As filed with the Securities and Exchange Commission on November 23, 1999.
1933 Act File No. 333-88213
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. / 15 /
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
DEBORAH R. GATZEK, 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, 1999
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) of the Securities Act
of 1933, or
as follows (the following boxes are included on the basis that the Registrant
makes repurchase offers under Rule 23c-3 under the Investment Company Act of
1940 and is making this filing in accordance with Rule 486 under the
Securities Act of 1933):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on December 1, 1999, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)
[ ] 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 _________.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Offering Aggregate Amount of
Being Amount Being Price Offering Registration
Registered Registered Per Unit Price Fee
- -------------------------------------------------------------------------------
Common Stock
par value $0.01 150,000,000 shares(1) $ 9.94 $1,491,000,000 $414,498.00(2)
- -------------------------------------------------------------------------------
(1) Previously registered
(2) Calculated pursuant to Rule 457(d) based on the net asset value per share
of $9.94 as of September 28, 1999.
PROSPECTUS
FRANKLIN FLOATING RATE TRUST
INVESTMENT STRATEGY
INCOME
DECEMBER 1, 1999
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 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, 1999, 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 63 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.
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 320,000,000 Common Shares. Common Shares are
offered at a price equal to the next determined Net Asset Value per share,
which, as of November 8, 1999, was $9.92 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 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 proceeds to the fund of the offering of the 150,000,000 Common Shares most
recently registered by the fund are estimated at $1,491,000,000 and, subject to
expenses of issuance and distribution and any repurchases, will be invested by
the fund over the course of the continuous offering.
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. The fund will
send to its shareholders a written notification about each Tender Offer at the
beginning of the Tender Offer. A Tender Offer is expected to conclude near the
end of every three months after the end of December 1999. Please see "Periodic
Offers By the Fund to Repurchase Common Shares From Shareholders."
1. The expenses of issuance and distribution for such Common Shares are
estimated at $7,404,370 which includes, in addition to other expenses,
$1,380,612 for government and self-regulatory organization filing fees and
$5,921,758 for accounting and transfer agent fees. The fund incurred
organizational expenses that remain a liability of the fund and are gradually
reduced in equal installments over a period of 60 months from the date the fund
commenced investment operations on October 10, 1997. The remaining liability, as
of December 1, 1999, is $62,900 and the amount of the monthly reduction is
$1,850. The foregoing expenses that are incurred during the annual period as
described in "Expense Summary" below are included in the total annual fund
operating expenses described in such summary.
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?......................... 30
Who Manages the Fund?................................................ 36
Portfolio Transactions By the Fund................................... 38
Investment Performance Information .................................. 18
How to Buy Common Shares............................................. 39
Periodic Offers By the Fund to Repurchase
Common Shares From Shareholders...................................... 43
Early Withdrawal Charge.............................................. 48
Exchanges............................................................ 51
Dividends and Distributions to Shareholders ......................... 52
How Taxation Affects the Fund and Its Shareholders................... 54
Description of Common Shares......................................... 55
Transaction Procedures and Special Requirements...................... 58
Services to Help You Manage Your Account............................. 61
What If I Have Questions About My Account?........................... 62
Additional General Information....................................... 63
Table of Contents of
Statement of Additional Information.................................. 63
Useful Terms and Definitions......................................... 63
APPENDIX
Description of Ratings............................................... 67
FRANKLIN
FLOATING RATE
TRUST
DECEMBER 1, 1999
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)
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, 1999. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES1
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%2
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE
TO COMMON SHARES)
Management fees ........................................... 0.80%
Other expenses ............................................ 0.66%3
-------
Total annual fund operating expenses ...................... 1.46%3
=======
1. If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
2. 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."
3. For the fiscal year ended July 31, 1999, FT Services had agreed in advance to
limit its administration fees. With this reduction, other expenses were 0.59%
and total annual fund operating expenses were 1.39%. FT Services may end this
arrangement at any time upon notice to the Board.
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.......... $15 $46 $80 $175
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............. $25
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The audit
report covering the period shown below is incorporated by reference in the SAI
and appears in the fund's Annual Report to Shareholders for the fiscal year
ended July 31, 1999. The Annual Report to Shareholders also includes more
information about the fund's performance. For a free copy, please call Fund
Information.
