any one or more Series (or
classes) is to vote as a single class separate from any other Shares, forty
percent (40%) of the Shares of each such Series (or classes) entitled to vote
shall constitute a quorum at a Shareholder's meeting of that Series. Any
meeting of Shareholders may be adjourned from time to time by a majority of
the votes properly cast upon the question of adjourning a meeting to another
date and time, whether or not a quorum is present, and the meeting may be
held as adjourned as provided in the By-Laws. Subject to the provisions of
Article III, Section 6(d), when a quorum is present at any meeting, a
majority of the Shares voted shall decide any questions and a plurality shall
elect a Trustee, except when a larger vote is required by any provision of
this Declaration of Trust or the By-Laws or by applicable law.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by
Shareholders may be taken without a meeting if Shareholders holding a
majority of the Shares entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration of Trust or by the By-Laws) and holding a majority (or such
larger proportion as aforesaid) of the Shares of any Series (or class)
entitled to vote separately on the matter consent to the action in writing
and such written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a vote taken
at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the
Shareholders of any Series (or class) who are entitled to vote or act at any
meeting or any adjournment thereof or to give consent to any action without a
meeting, the Trustees may from time to time fix a date, which shall be not
more than ninety (90) days nor less than seven (7) days before the date of
any meeting of Shareholders, as the record date for determining the
Shareholders of such Series (or class) having the right to notice of and to
vote at such meeting and any adjournment thereof, and in such case only
Shareholders of record on such record date shall have such right,
notwithstanding any transfer of Shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any Series
(or class) who are entitled to receive payment of any dividend or of any
other distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such other
payment, as the record date for determining the Shareholders of such Series
(or class) having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series for all
or any part of the period between a record date and a meeting of Shareholders
or the payment of a distribution. Nothing in this Section shall be construed
as precluding the Trustees from setting different record dates for different
Series (or classes).
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include
further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI.
Net Asset Value, Distributions, and Redemptions
SECTION 1. DETERMINATION OF NET ASSET VALUE, NET INCOME, AND
DISTRIBUTIONS. Subject to Article III, Section 6 hereof, the Trustees, in
their absolute discretion, may prescribe and shall set forth in the By-Laws
or in a duly adopted vote of the Trustees such bases and time for determining
the per Share or net asset value of the Shares of any Series or net income
attributable to the Shares of any Series, or the declaration and payment of
dividends and distributions on the Shares of any Series, as they may deem
necessary or desirable.
ARTICLE VII.
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled
to reasonable compensation from the Trust, and they may fix the amount of
such compensation. Nothing herein shall in any way prevent the employment of
any Trustee for advisory, management, legal, accounting, investment banking
or other services and payment for the same by the Trust.
SECTION 2. INDEMNIFICATION AND LIMITATION OF LIABILITY. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Manager or Principal Underwriter
of the Trust, nor shall any Trustee be responsible for the act or omission of
any other Trustee, and the Trust 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 Trust; provided that nothing herein
contained shall indemnify, hold harmless or protect any Trustee from or
against any liability to the Trust 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.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued, executed or done
by or on behalf of the Trust or the Trustees or any of them in connection
with the Trust shall be conclusively deemed to have been issued, executed or
done only in or with respect to their or his or her capacity as Trustees or
Trustee, and such Trustees or Trustee shall not be personally liable thereon.
SECTION 3. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND
OR SURETY. The exercise by the Trustees of their powers and discretion
hereunder shall be binding upon everyone interested. A Trustee shall be
liable to the Trust and to any Shareholder solely for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and shall not be liable for
errors of judgment or mistakes of fact or law. The Trustees may take advice
of counsel or other experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act or omission
in accordance with such advice nor for failing to follow such advice. The
Trustees shall not be required to give any bond as such, nor any surety if a
bond is required.
SECTION 4. INSURANCE. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust
assets insurance for liability and for all expenses reasonably incurred or
paid or expected to be paid by a Trustee in connection with any claim,
action, suit or proceeding in which he or she becomes involved by virtue of
his or her capacity or former capacity with the Trust, whether or not the
Trust would have the power to indemnify him or her against such liability
under the provisions of this Article.
ARTICLE VIII.
Miscellaneous
SECTION 1. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No
Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees
or to see to the application of any payments made or property transferred to
the Trust or upon its order.
SECTION 2. TERMINATION OF TRUST OR SERIES. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The
Trust may be terminated at any time by vote of a majority of the Shares of
each Series entitled to vote, voting separately by Series, or by the Trustees
by written notice to the Shareholders. Any Series may be terminated at any
time by vote of a majority of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities held, severally, with respect to each Series (or the applicable
Series, as the case may be), whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall, in accordance with such
procedures as the Trustees consider appropriate, reduce the remaining assets
held, severally, with respect to each Series (or the applicable Series, as
the case may be), to distributable form in cash or shares or other
securities, or any combination thereof, and distribute the proceeds held with
respect to each Series (or the applicable Series, as the case nay be), to the
Shareholders of that Series, as a Series, ratably according to the number of
Shares of that Series held by the several Shareholders on the date of
termination.
SECTION 3. MERGER AND CONSOLIDATION. The Trustees may cause (i)
the Trust or one or more of its Series to the extent consistent with
applicable law to be merged into or consolidated with another business trust
or any other business entity, (ii) the Shares of the Trust or any Series to
be converted into beneficial interests in another business trust (or series
thereof) created pursuant to this Section 3 of Article VIII, or (iii) the
Shares to be exchanged under or pursuant to any state or federal statute to
the extent permitted by law. Such merger or consolidation, Share conversion
or Share exchange must be authorized by vote of a majority of the outstanding
Shares of the Trust, as a whole, or any affected Series, as may be
applicable; provided that in all respects not governed by statute or
applicable law, the Trustees shall have power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or
consolidation including the power to create one or more separate business
trusts to which all or any part of the assets, liabilities, profits or losses
of the Trust may be transferred and to provide for the conversion of Shares
of the Trust or any Series into beneficial interests in such separate
business trust or trusts (or series thereof).
SECTION 4. AMENDMENTS. This Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by a
majority of the then Trustees and, if required, by approval of such amendment
by Shareholders in accordance with Article V, Section 3 hereof. Any such
restatement and/or amendment hereto shall be effective immediately upon
execution and approval. The Certificate of Trust of the Trust may be
restated and/or amended by a similar procedure, and any such restatement
and/or amendment shall be effective immediately upon filing with the Office
of the Secretary of State of the State of Delaware or upon such future date
as may be stated therein.
SECTION 5. FILING OF COPIES, REFERENCES, HEADINGS. The original
or a copy of this instrument and of each restatement and/or amendment hereto
shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on
a copy certified by an officer of the Trust to be a copy of this instrument
or of any such restatements and/or amendments. In this instrument and in any
such restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer
to this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is
used herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument
may be executed in any number of counterparts each of which shall be deemed
an original.
SECTION 6. APPLICABLE LAW. This Declaration of Trust is created
under and is to be governed by and construed and administered according to
the laws of the State of Delaware and the Delaware Business Trust Act, as
amended from time to time (the "Act"). The Trust shall be a Delaware
business trust pursuant to such Act, and without limiting the provisions
hereof, the Trust may exercise all powers which are ordinarily exercised by
such a business trust.
SECTION 7. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of the Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code of 1986, as amended (or any
successor statute) or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of the
Declaration of Trust; provided, however, that such determination shall not
affect any of the remaining provisions of the Declaration of Trust or render
invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or
any other provision of the Declaration of Trust in any jurisdiction.
SECTION 8. BUSINESS TRUST ONLY. It is the intention of the
Trustees to create a business trust pursuant to the Act and thereby to create
only the relationship of trustee and beneficial owners within the meaning of
the Act between the Trustees and each Shareholder. It is not the intention
of the Trustees to create a general partnership, limited partnership, joint
stock association, corporation, bailment, or any form of legal relationship
other than a business trust pursuant to the Act. Nothing in this Declaration
of Trust shall be construed to make the Shareholders, either by themselves or
with the Trustees, partners or members of a joint stock association.
SECTION 9. USE OF THE NAME "FRANKLIN". The name "Franklin" and
all rights to the use of the name "Franklin" belongs to Franklin Resources,
Inc. ("Franklin"), the sponsor of the Trust. Franklin has consented to the
use by the Trust of the identifying word "Franklin" and has granted to the
Trust a non-exclusive license to use the name "Franklin" as part of the name
of the Trust and the name of any Series of Shares. In the event Franklin or
an affiliate of Franklin is not appointed as Manager and/or Principal
Underwriter or ceases to be the Manager and/or Principal Underwriter of the
Trust or of any Series using such names, the non-exclusive license granted
herein may be revoked by Franklin and the Trust shall cease using the name
"Franklin" as part of its name or the name of any Series of Shares, unless
otherwise consented to by Franklin or any successor to its interests in such
names.
ARTICLE IX.
Certain Transactions
Notwithstanding any other provision of the Declaration of Trust
to the contrary and subject to the exception provided in this Article IX, the
transactions described in this Article IX shall require the affirmative vote
or consent of the holders of sixty-six and two-thirds percent (66_%) of the
outstanding Shares. Notwithstanding any other provision in the Declaration
of Trust, such affirmative vote shall be in addition to, and not in lieu of,
the vote or consent of the Shareholders otherwise required by law (including
any separate vote by Series (or class) that may be required by the 1940 Act),
by the terms of any Series (or class) that is now or hereafter authorized, or
between the Trust and any national securities exchange.
For purposes of this Article IX, the term "Principal Shareholder"
shall mean any Person or group (within the meaning of Rule 13d-5 under the
Securities Exchange Act of 1934), which is the beneficial owner, directly or
indirectly, of more than five percent (5%) of the outstanding Shares of the
Trust and shall include any affiliate or associate, as such terms are defined
in clause (2) below, of a Principal Shareholder. For the purposes of this
Article IX, in addition to the Shares which a Person or group beneficially
owns directly, any Person or group shall be deemed to be the beneficial owner
of any Shares (1) which it has the right to acquire pursuant to any agreement
or upon exercise of conversion rights or warrants, or otherwise or (2) which
are beneficially owned, directly or indirectly (including Shares deemed owned
through application of clause (1) above), by any other Person or group with
which it or its "affiliate" or "associate," as those terms are defined in
Rule 12b-2 under the Securities Exchange Act of 1934, has any agreement,
arrangement, or understanding for the purpose of acquiring, holding, voting,
or disposing of Shares, or which is its "affiliate" or "associate" as so
defined. For purposes of this Article IX, calculation of the outstanding
Shares shall not include Shares deemed owned through application of clause
(1) above.
This Article IX shall apply to the following transactions:
1. Merger, consolidation or statutory Share exchange of the
Trust with or into any other business trust or other business entity;
2. Issuance of any securities of the Trust to any Person for
cash;
3. Sale, lease, or exchange of all or any substantial part of
the assets of the Trust to any Person (except assets having an aggregate fair
market value of less than $1,000,000); or
4. Sale, lease, or exchange to the Trust, in exchange for
securities of the Trust, of any assets of any Person (except assets having an
aggregate fair market value of less than $1,000,000).
The provisions of this Article IX shall not apply to any
transaction described above if the Board of Trustees authorizes such
transaction by an affirmative vote of a majority of the Trustees, including a
majority of the Trustees who are not "interested persons" of the Trust, as
that term is defined in the 1940 Act.
IN WITNESS WHEREOF, the Trustees named below do hereby make and
enter into this Declaration of Trust as of the 13TH day of MAY , 1997.
/S/ FRANK H. ABBOTT, III /S/ CHARLES B. JOHNSON
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Frank H. Abbott, III Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404
/S/ HARRIS J. ASHTON /S/ RUPERT H. JOHNSON, JR.
- ---------------------------- --------------------------
Harris J. Ashton Rupert H. Johnson, Jr.
Metro Center, 1 Station Place 777 Mariners Island Blvd.
Stamford, CT 06904 San Mateo, CA 94404
/S/ S. JOSEPH FORTUNATO /S/ FRANK W.T. LAHAYE
- ---------------------------- ---------------------
S. Joseph Fortunato Frank W.T. LaHaye
Park Avenue at Morris County 20833 Stevens Creek Blvd.
P.O. Box 1945 Suite 102
Morristown, NJ 07962-1945 Cupertino, CA 95104
/S/ DAVID W. GARBELLANO /S/ GORDON S. MACKLIN
- ---------------------------- ---------------------
David W. Garbellano Gordon S. Macklin
111 New Montgomery St. #402 8212 Burning Tree Road
San Francisco, CA 94105 Bethesda, MD 20817
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 777 Mariners
Island Boulevard, San Mateo, California 94403-7777
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: Amended 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. An
Early Withdrawal Charge may be paid to you for those Shares redeemed by an
investor within the first twelve(12)months after purchase at the rate of 1% of
the lesser of the net asset value of the tendered Shares on the repurchase
pricing date or the net asset value at the time of purchase.
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: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Harmon E. Burns
-------------------
Harmon E. Burns
Executive Vice President
DATED: July 1, 1998
DEALER AGREEMENT
Effective: March 1, 1998
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to
participate in the distribution of shares of the Franklin Templeton
investment companies (the "Funds") for which we now or in the future serve as
principal underwriter, subject to the terms of this Agreement. We will notify
you from time to time of the Funds which are eligible for distribution and
the terms of compensation under this Agreement. This Agreement supersedes any
prior dealer agreements between us, as stated in Section 18, below.
1. LICENSING.
(a) You represent that you are (i) a member in good standing of the
National Association of Securities Dealers, Inc. ("NASD") and are presently
licensed to the extent necessary by the appropriate regulatory agency of each
jurisdiction in which you will offer and sell shares of the Funds, or (ii) a
broker, dealer or other company licensed, registered or otherwise qualified to
effect transactions in securities in a country (a "foreign country") other than
the United States of America (the "U.S.") where you will offer or sell shares of
the Funds. You agree that termination or suspension of such membership with the
NASD, or of your license to do business by any regulatory agency having
jurisdiction, at any time shall terminate or suspend this Agreement forthwith
and shall require you to notify us in writing of such action. If you are not a
member of the NASD but are a broker, dealer or other company subject to the laws
of a foreign country, you agree to conform to the Conduct Rules of the NASD.