YEAR ENDED JULY 31,
-----------------------
1999 1998 1
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year .................. 10.04 10.00
-----------------------
Net investment income .............................. .70 .48
Net realized and unrealized gains (losses) ......... (.06) .04
-----------------------
Total from investment operations .................... .64 .52
-----------------------
Distributions from net investment income ........... (.70) (.48)
-----------------------
Net asset value, end of year ........................ 9.98 10.04
=======================
Total return (%)2 ................................... 6.62 5.33
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) ................. 1,106,363 168,537
Ratios to average net assets: (%)
Expenses ........................................... 1.39 1.32 3
Expenses excluding waiver and payments by affiliate 1.46 1.76 3
Net investment income .............................. 6.93 6.06 3
Portfolio turnover rate (%) ......................... 63.29 45.3 2
1October 10, 1997 (effective date) to July 31, 1998.
2Total return does not reflect the Early Withdrawal Charge and is not
annualized.
3Annualized.
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 makes quarterly Tender Offers to repurchase Common
Shares from shareholders. The fund imposes a 1% Early Withdrawal Charge on the
repurchase proceeds of Common Shares that are held for less than twelve months.
Certain waivers of this charge may apply. See "How to Buy Common Shares,"
"Periodic Offers by the Fund to Repurchase Common Shares From Shareholders" 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 Corporation Loans or Assignments of Corporate Loans. Corporate Debt
Securities 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, 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."
The fund may invest up to 100% of its portfolio in Corporate Loans or Corporate
Debt Securities, which may be high yield, high risk, debt securities which are
rated less than investment grade. These entail Default and other risks greater
than those associated with higher-rated securities. 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." However, 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." 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."
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, to a limited extent, 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 originator 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 an 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 may be able to invest in Corporate
Loans only through Participation Interests or Assignments at certain times when
reduced direct investment opportunities in Corporate Loans 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. Where the Borrower is a privately held company, 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 $218 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 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 Borrowers and U.S. subsidiaries of foreign
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
and certain custody and settlement risks 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 10% 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."
LIMITATIONS ON 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
may from time to time have only limited availability. Consequently, 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. Limitations on the 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 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, with the exception noted below, the fund has no current intention of
investing more than 20% of its assets in the obligations of Borrowers in any
single industry. The fund will invest more than 25% (and may invest up to 100%)
of its total assets in the securities of the following industry group:
commercial banks, thrift institutions, insurance companies and finance
companies. The fund may invest at these levels because the fund regards the
issuers of the Corporate Loans in which the fund may invest to include the Agent
Bank that administers the Corporate Loan, and any Intermediate Participant, as
well as the Borrower. The availability of Corporate Loans, Participation
Interests, Assignments and Corporate Debt Securities may from time to time
reduce the fund's ability to readily comply with this investment policy. See
"Other Investment Policies - Non-Concentration in a Single Industry." This means
that 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 who files for protection under Chapter 11 of the U.S. Bankruptcy Code.
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 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.
LEVERAGE AND BORROWINGS. Subject to certain limits, the fund is authorized to
borrow money and has arranged a credit facility with a bank, which permits it to
borrow funds to make repurchases of shares in Tender Offers for Common Shares or
to meet unfunded commitments in connection with investments. However, the fund
will only borrow money under this facility for temporary, extraordinary or
emergency purposes. Under the 1940 Act, the fund is required with respect to all
borrowings to maintain minimum asset coverage of at least 300% immediately
following any such borrowing and on an ongoing basis as a condition of declaring
dividends and repurchasing 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 that 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 Limitations on 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. 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.
The manager uses its credit analysis to select Corporate Loans and Corporate
Debt Securities that are suitable for investment by the fund. 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 types of debt obligations other than Corporate Loans or Corporate Debt
Securities, 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 (other than Corporate Loans and Corporate Debt
Securities) and cash and cash equivalents 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.
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 rise, the value of a fixed-income
portfolio can be expected to fall. 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 10% of its total assets in the obligations of any single Borrower. For
purposes of the diversification requirements, the fund regards the issuer of a
Corporate Loan in which the fund may invest to include both the Borrower
involved in a Corporate Loan and the Agent Bank that administers the Corporate
Loan. 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 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 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 an
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.
Opportunities for direct investments in Corporate Loans and to a lesser degree,
of investments in Participation Interests or Assignments may, from time to time,
be limited. The fund may not be able to invest in Corporate Loans other than
through Participation Interests or Assignments. Due to these possible
limitations on supply, there is a risk that the fund may not be able to invest
65% or more of its total assets as described above.
The Lenders or the Agent Bank may have an 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 - Limitations on Availability
of Corporate Loans, Participation Interests, Assignments and Corporate Debt
Securities."
The SEC has for some time been 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
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 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.
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.
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
that 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.
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.
There is also 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 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. With the
exception noted below, the fund does not currently intend to invest more than
20% of its assets in the obligations of Borrowers in any single industry. 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 fund may invest at these levels because the
fund regards the issuers of the Corporate Loans in which the fund may invest to
include the Agent Bank that administers the Corporate Loan, and any Intermediate
Participant, as well as the Borrower. 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 and has arranged a credit
facility with a bank, which permits it to borrow funds to make repurchases of
shares in Tender Offers for Common Shares or to meet unfunded commitments in
connection with investments. 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. Under the 1940 Act, the fund is required with
respect to all borrowings to maintain minimum asset coverage of at least 300%
immediately following any such borrowing and on an ongoing basis as a condition
of declaring dividends and repurchasing shares. The fund may also issue one or
more series of preferred shares, but it does not currently intend to do so. See
"What Are the Risks of Investing in the Fund? - Effects of Leverage."
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the bank or broker-dealer, including possible
delays or restrictions upon the fund's ability to sell the underlying
securities. The fund will enter into repurchase agreements only with parties who
meet certain creditworthiness standards, i.e., banks or broker-dealers that the
manager has determined present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
transaction.
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."
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 and has arranged a
credit facility with a bank, which permits it to borrow funds to meet unfunded
commitments in connection with investments or to make repurchases of shares in
Tender Offers for Common Shares. However, the fund will only borrow money under
this facility for temporary, extraordinary or emergency purposes. See "Periodic
Offers By the Fund to Repurchase Common Shares From Shareholders." Under the
1940 Act, the fund is required with respect to all borrowings to maintain
minimum asset coverage of at least 300% immediately following any such borrowing
and on an ongoing basis as a condition of declaring dividends and repurchasing
shares.
There is a risk that the costs of borrowing may exceed the income and
appreciation, if any, on assets acquired with the borrowed funds. 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 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.
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 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., and do not honor legal rights enjoyed in the U.S. In certain
foreign countries, the financial institutions with which the fund deals may have
custody and 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) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, 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 its impact on
fund performance. To the extent the fund holds non-U.S. dollar (euro or other)
denominated securities, it will still be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. 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.
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 one of the factors the 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 be more susceptible to Year 2000 risks and
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 in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will 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 fund's performance.
Please see page 37 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 $218 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, 1999, management fees
totaled 0.80% of the average net assets of the fund.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the fund. Under its agreement with the fund, FT Services is
entitled to a monthly fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal year ended July 31, 1999, administration fees, before
any advance waiver totaled 0.14%. Under an agreement by FT Services to limit its
fees, the fund paid administration fees totaling 0.07%. The administrator may
end this arrangement at any time upon notice to the Board. 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 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 8, 1999,
the Net Asset Value per share for Common Shares was $9.92. 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 in a subsequent Tender Offer. This inadvertent acquisition may 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 account application, including the
optional shareholder privileges section. By applying for privileges now, you
can avoid the delay and inconvenience of having to send an additional
application to add privileges later. It is important that we receive a
signed application since we will not be able to process any redemptions from
your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check made
payable to the fund.
For additional investments:
Send a check made payable to the fund. Please include your
account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is busy,
call 1-650/312-2000 collect, to receive a wire control
number and wire instructions. You need a new wire
control number every time you wire money into your
account. If you do not have a currently effective wire
control number, we will return the money to the bank,
and we will not credit the purchase to your account.