This Agreement is in all respects subject to the Conduct Rules of the NASD,
particularly Conduct Rule 2830 of the NASD, which shall control any provision to
the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at any time you are
not a member in good standing of the Securities Investor Protection Corporation
("SIPC").
2. SALES OF FUND SHARES. You may offer and sell shares of each Fund and class of
each Fund only at the public offering price which shall be applicable to, and in
effect at the time of, each transaction. The procedures relating to all orders
and the handling of them shall be subject to the terms of the applicable then
current prospectus and statement of additional information (hereafter, the
"prospectus") and new account application, including amendments, for each such
Fund and each class of such Fund, and our written instructions from time to
time. This Agreement is not exclusive, and either party may enter into similar
agreements with third parties.
3. DUTIES OF DEALER: You agree:
(a) To act as principal, or as agent on behalf of your customers, in all
transactions in shares of the Funds except as provided in Section 4 hereof. You
shall not have any authority to act as agent for the issuer (the Funds), for the
Principal Underwriter, or for any other dealer in any respect, nor will you
represent to any third party that you have such authority or are acting in such
capacity.
(b) To purchase shares only from us or from your customers.
(c) To enter orders for the purchase of shares of the Funds only from us
and only for the purpose of covering purchase orders you have already received
from your customers or for your own bona fide investment.
(d) To maintain records of all sales, redemptions and repurchases of shares
made through you and to furnish us with copies of such records on request.
(e) To distribute prospectuses and reports to your customers in compliance
with applicable legal requirements, except to the extent that we expressly
undertake to do so on your behalf.
(f) That you will not withhold placing customers' orders for shares so as
to profit yourself as a result of such withholding or place orders for shares in
amounts just below the point at which sales charges are reduced so as to benefit
from a higher sales charge applicable to an amount below the breakpoint.
(g) That if any shares confirmed to you hereunder are repurchased or
redeemed by any of the Funds within seven business days after such confirmation
of your original order, you shall forthwith refund to us the full concession,
allowed to you on such orders, including any payments we made to you from our
own resources as provided in Section 6(b) hereof with respect to such orders. We
shall forthwith pay to the appropriate Fund the share, if any, of the sales
charge we retained on such order and shall also pay to such Fund the refund of
the concession we receive from you as herein provided (other than the portion of
such concession we paid to you from our own resources as provided in Section
6(b) hereof). We shall notify you of such repurchase or redemption within a
reasonable time after settlement. Termination or suspension of this Agreement
shall not relieve you or us from the requirements of this subsection.
(h) That if payment for the shares purchased is not received within the
time customary or the time required by law for such payment, the sale may be
canceled without notice or demand and without any responsibility or liability on
our part or on the part of the Funds, or at our option, we may sell the shares
which you ordered back to the Funds, in which latter case we may hold you
responsible for any loss to the Funds or loss of profit suffered by us resulting
from your failure to make payment as aforesaid. We shall have no liability for
any check or other item returned unpaid to you after you have paid us on behalf
of a purchaser. We may refuse to liquidate the investment unless we receive the
purchaser's signed authorization for the liquidation.
(i) That you shall assume responsibility for any loss to the Funds caused
by a correction made subsequent to trade date, provided such correction was not
based on any error, omission or negligence on our part, and that you will
immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered, instructions in proper
form, including outstanding certificates, are not received within the time
customary or the time required by law, the redemption may be canceled forthwith
without any responsibility or liability on our part or on the part of any Fund,
or at our option, we may buy the shares redeemed on behalf of the Fund, in which
latter case we may hold you responsible for any loss to the Fund or loss of
profit suffered by us resulting from your failure to settle the redemption.
(k) To obtain from your customers all consents required by applicable
privacy laws to permit us, any of our affiliates or the Funds to provide you
either directly or through a service established for that purpose with
confirmations, account statements and other information about your customers'
investments in the Funds.
4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with orders for the
purchase of shares on behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone, or wire, you
shall act as agent for the custodian or trustee of such plans (solely with
respect to the time of receipt of the application and payments), and you shall
not place such an order until you have received from your customer payment for
such purchase and, if such purchase represents the first contribution to such a
plan, the completed documents necessary to establish the plan and enrollment in
the plan. You agree to indemnify us and Franklin Templeton Trust Company and/or
Templeton Funds Trust Company as applicable for any claim, loss, or liability
resulting from incorrect investment instructions received from you which cause a
tax liability or other tax penalty.
5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from you any conditional
orders for shares of any of the Funds. Delivery of certificates or confirmations
for shares purchased shall be made by the Funds only against constructive
receipt of the purchase price, subject to deduction for your concession and our
portion of the sales charge, if any, on such sale. No certificates for shares of
the Funds will be issued unless specifically requested.
6. DEALER COMPENSATION.
(a) On each purchase of shares by you from us, the total sales charges and
your dealer concessions shall be as stated in each Fund's then current
prospectus, subject to NASD rules and applicable laws. Such sales charges and
dealer concessions are subject to reductions under a variety of circumstances as
described in the Funds' prospectuses. For an investor to obtain these
reductions, we must be notified at the time of the sale that the sale qualifies
for the reduced charge. If you fail to notify us of the applicability of a
reduction in the sales charge at the time the trade is placed, neither we nor
any of the Funds will be liable for amounts necessary to reimburse any investor
for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or our affiliates may,
but are not obligated to, make payments to you from our own resources as
compensation for certain sales which are made at net asset value ("Qualifying
Sales"). If you notify us of a Qualifying Sale, we may make a contingent advance
payment up to the maximum amount available for payment on the sale. If any of
the shares purchased in a Qualifying Sale are repurchased or redeemed within
twelve months of the month of purchase, we shall be entitled to recover any
advance payment attributable to the repurchased or redeemed shares by reducing
any account payable or other monetary obligation we may owe to you or by making
demand upon you for repayment in cash. We reserve the right to withhold advances
to you, if for any reason we believe that we may not be able to recover unearned
advances from you. Termination or suspension of this Agreement shall not relieve
you or us from the requirements of this subsection.
7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of shares of the Funds
will be made at the net asset value of such shares, less any applicable deferred
sales or redemption charges, in accordance with the applicable prospectuses.
Except as permitted by applicable law, you agree not to purchase any shares from
your customers at a price lower than the net asset value of such shares next
computed by the Funds after the purchase (the "Redemption/Repurchase Price").
You shall, however, be permitted to sell shares of the Funds for the account of
the record owner to the Funds at the Redemption/Repurchase Price for such
shares.
8. EXCHANGES. Telephone exchange orders will be effective only for
uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
9. TRANSACTION PROCESSING. All orders are subject to acceptance by us and by the
Fund or its transfer agent, and become effective only upon confirmation by us.
If required by law, each transaction shall be confirmed in writing on a fully
disclosed basis and if confirmed by us, a copy of each confirmation shall be
sent simultaneously to you if you so request. All sales are made subject to
receipt of shares by us from the Funds. We reserve the right in our discretion,
without notice, to suspend the sale of shares of the Funds or withdraw the
offering of shares of the Funds entirely. Orders will be effected at the
price(s) next computed on the day they are received if, as set forth in the
applicable Fund's current prospectus, the orders are received by us, an agent
appointed by us or the Funds prior to the time the price of the Fund's shares is
calculated. Orders received after that time will be effected at the price(s)
computed on the next business day. All orders must be accompanied by payment in
U.S. Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a
U.S. bank, for the full amount of the investment.