2. For an initial investment you must also return your signed
application to the fund.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds
and reports the receipt of wired funds to the fund by 3:00
p.m. Pacific time, we will credit the purchase to your
account that day. If we receive your call after 1:00 p.m.
or the bank receives the wire after 3:00 p.m., we will
credit the purchase to your account the following business
day.
- ------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
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. These plans require separate applications and their policies
and procedures may be different than those described 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 $2 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 will pay Securities
Dealers quarterly at an annual rate of 0.50% of the dollar amount invested
in Common Shares and remaining outstanding, beginning immediately after the
Common Shares are purchased.
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 the 1.00% payment 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 will make a
Tender Offer to repurchase a portion of the outstanding Common Shares from
shareholders who request repurchases. The fund will suspend or delay a Tender
Offer only if certain regulatory requirements (described in the notice of the
Tender Offer) are met. See "Suspension or Postponement of Repurchase Offer." 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 will send
to its shareholders a written notification 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
conclude near the end of every calendar quarter each year.
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 sent 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 (Independent Trustees), vote to do so, and only (a) if the Tender
Offer would cause the fund to lose its status as a regulated investment company
under Subchapter M of the Code; (b) for any period during which the NYSE or any
market in which the securities owned by the fund are principally traded is
closed, other than customary weekend and holiday closings, or during which
trading in such market is restricted; (c) for any period during which any
emergency exists as a result of which disposal by the fund of securities owned
by it is not reasonably practicable, or during which it is not reasonably
practicable for the fund fairly to determine its NAV; or (d) for such other
periods as the SEC may by order permit for the protection of shareholders of the
fund. The fund will send to its shareholders notice of any suspension or
postponement and 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 has arranged a credit facility with a bank under which it may borrow to
finance the repurchase of Common Shares through Tenders Offers. Any such
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,
when the fund borrows money for the purpose of financing the repurchase of
Common Shares in 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. 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 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 and held 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 A, Advisor or Class Z only).
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 Templeton Variable Insurance Products Trust 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 A, 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 A shares,
you must have held the originally purchased Class A 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. Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
9. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
10. Accounts managed by the Franklin Templeton Group
11. 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 $2 million or more if the Securities Dealer of record has
waived a payment from Distributors 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 A 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 A 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 A
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 Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. 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 beginning the day after we receive your
money or settlement of a wire trade for purchase of shares, whichever is later,
and continues to accrue until your request that the fund repurchase your shares
is processed after the Repurchase Request Deadline.
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 A SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy Class A 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 SECTION 3 OF THE ACCOUNT
APPLICATION 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.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
TAX CONSIDERATIONS
In general, fund distributions are taxable to you as either ordinary income or
capital gains. This is true whether you reinvest your distributions in
additional Common Shares or receive them in cash. Any capital gains the fund
distributes are taxable to you as long-term capital gains no matter how long you
have owned your shares.
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
A tender of your Common Shares for repurchase or exchange will be a taxable
transaction for federal income tax purposes. In general, the transaction will be
treated as a sale or exchange of your Common Shares, if the repurchase or
exchange (a) completely terminates your interest in the fund, (b) is a
distribution that is "substantially disproportionate," or (c) is treated as a
distribution that is "not essentially equivalent to a dividend." A complete
termination of a shareholder's interest generally requires that the shareholder
dispose of all Common Shares directly owned or attributed to him or her. A
"substantially disproportionate" distribution generally requires a reduction of
more than 20% in the shareholder's proportionate interest in the fund after all
Common Shares are tendered. A distribution "not essentially equivalent to a
dividend" requires that there be a "meaningful reduction" in the shareholder's
interest, which should be the case if the shareholder has a minimal interest in
the fund, exercises no control over fund affairs, and suffers a reduction in his
or her proportionate interest. If, however, a tender of less than all of your
Common Shares does not qualify for sale or exchange treatment, the purchase
proceeds may be treated as a deemed dividend distribution.
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.
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.
Fund distributions and gains from the tender of your Common Shares of the
fund generally will be subject to state and local income tax. Non-U.S.
investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in the fund.
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, for each of the fund's fiscal quarters ending on
the dates set forth below during the two most recent fiscal years of the fund
and since the beginning of the current fiscal year, 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
January 31, 1999 $ 9.98 $ 9.91
April 30, 1999 $ 9.96 $ 9.91
July 31, 1999 $ 9.99 $ 9.94
October 31, 1999 $10.04 $ 9.92
As of November 8, 1999, the Net Asset Value per share for Common Shares was
$9.92.