10. MULTIPLE CLASSES. We may from time to time provide to you written compliance
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of shares (each, a "Class") with different sales charges and
distribution related operating expenses. In addition, you will be bound by any
applicable rules or regulations of government agencies or self-regulatory
organizations generally affecting the sale or distribution of shares of
investment companies offering multiple classes of shares.
11. RULE 12B-1 PLANS. You are invited to participate in all distribution plans
(each, a "Plan") adopted for a Class of a Fund or for a Fund that has only a
single Class (each, a "Plan Class") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act").
To the extent you provide administrative and other services, including, but
not limited to, furnishing personal and other services and assistance to your
customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, we shall pay you
a Rule 12b-1 servicing fee. To the extent that you participate in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution fee,
we shall also pay you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing
and distribution fees shall be based on the value of shares attributable to
customers of your firm and eligible for such payment, and shall be calculated on
the basis and at the rates set forth in the compensation schedule then in effect
for the applicable Plan (the "Schedule"). Without prior approval by a majority
of the outstanding shares of a particular Class of a Fund which has a Plan, the
aggregate annual fees paid to you pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in your customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective prospectus).
You shall furnish us and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to you pursuant to
the Schedule of such Plan Fund. We shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of the Rule 12b-1
Directors, or by a vote of a majority of the outstanding shares of the Class
that has such Plan, on sixty (60) days' written notice, without payment of any
penalty. A Plan or the provisions of this Agreement may also be terminated by
any act that terminates the Underwriting Agreement between us and the Fund that
has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.
Continuation of a Plan and provisions of this Agreement relating to such
Plan are conditioned on Rule 12b-1 Directors being ultimately responsible for
selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that such Plan will benefit the Plan Class. Absent such
yearly determination, such Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. You agree to waive payment of any amounts payable to you
by us under a Fund's Plan until such time as we are in receipt of such fee from
the Fund.
The provisions of the Plans between the Plan Funds and us shall control
over the provisions of this Agreement in the event of any inconsistency.
12. REGISTRATION OF SHARES. Upon request, we shall notify you of the states or
other jurisdictions in which each Fund's shares are currently noticed,
registered or qualified for offer or sale to the public. We shall have no
obligation to make notice filings of, register or qualify, or to maintain notice
filings of, registration of or qualification of, Fund shares in any state or
other jurisdiction. We shall have no responsibility, under the laws regulating
the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.
13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13 relates solely to
shares of Funds that represent a beneficial interest in the Franklin Floating
Rate Trust and shares issued by any other continuously offered closed-end
investment company registered under the 1940 Act for which we or an affiliate of
ours serve as principal underwriter and that periodically repurchases its shares
(each, a "Trust"). Shares of a Trust that are offered to the public will be
registered under the 1933 Act, and are expected to be offered during an offering
period that may continue indefinitely ("Continuous Offering Period"). There is
no guarantee that such a continuous offering will be maintained by a Trust. The
Continuous Offering Period, shares of a Trust and certain of the terms on which
such shares are offered shall be as described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, we may, but are not
obligated to, provide you with appropriate compensation for selling shares of
the Trust. In addition, you may be entitled to a fee for servicing your clients
who are shareholders in a Trust, subject to applicable law and NASD Conduct
Rules. You agree that any repurchases of shares of a Trust that were originally
purchased as Qualifying Sales shall be subject to Subsection 6(b) hereof.
You expressly acknowledge and understand that, notwithstanding anything to
the contrary in this Agreement:
(a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
you.
(b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by us and no secondary market for such shares exists currently, or
is expected to develop. Any representation as to a repurchase or
tender offer by a Trust, other than that set forth in the Trust's then
current prospectus, notification letters, reports or other related
material provided by the Trust, is expressly prohibited.
(c) An early withdrawal charge payable by shareholders of a Trust to us
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
(d) In the event your customer cancels his or her order for shares of a
Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.
14. FUND INFORMATION. No person is authorized to give any information or make
any representations concerning shares of any Fund except those contained in the
Fund's then current prospectus or in materials issued by us as information
supplemental to such prospectus. We will supply reasonable quantities of
prospectuses, supplemental sales literature, sales bulletins, and additional
information as issued by the Fund or us. You agree not to use other advertising
or sales material relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by us in
advance of such use. Such approval may be withdrawn by us in whole or in part
upon notice to you, and you shall, upon receipt of such notice, immediately
discontinue the use of such sales literature, sales material and advertising.
You are not authorized to modify or translate any such materials without our
prior written consent.
15. INDEMNIFICATION. You agree to indemnify, defend and hold harmless us, the
Funds, and the respective officers, directors and employees of the Funds and us
from any and all losses, claims, liabilities and expenses arising out of (1) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the U.S. or any state or foreign country) or
any alleged tort or breach of contract, in or related to the offer or sale by
you of shares of the Funds pursuant to this Agreement (except to the extent that
our negligence or failure to follow correct instructions received from you is
the cause of such loss, claim, liability or expense), (2) any redemption or
exchange pursuant to telephone instructions received from you or your agents or
employees, or (3) the breach by you of any of the terms and conditions of this
Agreement. This Section 15 shall survive the termination of this Agreement.
16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party to this Agreement
may terminate its participation in this Agreement by giving written notice to
the other parties. Such notice shall be deemed to have been given and to be
effective on the date on which it was either delivered personally to the other
parties or any officer or member thereof, or was mailed postpaid or delivered by
electronic transmission to the other parties' chief legal officers at the
addresses shown herein or in the most recent NASD Manual. This Agreement shall
terminate immediately upon the appointment of a Trustee under the Securities
Investor Protection Act or any other act of insolvency by you. The termination
of this Agreement by any of the foregoing means shall have no effect upon
transactions entered into prior to the effective date of termination. A trade
placed by you subsequent to your voluntary termination of this Agreement will
not serve to reinstate the Agreement. Reinstatement, except in the case of a
temporary suspension of a dealer, will be effective only upon written
notification by us to you. This Agreement will terminate automatically in the
event of its assignment by us. For purposes of the preceding sentence, the word
"assignment" shall have the meaning given to it in the 1940 Act. This Agreement
may not be assigned by you without our prior written consent. This Agreement may
be amended by us at any time by written notice to you and your placing of an
order or acceptance of payments of any kind after the effective date and receipt
of notice of any such Amendment shall constitute your acceptance of such
Amendment.
17. SETOFF; DISPUTE RESOLUTION. Should any of your concession accounts with us
have a debit balance, we may offset and recover the amount owed to us or the
Funds from any other account you have with us, without notice or demand to you.
In the event of a dispute concerning any provision of this Agreement, either
party may require the dispute to be submitted to binding arbitration under the
commercial arbitration rules of the NASD or the American Arbitration
Association. Judgment upon any arbitration award may be entered by any court
having jurisdiction. This Agreement shall be construed in accordance with the
laws of the State of California, not including any provision that would require
the general application of the law of another jurisdiction.
18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative and supersedes
any agreement previously in effect. It shall be binding upon the parties hereto
when signed by us and accepted by you. If you have a current dealer agreement
with us, your first trade or acceptance of payments from us after your receipt
of this Agreement, as it may be amended pursuant to Section 16, above, shall
constitute your acceptance of its terms. Otherwise, your signature below shall
constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue
St. Petersburg, Florida 33701-3628
813/823-8712
- --------------------------------------------------------------------------------
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
__________________________________
DEALER NAME:
By _______________________________
(Signature)
Name:_____________________________
Title: ___________________________
Address: ______________________________
_______________________________________
_______________________________________
Telephone: _______________________
NASD CRD # _______________________
- --------------------------------------------------------------------------------
Franklin Templeton Dealer # ______________________
(Internal Use Only)
- --------------------------------------------------------------------------------
Version 12/31/97
232567.4
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16
Dear Securities Dealer:
This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Section 6 is modified to add a subsection 6(c), as follows:
(c) The following limitations apply with respect to shares of each Trust as
described in Section 13 of this Agreement.
(1) Consistent with the NASD Conduct Rules, the total compensation to
be paid to us and selected dealers and their affiliates, including you and your
affiliates, in connection with the distribution of shares of a Trust will not
exceed the underwriting compensation limitation prescribed by NASD Conduct Rule
2710. The total underwriting compensation to be paid to us and selected dealers
and their affiliates, including you and your affiliates, may include: (i) at the
time of purchase of shares a payment to you or another securities dealer of 1%
of the dollar amount of the purchased shares by the Distributor; and (ii) a
quarterly payment at an annual rate of .50% to you or another securities dealer
based on the value of such remaining shares sold by you or such securities
dealer, if after twelve (12) months from the date of purchase, the shares sold
by you or such securities dealer remain outstanding.
(2) The maximum compensation shall be no more than as disclosed in the
section "Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
--------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
MUTUAL FUND PURCHASE AND SALES AGREEMENT
FOR ACCOUNTS OF BANK AND TRUST COMPANY CUSTOMERS
EFFECTIVE: APRIL 1, 1998
1. INTRODUCTION
The parties to this Agreement are the undersigned bank or trust company
("Bank") and Franklin/Templeton Distributors, Inc. ("FTDI"). This Agreement sets
forth the terms and conditions under which FTDI will execute purchases and
redemptions of shares of the Franklin or Templeton investment companies or
series of such investment companies for which FTDI now or in the future serves
as principal underwriter (each, a "Fund"), at the request of the Bank upon the
order and for the account of Bank's customers ("Customers"). In this Agreement,
"Customer" shall include the beneficial owners of an account and any agent or
attorney-in-fact duly authorized or appointed to act on the owners' behalf with
respect to the account; and "redemptions" shall include redemptions of shares of
Funds that are open-end management investment companies and repurchases of
shares of Funds that are closed-end investment companies by the Fund that is the
issuer of such shares. FTDI will notify Bank from time to time of the Funds
which are eligible for distribution and the terms of compensation under this
Agreement. This Agreement is not exclusive, and either party may enter into
similar agreements with third parties.
2. REPRESENTATIONS AND WARRANTIES OF BANK
Bank warrants and represents to FTDI and the Funds that:
a) Bank is a "bank" as defined in section 3(a)(6) of the Securities
Exchange Act of 1934, as amended (the "1934 Act");
b) Bank is authorized to enter into this Agreement as agent for the
Customers, and Bank's performance of its obligations and receipt of
consideration under this Agreement will not violate any law,
regulation, charter, agreement, or regulatory restriction to which
Bank is subject; and
c) Bank has received all regulatory agency approvals and taken all legal
and other steps necessary for offering the services Bank will provide
to Customers and receiving any applicable compensation in connection
with this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL UNDERWRITER
FTDI warrants and represents to Bank that:
a) FTDI is a broker/dealer registered under the 1934 Act; and
b) FTDI is the principal underwriter of the Funds.
4. COVENANTS OF BANK
a) For each purchase or redemption transaction under this Agreement
(each, a "Transaction"), Bank will:
1) be authorized to engage in the Transaction;
2) act as agent for the Customer, unless Bank is the Customer;
3) act solely at the request of and for the account of the Customer,
unless Bank is the Customer;
4) not submit an order unless Bank has already received the order
from the Customer, unless Bank is the Customer;
5) not offer to sell shares of Fund(s) or submit a purchase order
unless Bank has already delivered to the Customer a copy of the
then current prospectuses for the Fund(s) whose shares are
offered or are to be purchased;
6) not withhold placing any Customer's order for the purpose of
profiting from the delay or place orders for shares in amounts
just below the point at which sales charges are reduced so as to
benefit from a higher Fee (as defined in Paragraph 5(e) below)
applicable to a Transaction in an amount below the breakpoint;
7) have no beneficial ownership of the securities in any purchase
Transaction (the Customer will have the full beneficial
ownership), unless Bank is the Customer (in which case, Bank will
not engage in the Transaction unless the Transaction is legally
permissible for Bank);
8) not accept or withhold any Fee (as defined in Paragraph 5(e) of
this Agreement) otherwise allowed under Paragraphs 5(d) and (e)
of this Agreement, if prohibited by the Employee Retirement
Income Security Act of 1974, as amended, or trust or similar laws
to which Bank is subject, in the case of Transactions of Fund
shares involving retirement plans, trusts, or similar accounts;
9) maintain records of all Transactions of Fund shares made through
Bank and furnish FTDI with copies of such records on request; and
10) distribute prospectuses, statements of additional information and
reports to Customers in compliance with applicable legal
requirements, except to the extent that FTDI expressly undertakes
to do so on behalf of Bank.
b) While this Agreement is in effect, Bank will:
1) not purchase any Fund shares from any person at a price lower
than the redemption or repurchase price as applicable next
determined by the applicable Fund;
2) repay FTDI the full Fee received by Bank under Paragraphs 5(d)
and (e) of this Agreement, and any payments FTDI or its
affiliates made to Bank from their own resources under Paragraph
5(e) of this Agreement ("FTDI Payments"), for any Fund shares
purchased under this Agreement which are redeemed or repurchased
by the Fund within 7 business days after the purchase; in turn,
FTDI shall pay to the Fund the amount repaid by Bank (other than
any portion of such repayment that is a repayment of FTDI
Payments) and will notify Bank of any such redemption within a
reasonable time (termination or suspension of this Agreement
shall not relieve Bank or FTDI from the requirements of this
subparagraph);
3) in connection with orders for the purchase of Fund shares on
behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone,
or wire, act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application
and payments) and shall not place such an order until Bank has
received from its Customer payment for such purchase and, if such
purchase represents the first contribution to such a plan, the
completed documents necessary to establish the plan and
enrollment in the plan (Bank agrees to indemnify FTDI and
Franklin Templeton Trust Company and/or Templeton Funds Trust
Company as applicable for any claim, loss, or liability resulting
from incorrect investment instructions received from Bank which
cause a tax liability or other tax penalty);
4) be responsible for compliance with all laws and regulations,
including those of the applicable federal and state bank and
securities regulatory authorities, with regard to Bank and Bank's
Customers; and
5) obtain from its Customers any consents required by applicable
federal and/or state privacy laws to permit FTDI, any of its
affiliates or the Funds to provide Bank with confirmations,
account statements and other information about Customers'
investments in the Funds.