The following table sets forth certain information with respect to Common Shares
as of November 8, 1999:
(4)
(3) AMOUNT OUTSTANDING
(1) (2) AMOUNT HELD BY EXCLUSIVE OF AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED FUND FOR OWN ACCOUNT SHOWN UNDER (3)
- -------------------------------------------------------------------------------
Common Shares of
beneficial interest Unlimited N/A 151,542,153.49
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 $100,000 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
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CORPORATION Corporate Resolution
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PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
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TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
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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. The
minimum investment to open an account with an automatic investment plan is $50.
To sign up, complete the appropriate section of your account application. 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 Shareholder Services.
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 A shares of another Franklin
Templeton Fund at a discount. You also may 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 A 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 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 P.O. Box 997151, Sacramento, CA 95899-9983. The fund, Distributors and the
manager are located 777 Mariners Island Blvd, P.O. Box 7777, San Mateo, CA
94403-7777. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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?......................... 4
Investment Restrictions.............................................. 4
Officers and Trustees................................................ 5
Investment Management and Other Services............................. 8
How Does the Fund Buy Securities for Its Portfolio?.................. 9
How Do I Buy and Exchange Common Shares?............................. 9
How Are Common Shares Valued?........................................ 10
Additional Information on Distributions and Taxes.................... 11
The Fund's Underwriter............................................... 13
How Does the Fund Measure Performance?............................... 13
Miscellaneous Information............................................ 16
Financial Statements................................................. 17
Useful Terms and Definitions......................................... 17
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 A, CLASS B, CLASS C, 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 A 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 Assignments of Corporate Loans.
DECLARATION OF TRUST - The Agreement and Declaration of Trust of the fund, 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 is a wholly owned subsidiary of Resources. The SAI lists the
fund's 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 that
have been held for less than twelve months and that are repurchased by the fund
in a Tender Offer. 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 Templeton
Variable Insurance Products Trust, 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.
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
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 is a wholly owned subsidiary 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 also may 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, 1999
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ............................... 2
What Are the Risks of Investing in the Fund? ....................... 4
Investment Restrictions ............................................ 4
Officers and Trustees .............................................. 5
Investment Management and Other Services ........................... 8
How Does the Fund Buy
Securities for Its Portfolio? ..................................... 9
How Do I Buy and Exchange Common Shares? ........................... 9
How Are Common Shares Valued? ...................................... 10
Additional Information on Distributions and Taxes .................. 11
The Fund's Underwriter ............................................. 13
How Does the Fund Measure Performance? ............................. 13
Miscellaneous Information .......................................... 16
Financial Statements ............................................... 17
Useful Terms and Definitions ....................................... 17
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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 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, 1999, 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?
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 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 counterparty's outstanding debt
obligations are investment grade. 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.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 331/3% of the value of the fund's total assets, measured at
the time of the most recent loan. 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 borrower must maintain with the
fund's custodian collateral (consisting of any combination of cash, securities
issued by the U.S. government and its agencies and instrumentalities, or
irrevocable letters of credit) with a value at least equal to 100% of the
current market value of the loaned securities. The fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund also continues to receive any distributions paid on
the loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
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 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.
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.
WARRANTS AND OTHER EQUITY SECURITIES 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 other investment activities.
EFFECTS OF LEVERAGE - PREFERRED SHARES 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 issuing additional classes of securities may exceed
the income and appreciation, if any, on assets acquired with the 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 offerings include interest payments, fees and
dividends. 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 preferred stock that has Floating Interest Rates.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
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.
INVESTMENT RESTRICTIONS
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
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 name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
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) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
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), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (metal mill products) (July 1999-present); director
or trustee, as the case may be, of 24 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 (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin 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 48 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; 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 51 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
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); 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),
Digital Transmission Systems, Inc. (wireless communications) and Quarterdeck
Corporation (software firm), and General Partner, Peregrine Associates, which
was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 47 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 (54)
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 Investment Advisory
Services, Inc. and 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 51 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer 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, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton 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 51 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 52 of the investment
companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
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 (42)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.