5. TERMS AND CONDITIONS FOR TRANSACTIONS
a) Price
Purchase orders for Fund shares received from Bank will be accepted only at
the public offering price and in compliance with procedures applicable to each
purchase order as set forth in the then current prospectus and statement of
additional information (hereinafter, collectively, "prospectus") for the
applicable Fund. All purchase orders must be accompanied by payment in U.S.
Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a U.S.
bank, for the full amount of the investment. All sales are made subject to
receipt of shares by FTDI from the Funds. FTDI reserves the right in its
discretion, without notice, to suspend the sale of shares or withdraw the
offering of shares entirely.
b) Orders and Confirmations
All orders are subject to acceptance or rejection by FTDI and by the Fund
or its transfer agent at their sole discretion, and become effective only upon
confirmation by FTDI. Transaction orders shall be made using the procedures and
forms required by FTDI from time to time. Orders received by FTDI or an agent
appointed by FTDI or the Funds on any business day after the time for
calculating the price of Fund shares as set forth in each Fund's current
prospectus will be effected at the price determined on the next business day. No
order will be accepted unless Bank or the Customer shall have provided FTDI with
the Customer's full name, address and other information normally required by
FTDI to open a customer account, and FTDI shall be entitled to rely on the
accuracy of the information provided by Bank. A written confirming statement
will be sent to Bank and to Customer upon settlement of each Transaction.
c) Multiple Class Guidelines
FTDI may from time to time provide to Bank written compliance guidelines or
standards relating to the sale or distribution of Funds offering multiple
classes of shares (each, a "Class") with different sales charges and
distribution-related operating expenses. Bank will comply with FTDI's written
compliance guidelines and standards, as well as with any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of investment companies offering multiple
classes of shares, whether or not Bank deems itself otherwise subject to such
rules or regulations.
d) Payments by Bank for Purchases
On the settlement date for each purchase, Bank shall either (i) remit the
full purchase price by wire transfer to an account designated by FTDI, or (ii)
following FTDI's procedures, wire the purchase price less the Fee allowed by
Paragraph 5(e) of this Agreement. Twice monthly, FTDI will pay Bank Fees not
previously paid to or withheld by Bank. Each calendar month, FTDI, as
applicable, will prepare and mail an activity statement summarizing all
Transactions.
e) Fees and Payments
Where permitted by the prospectus for a Fund, a charge, concession, or fee
(each of the foregoing forms of compensation, a "Fee") may be paid to Bank,
related to services provided by Bank in connection with Transactions in shares
of such Fund. The amount of the Fee, if any, is set by the relevant prospectus.
Adjustments in the Fee are available for certain purchases, and Bank is solely
responsible for notifying FTDI when any purchase or redemption order is
qualified for such an adjustment. If Bank fails to notify FTDI of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither FTDI nor any of the Funds will be liable for amounts necessary
to reimburse any Customer for the reduction which should have been effected.
In accordance with the Funds' prospectuses, FTDI or its affiliates may, but
are not obligated to, make payments from their own resources to Bank as
compensation for certain sales that are made at net asset value ("Qualifying
Sales"). If Bank notifies FTDI of a Qualifying Sale, FTDI may make a contingent
advance payment up to the maximum amount available for payment on the sale. If
any of the shares purchased in a Qualifying Sale are redeemed or repurchased
within twelve months of the month of purchase, FTDI shall be entitled to recover
any advance payment attributable to the redeemed or repurchased shares by
reducing any account payable or other monetary obligation FTDI may owe to Bank
or by making demand upon Bank for repayment in cash. FTDI reserves the right to
withhold any one or more advances, if for any reason FTDI believes that FTDI may
not be able to recover unearned advances. Termination or suspension of this
Agreement does not relieve Bank from the requirements of this paragraph.
f) Rule 12b-1 Plans
Bank is also invited to participate in all distribution plans (each, a
"Plan") adopted for a Class of a Fund or for a Fund that has only a single Class
(each, a "Plan Class") pursuant to Rule 12b-1 under the Investment Company Act
of 1940, as amended (the "1940 Act").
To the extent Bank provides administrative and other services, including,
but not limited to, furnishing personal and other services and assistance to
Customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, FTDI shall pay
Bank a Rule 12b-1 servicing fee. To the extent that Bank participates in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution
fee,FTDI shall also pay Bank a Rule 12b-1 distribution fee. All Rule 12b-1
servicing and distribution fees shall be based on the value of shares
attributable to Customers and eligible for such payment, and shall be calculated
on the basis and at the rates set forth in the compensation schedule then in
effect for the applicable Plan (the "Schedule"). Without prior approval by a
majority of the outstanding shares of a particular Class of a Fund, the
aggregate annual fees paid to Bank pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in Customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective Prospectus).
Bank shall furnish FTDI and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to Bank pursuant to
the Schedule of such Plan Fund. FTDI shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of Rule 12b-1 Directors
of the Fund that has such Plan, or by a vote of a majority of the outstanding
shares of the Class that has such Plan on sixty (60) days' written notice,
without payment of any penalty. A Plan or the provisions of this Agreement may
also be terminated by any act that terminates the Underwriting Agreement between
FTDI and the Fund that has such Plan, and/or the management or administration
agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc.
or their affiliates and such Plan Fund. In the event of the termination of a
Plan for any reason, the provisions of this Agreement relating to such Plan will
also terminate.
Continuation of a Plan and the provisions of this Agreement relating to
such Plan are conditioned on Rule 12b-1 Directors being ultimately responsible
for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that the Plan will benefit the Plan Class. Absent such
yearly determination, a Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. Bank agrees to waive payment of any amounts payable to
Bank by FTDI under a Fund's Plan until such time as FTDI is in receipt of such
fee from the Fund.
The provisions of the Plans between the Plan Funds and FTDI shall control
over the provisions of this Agreement in the event of any inconsistency.
g) Other Distribution Services
From time to time, FTDI may offer telephone and other augmented services in
connection with Transactions under this Agreement. If Bank uses any such
service, Bank will be subject to the procedures applicable to the service,
whether or not Bank has executed any agreement required for the service.
h) Conditional Orders; Certificates
FTDI will not accept any conditional Transaction orders. Delivery of
certificates or confirmations for shares purchased shall be made by a Fund only
against constructive receipt of the purchase price, subject to deduction of any
Fee and FTDI's portion of the sales charge, if any, on such sale. No
certificates for shares of the Funds will be issued unless specifically
requested.
i) Cancellation of Orders
If payment for shares purchased is not received within the time customary
or the time required by law for such payment, the sale may be canceled without
notice or demand, and neither FTDI nor the Fund(s) shall have any responsibility
or liability for such a cancellation; alternatively, at FTDI's option, the
unpaid shares may be sold back to the Fund, and Bank shall be liable for any
resulting loss to FTDI or to the Fund(s). FTDI shall have no liability for any
check or other item returned unpaid to Bank after Bank has paid FTDI on behalf
of a purchaser. FTDI may refuse to liquidate the investment unless FTDI receives
the purchaser's signed authorization for the liquidation.
j) Order Corrections
Bank shall assume responsibility for any loss to a Fund(s) caused by a
correction made subsequent to trade date, provided such correction was not based
on any error, omission or negligence on FTDI's part, and Bank will immediately
pay such loss to the Fund(s) upon notification.