Edward V. McVey (62)
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 board member is considered an "interested person" 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 a
board meeting. Noninterested trustees also may 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 the Franklin Templeton Group of
Funds.
NUMBER OF
BOARDS
IN THE
TOTAL FEES FRANKLIN
RECEIVED TEMPLETON
FROM THE GROUP
FRANKLIN OF FUNDS
TEMPLETON ON WHICH
GROUP EACH
NAME OF FUNDS* SERVES**
- --------------------------------------------------------------------------
Frank H. Abbott, III $166,614 27
Harris J. Ashton $361,157 47
S. Joseph Fortunato $367,835 49
Edith E. Holiday $211,400 24
Frank W.T. LaHaye $171,536 27
Gordon S. Macklin $361,157 47
*For the calendar year ended December 31, 1998.
**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 53 registered investment companies, with approximately 156 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 5, 1999, the officers and Board members, as a group, owned of
record and beneficially approximately 51,132 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
INVESTMENT MANAGER AND SERVICE 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.
The fund pays the manager a fee equal to an annual rate of 0.80% of the average
daily net assets of the fund. The fee is computed daily according to the terms
of the management agreement.
For the last two fiscal years ended July 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- -------------------------------------
1999 4,152,679 1
1998 282,909 2
1. Management fees before any advance waiver totaled $4,175,244. Under an
agreement by the manager to reduce its fees to reflect reduced services
resulting from the fund's investments in a Franklin Templeton money fund, the
fund paid the management fees shown.
2. For the period from October 10, 1997 to July 31, 1998. Management fees before
any advance waiver totaled $445,016. Under an agreement by the manager to limit
its fees, the fund paid the management fees shown.
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.
The fund pays FT Services a monthly fee equal to an annual rate of 0.15% of the
fund's average daily net assets up to $200 million, 0.135% of average daily net
assets over $200 million up to $700 million, 0.10% of average daily net assets
over $700 million up to $1.2 billion, and 0.075% of average daily net assets
over $1.2 billion.
During the last two fiscal years ended July 31, the fund paid FT Services the
following administration fees:
ADMINISTRATION
FEES PAID ($)
- -----------------------------------------
1999 361,404 1
1998 0 2
1. Administration fees before any advance waiver totaled $734,572. Under an
agreement by FT Services to limit its fees, the fund paid the administration
fees shown.
2. For the period from October 10, 1997 to July 31, 1998. Administration fees
before any advance waiver totaled $83,313. Under an agreement by FT Services to
waive its fees, the fund paid the administration fees shown.
SHAREHOLDER SERVICING AGENT. The fund will 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 will 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 year
ended July 31, 1999, the auditor's services consisted of rendering an opinion on
the financial statements of the fund included in the fund's Annual Report to
Shareholders for the fiscal year ended July 31, 1999.
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 allows 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, also may 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. To recapture 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 year ended July 31, 1999, the fund paid no brokerage
commissions.
As of July 31, 1999, 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 generally are 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. We may deduct any applicable banking charges
imposed by the bank from your account.
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 also may 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 dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
Common Shares. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities 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 of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held Common Shares for a full year, the fund may designate and distribute 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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. 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 shareholders. 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or to pay them in January, in which case you must treat them as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
TENDER OFFERS OF COMMON 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 or short-term, generally
depending on how long you have held your Common Shares. 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 buy 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
buy.
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 percentage 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 Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income consists
of 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 calendar year qualified for such
deduction, and it is anticipated that none of the current year's dividends will
so qualify.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by 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 $344,379 for the fiscal
year ended July 31, 1999. This entire amount was received in connection with
payments of the Early Withdrawal Charge on 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. The average annual total returns for the indicated
periods ended July 31, 1999, were:
SINCE
INCEPTION
(10/10/97)
1 YEAR (%) (%)
- -------------------------------------------------------
5.62 6.63
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, income dividends and capital gain distributions are reinvested
at Net Asset Value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 cumulative total
returns for the indicated periods ended July 31, 1999, were:
SINCE
INCEPTION
(10/10/97)
1 YEAR (%) (%)
- -----------------------------------------------------
5.62 12.29
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, 1999, was 7.10%.
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, 1999, was 6.99%.
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 also may 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 that are actively traded on the secondary market.
f) Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average is a
combination of the Dow Jones Industrial Average (30 blue-chip stocks that are
generally leaders in their industry), the Dow Jones Transportation Average (20
transportation stocks), and the Dow Jones Utilities Average (15 utility stocks
involved in the production of electrical energy).
g) Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
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 also may 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 fall.
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 4 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 $218 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 105 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 Shares.
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.
YEAR 2000. The Information Services & Technology division of Resources
established a Year 2000 Project Team in 1996. This team has been making
necessary software changes to help the computer systems that service the fund
and its 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 also developing
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 and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended July 31, 1999, are
incorporated herein by reference (are legally a part of this SAI).
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 A 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 fund, which
is the basic charter document of the fund
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. This SAI lists the fund's 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 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 Templeton
Variable Insurance Products Trust, 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.
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, 1999, 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 in Part B by reference to
the Registrant's Annual Report to Shareholders dated July 31,
1999 as filed with the SEC on Form N-30D on September
29, 1999:
(i) Financial Highlights
(ii) Statement of Investments, July 31, 1999
(iii) Statement of Assets and Liabilities - July 31, 1999
(iv) Statement of Operations - for the year ended July 31,
1999
(v) Statements of Changes in Net Assets - for the years
ended July 31, 1999 and 1998
(vi) Statement of Cash Flows - for the year ended July 31,
1999
(vii) Reconciliation of Net Investment Income to Net Cash
Provided by Operations - for the year ended July 31,
1999
(viii) Notes to Financial Statements
(ix) Independent Auditors' Report
(2) Exhibits:
The following exhibits are incorporated by reference herein, except
exhibits h(iii) and (n) which are attached hereto.
(a) (i) Agreement and Declaration of Trust dated May 13, 1997
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-2
File No. 333-65111
Filing Date: November 24, 1998
(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) 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
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-2
File No. 333-65111
Filing Date: November 24, 1998
(ii) Form of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-2
File No. 333-65111
Filing Date: November 24, 1998
(iii) Amendment of Amended Distribution Agreement dated
January 12, 1999
(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) Opinion and Consent of Counsel
Filing: Registration Statement on Form N-2
File No. 333-65111
Filing Date: October 1, 1999
(m) Not Applicable
(n) Consent of Independent Auditors
(o) Not Applicable
(p) 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 March 16, 1999
Filing: Registration Statement on Form N-2
File No. 333-88213
Filing Date: October 1, 1999
(ii) Certificate of Secretary dated March 16, 1999
Filing: Registration Statement on Form N-2
File No. 333-88213
Filing Date: October 1, 1999
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 issuance and distribution of the 150,000,000
shares of Registrant being registered in this registration statement under the
Securities Act of 1933, other than underwriting discounts and commissions.
SEC/NASD/Blue Sky fees $525,773
Printing and Engraving Expenses 12,000
Legal Fees 37,500
Audit Fees 37,500
Accounting/Transfer Agent Fees 5,921,758
Mailing Expenses 15,000
----------
Total $6,549,531
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
32,835 record holders as of October 31, 1999
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 23rd
day of November, 1999.