k) Redemptions; Cancellation
Redemptions or repurchases of shares will be made at the net asset value of
such shares, less any applicable deferred sales or redemption charges, in
accordance with the applicable prospectuses. If Bank sells shares for the
account of the record owner to the Funds, Bank shall be deemed to represent to
FTDI that Bank is doing so as agent for the Customer and that Bank is authorized
to do so in such capacity. Such sales to the Funds shall be at the redemption or
repurchase price then currently in effect for such shares. If on a redemption
which Bank has ordered, instructions in proper form, including outstanding
certificates, are not received within the time customary or the time required by
law, the redemption may be canceled forthwith without any responsibility or
liability on the part of FTDI or any Fund, or at the option of FTDI, FTDI may
buy the shares redeemed on behalf of the Fund, in which latter case FTDI may
hold Bank responsible for any loss to the Fund or loss of profit suffered by
FTDI resulting from Bank's failure to settle the redemption.
l) Exchanges
Telephone exchange orders will be effective only for uncertificated shares
or for which share certificates have been previously deposited and may be
subject to any fees or other restrictions set forth in the applicable
prospectuses. Exchanges from a Fund sold with no sales charge to a Fund which
carries a sales charge, and exchanges from a Fund sold with a sales charge to a
Fund which carries a higher sales charge may be subject to a sales charge in
accordance with the terms of the applicable Fund's prospectus. Bank will be
obligated to comply with any additional exchange policies described in the
applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
m) Qualification of Shares; Indemnification
Upon request, FTDI shall notify Bank of the states or other jurisdictions
in which each Fund's shares are currently noticed, registered or qualified for
offer or sale to the public. FTDI shall have no obligation to make notice
filings of, register or qualify, or to maintain notice filings of, registration
of or qualification of, Fund shares in any state or other jurisdiction. FTDI
shall have no responsibility, under the laws regulating the sale of securities
in any U.S. or foreign jurisdiction, for the registration, qualification or
licensed status of Bank or any of its agents or sub-agents in connection with
the purchase or sale of Fund shares or for the manner of offering, sale or
purchase of Fund shares. Except as stated in this paragraph, FTDI shall not, in
any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by FTDI in this Agreement
shall be implied. If it is necessary to file notice of, register or qualify
shares of any Fund in any country, state or other jurisdiction having authority
over the purchase or sale of Fund shares that are purchased by a Customer, it
will be Bank's responsibility to arrange for and to pay the costs of such notice
filing, registration or qualification; prior to any such notice filing,
registration or qualification, Bank will notify FTDI of its intent and of any
limitations that might be imposed on the Funds, and Bank agrees not to proceed
with such notice filing, registration or qualification without the written
consent of the applicable Funds and of FTDI. Nothing in this Agreement shall be
deemed to be a condition, stipulation, or provision binding any person acquiring
any security to waive compliance with any provision of the Securities Act of
1933, as amended (the "1933 Act"), the 1934 Act, the 1940 Act, the rules and
regulations of the U.S. Securities and Exchange Commission, or any applicable
laws or regulations of any government or authorized agency in the U.S. or any
other country having jurisdiction over the offer or sale of shares of the Funds,
or to relieve the parties hereto from any liability arising under such laws,
rules or regulations.
Bank further agrees to indemnify, defend and hold harmless FTDI, the Funds,
their officers, directors and employees from any and all losses, claims,
liabilities and expenses, arising out of (1) any alleged violation of any
statute or regulation (including without limitation the securities laws and
regulations of the United States of America or any state or foreign country) or
any alleged tort or breach of contract, in or related to any offer, sale or
purchase of shares of the Funds involving Bank or any Customer pursuant to this
Agreement (except to the extent that FTDI's negligence or failure to follow
correct instructions received from Bank is the cause of such loss, claim,
liability or expense), (2) any redemption or exchange pursuant to telephone
instructions received from Bank or its agents or employees, or (3) the breach by
Bank of any of the terms and conditions of this Agreement. This Paragraph 5(m)
shall survive the termination of this Agreement.
n) Prospectus and Sales Materials; Limit on Advertising
No person is authorized to give any information or make any representations
concerning shares of any Fund except those contained in the Fund's current
prospectus or in materials issued by FTDI as information supplemental to such
prospectus. FTDI will supply prospectuses, reasonable quantities of supplemental
sale literature, sales bulletins, and additional information as issued. Bank
agrees not to use other advertising or sales material or other material or
literature relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by FTDI
in advance of such use. Such approval may be withdrawn by FTDI in whole or in
part upon notice to Bank, and Bank shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales material and
advertising. Bank is not authorized to modify or translate any such materials
without the prior written consent of FTDI.
o) Customer Information
1) DEFINITION. For purposes of this Paragraph 5(o), "Customer
Information" means customer names and other identifying
information pertaining to one or more Customers which is
furnished by Bank to FTDI in the ordinary course of business
under this Agreement. Customer Information shall not include any
information obtained from any sources other than the Customer or
the Bank.
2) PERMITTED USES. FTDI may use Customer Information to fulfill its
obligations under this Agreement, the Distribution Agreements
between the Funds and FTDI, the Funds' prospectuses, or other
duties imposed by law. In addition, FTDI or its affiliates may
use Customer Information in communications to shareholders to
market the Funds or other investment products or services,
including without limitation variable annuities, variable life
insurance, and retirement plans and related services. FTDI may
also use Customer Information if it obtains Bank's prior written
consent.
3) PROHIBITED USES. Except as stated above, FTDI shall not disclose
Customer Information to third parties, and shall not use Customer
Information in connection with any advertising, marketing or
solicitation of any products or services, provided that Bank
offers or soon expects to offer comparable products or services
to mutual fund customers and has so notified FTDI.
4) SURVIVAL; TERMINATION. The agreements described in this paragraph
5(o) shall survive the termination of this Agreement, but shall
terminate as to any account upon FTDI's receipt of valid
notification of either the termination of that account with Bank
or the transfer of that account to another bank or dealer.
6. CONTINUOUSLY OFFERED CLOSED-END FUNDS
This Paragraph 6 relates solely to shares of Funds that represent a
beneficial interest in the Franklin Floating Rate Trust or that are issued by
any other continuously offered closed-end investment company registered under
the 1940 Act for which FTDI or an affiliate of FTDI serves as principal
underwriter and that periodically repurchases its shares (each, a "Trust").
Shares of a Trust being offered to the public will be registered under the 1933
Act and are expected to be offered during an offering period that may continue
indefinitely ("Continuous Offering Period"). There is no guarantee that such a
continuous offering will be maintained by the Trust. The Continuous Offering
Period, shares of a Trust and certain of the terms on which such shares are
being offered are more fully described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, FTDI shall provide Bank
with appropriate compensation for purchases of shares of the Trust made by the
Bank for the account of Customers or by Customers. In addition, Bank may be
entitled to a fee for servicing Customers who are shareholders in a Trust,
subject to applicable law. Bank agrees that any repurchases of shares of a Trust
that were originally purchased as Qualifying Sales shall be subject to Paragraph
5(e) hereof.
Bank expressly acknowledges and understands that, notwithstanding anything
to the contrary in this Agreement:
a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
Bank.
b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by FTDI and no secondary market for such shares exists currently,
or is expected to develop. Any representation as to a repurchase or
tender offer by the Trust, other than that set forth in the Trust's
then current Prospectus, notification letters, reports or other
related material provided by the Trust, is expressly prohibited.
c) An early withdrawal charge payable by shareholders of a Trust to FTDI
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
d) In the event a Customer cancels his or her order for shares of a Trust
after confirmation, such shares will not be repurchased, remarketed or
otherwise disposed of by or though FTDI.
7. GENERAL
a) Successors and Assignments
This Agreement shall extend to and be binding upon the parties hereto and
their respective successors and assigns; provided that this Agreement will
terminate automatically in the event of its assignment by FTDI. For purposes of
the preceding sentence, the word "assignment" shall have the meaning given to it
in the 1940 Act. Bank may not assign this Agreement without the advance written
consent of FTDI.
b) Paragraph Headings
The paragraph headings of this Agreement are for convenience only, and
shall not be deemed to define, limit, or describe the scope or intent of this
Agreement.
c) Severability
Should any provision of this Agreement be determined to be invalid or
unenforceable under any law, rule, or regulation, that determination shall not
affect the validity or enforceability of any other provision of this Agreement.
d) Waivers
There shall be no waiver of any provision of this Agreement except a
written waiver signed by Bank and FTDI. No written waiver shall be deemed a
continuing waiver or a waiver of any other provision, unless the waiver
expresses such intention.
e) Sole Agreement
This Agreement is the entire agreement of Bank and FTDI and supersedes all
oral negotiations and prior writings.
f) Governing Law
This Agreement shall be construed in accordance with the laws of the State
of California, not including any provision which would require the general
application of the law of another jurisdiction, and shall be binding upon the
parties hereto when signed by FTDI and accepted by Bank, either by Bank's
signature in the space provided below or by Bank's first trade entered after
receipt of this Agreement.
g) Arbitration
Should Bank owe any sum of money to FTDI under or in relation to this
Agreement for the purchase, sale, redemption or repurchase of any Fund shares,
FTDI may offset and recover the amount owed by Bank to FTDI or the Funds from
any amount owed by FTDI to Bank or from any other account Bank has with FTDI,
without notice or demand to Bank. Either party may submit any dispute under this
Agreement to binding arbitration under the commercial arbitration rules of the
American Arbitration Association. Judgment upon any arbitration award may be
entered by any court having jurisdiction.
h) Amendments
FTDI may amend this Agreement at any time by depositing a written notice of
the amendment in the U.S. mail, first class postage pre-paid, addressed to
Bank's address given below. Bank's placement of any Transaction order or
acceptance of any payments after the effective date and receipt of notice of any
such amendment shall constitute Bank's acceptance of the amendment.
i) Term and Termination
This Agreement shall continue in effect until terminated and shall
terminate automatically in the event that Bank ceases to be a "bank" as set
forth in paragraph 2(a) of this Agreement. FTDI or Bank may terminate this
Agreement at any time by written notice to the other, but such termination shall
not affect the payment or repayment of Fees on Transactions prior to the
termination date. Termination also will not affect the indemnities given under
this Agreement.
j) Acceptance; Cumulative Effect
This Agreement is cumulative and supersedes any agreement previously in
effect. It shall be binding upon the parties hereto when signed by FTDI and
accepted by Bank. If Bank has a current agreement with FTDI, Bank's first trade
or acceptance of payments from FTDI after receipt of this Agreement, as it may
be amended pursuant to paragraph 7(h), above, shall constitute Bank's acceptance
of the terms of this Agreement.
Otherwise, Bank's signature below shall constitute Bank's acceptance of
these terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ Greg Johnson
-----------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal
notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, Florida 33716
813/299-8712
- --------------------------------------------------------------------------------
To the Bank or Trust Company: If you have not previously signed an agreement
with FTDI for the sale of mutual fund shares to your customers, please complete
and sign this section and return the original to us.
BANK OR TRUST COMPANY:
____________________________________
(Bank's name)
By: ____________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Mutual Fund Purchase and Sales Agreement for Accounts of
Bank and Trust Company Customers - Notice Pursuant to Paragraph 7(h)
Dear Bank or Trust Company:
This letter constitutes notice of amendment of the current Mutual Fund Purchase
and Sales Agreement for Accounts of Bank and Trust Company Customers (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("FTDI") and the bank
or trust company ("the Bank") pursuant to Paragraph 7(h) of the Agreement. The
Agreement is hereby amended as follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Paragraph 5(e) is modified to add the following language:
With respect to shares of each Trust as described in Paragraph 6 of this
Agreement, the total compensation to be paid to FTDI and selected dealers and
their affiliates, including the Bank and the Bank's affiliates, in connection
with the distribution of shares of a Trust will not exceed the underwriting
compensation limitation prescribed by NASD Conduct Rule 2710. The total
underwriting compensation to be paid to FTDI and selected dealers and their
affiliates, including the Bank and the Bank's affiliates, may include: (i) at
the time of purchase of shares a payment to the Bank or a securities dealer of
1% of the dollar amount of the purchased shares by FTDI; and (ii) a quarterly
payment at an annual rate of .50% to the Bank or a securities dealer based on
the value of such remaining shares sold by the Bank or such securities dealer,
if after twelve (12) months from the date of purchase, the shares sold by the
Bank or such securities dealer remain outstanding.
The maximum compensation shall be no more than as disclosed in the section
"Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Paragraph 7(h) of the Agreement, the Bank's placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute the Bank's acceptance of this
amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post-Effective Amendment No.
1 to the Registration Statement of Franklin Floating Rate Trust on Form N-2,
File No. 333-65111 of our report dated September 4, 1998, on our audit of the
financial statements and financial highlights of the Franklin Floating Rate
Trust, which report is included in the Annual Report to Shareholders for the
fiscal year ended July 31, 1998, which is incorporated by reference in the
Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
November 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
FLOATING RATE TRUST JULY 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> FRANKLIN FLOATING RATE TRUST
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 145,402,223
<INVESTMENTS-AT-VALUE> 145,585,480
<RECEIVABLES> 21,537,358
<ASSETS-OTHER> 1,512,322
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 168,635,160
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 98,210
<TOTAL-LIABILITIES> 98,210
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 168,333,532
<SHARES-COMMON-STOCK> 16,784,008
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,161
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 183,257
<NET-ASSETS> 168,536,950
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,106,613
<OTHER-INCOME> 0
<EXPENSES-NET> (735,364)
<NET-INVESTMENT-INCOME> 3,370,979
<REALIZED-GAINS-CURRENT> 20,161
<APPREC-INCREASE-CURRENT> 183,257
<NET-CHANGE-FROM-OPS> 3,574,397
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,370,979)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,956,054
<NUMBER-OF-SHARES-REDEEMED> (224,698)
<SHARES-REINVESTED> 52,652
<NET-CHANGE-IN-ASSETS> 168,536,950
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 445,016
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (981,054)
<AVERAGE-NET-ASSETS> 68,826,800
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .480
<PER-SHARE-GAIN-APPREC> .040
<PER-SHARE-DIVIDEND> .000
<PER-SHARE-DISTRIBUTIONS> .480
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.040
<EXPENSE-RATIO> 1.320<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>ANNUALIZED; EXPENSE RATIO INCLUDING WAIVER 1.76%
</TABLE>