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 23, 1999
Rupert H. Johnson, Jr. Executive Officer
MARTIN L. FLANAGAN* Principal Financial November 23, 1999
Martin L. Flanagan Officer
DIOMEDES LOO-TAM* Principal Accounting November 23, 1999
Diomedes Loo-Tam Officer
FRANK H. ABBOTT, III* Trustee November 23, 1999
Frank H. Abbott, III
HARRIS J. ASHTON* Trustee November 23, 1999
Harris J. Ashton
S. JOSEPH FORTUNATO* Trustee November 23, 1999
S. Joseph Fortunato
EDITH E. HOLIDAY* Trustee November 23, 1999
Edith E. Holiday
CHARLES B. JOHNSON* Trustee & Chairman November 23, 1999
Charles B. Johnson of the Board
FRANK W. T. LAHAYE* Trustee November 23, 1999
Frank W. T. LaHaye
GORDON S. MACKLIN* Trustee November 23, 1999
Gordon S. Macklin
*By: /S/ Leiann Nuzum
Leiann Nuzum
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 *
of Trust dated May 13, 1997
EX-99.2(a)(ii) Certificate of Trust dated May 13, 1997 *
EX-99.2(b) 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 *
Registrant and Franklin/Templeton
Distributors, Inc. dated July 1, 1998
EX-99.2(h)(ii) Forms of Dealer Agreements *
between Franklin/Templeton
Distributors, Inc. and
Securities Dealers
EX-99.2(h)(iii) Amendment of Amended Distribution Attached
Agreement dated January 12, 1999
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) Opinion and Consent *
of Counsel
EX-99.2(n) Consent of Independent Attached
Auditors
EX-99.2(p) Letter of Investment *
Intent dated September
16, 1997
EX-99.2(s)(i) Power of Attorney dated *
March 16, 1999
EX-99.2(s)(ii) Certificate of Secretary dated *
March 16, 1999
*Incorporated by Reference
FRANKLIN FLOATING RATE TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are
registered under the Securities Act of 1933, as amended (the "1933 Act"). You
have informed us that your company is registered as a broker-dealer under the
provisions of the Securities Exchange Act of 1934, as amended (the "1934 Act")
and that your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to you
by a resolution of our 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 of you or your related organizations, were present and voted in
favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any provision
of the Agreement, the Amendment provision supersedes the Agreement provision.
The Agreement and the Amendment together constitute the entire agreement between
the parties hereto and supersede all prior oral or written agreements between
the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following sentences
at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan applicable
to Class B Shares (the "Class B Plan") is divided into a distribution
fee and a service fee, each of which fees is in compensation for
different services to be rendered to the Fund. Subject to the
termination provisions in the Class B Plan, the distribution fee with
respect to the sale of a Class B Share shall be earned when such Class
B Share is sold and shall be payable from time to time as provided in
the Class B Plan. The distribution fee payable to you as provided in
the Class B Plan shall be payable without offset, defense or
counterclaim (it being understood by the parties hereto that nothing in
this sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance Company
Limited ("LFL") or other persons providing funds to you to cover
expenses referred to in Section 2(a) of the Class B Plan and to cause
our custodian to pay the service fee to you for payment to dealers or
others or directly to others to cover expenses referred to in Section
2(b) of the Class B Plan.
We understand that you intend to assign your right to receive certain
distribution fees with respect to Class B Shares to LFL in exchange for
funds that you will use to cover expenses referred to in Section 2(a)
of the Class B Plan. In recognition that we will benefit from your
arrangement with LFL, we agree that, in addition to the provisions of
Section 7 (iii) of the Class B Plan, we will not pay to any person or
entity, other than LFL, any such assigned distribution fees related to
Class B Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding sentence
shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following Subsection
4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of Shares of
each series and class of the Fund as provided in Subsection 4.A. above,
we will cause our shareholder services agent (the "Transfer Agent") to
withhold from redemption proceeds payable to holders of the Shares all
contingent deferred sales charges properly payable by such holders in
accordance with the terms of our then current prospectuses and
statements of additional information (each such sales charge, a
"CDSC"). Upon receipt of an order for redemption, the Transfer Agent
shall direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to pay
over to you or your assigns from the general trust account such CDSCs
properly payable by such holders as promptly as possible after the
settlement date for each such redemption of Shares. CDSCs shall be
payable without offset, defense or counterclaim (it being understood
that nothing in this sentence shall be deemed a waiver by us of any
claim we may have against you.) You may direct that the CDSCs payable
to you be paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the reference
in the second paragraph to "Rules of Fair Practice" with a reference to the
"Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules and
Regulations thereunder.)
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: January 12, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to the Registration Statement of Franklin Floating Rate Trust on Form N-2, File
No. 333-88213, of our report dated September 8, 1999, on our audit of the
financial statements and financial highlights of Franklin Floating Rate Trust,
which report is included in the Annual Report to Shareholders for the year ended
July 31, 1999, filed with the Securities and Exchange Commission pursuant to
section 30(d) of the Investment Company Act of 1940, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
firm under the captions "Financial Highlights" and "Auditor."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
November 23, 1999
