As filed with the Securities and Exchange Commission on May 15, 2000
File No. 811-09869
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
[ X ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
[ X ] Amendment No 1
FRANKLIN FLOATING RATE MASTER TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
777 Mariners Island Boulevard, San Mateo, CA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
650-312-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
MURRAY L. SIMPSON,
777 Mariners Island Boulevard, San Mateo, CA 94404
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
---------------
Please Send A Copy of Communications to:
Merrill R. Steiner, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[__] THIS [POST-EFFECTIVE] AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED [POST-EFFECTIVE AMENDMENT] [REGISTRATION STATEMENT].
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE IMMEDIATELY UPON FILING
UNDER THE INVESTMENT COMPANY ACT OF 1940.
FRANKLIN/TEMPLETON GROUP OF FUNDS
FRANKLIN FLOATING RATE MASTER TRUST
FRANKLIN FLOATING RATE MASTER SERIES
(INVESTMENT STRATEGY: INCOME)
May 15, 2000
FORM N-2, PART A:
RESPONSES TO ITEMS 1 AND 2 HAVE BEEN OMITTED PURSUANT TO PARAGRAPH 3 OF
INSTRUCTION G OF THE GENERAL INSTRUCTIONS TO FORM N-2.
In this Prospectus certain terms begin with capital letters. This means the
term is explained under "Useful Terms and Definitions."
ITEM 3. FEE TABLE
EXPENSE SUMMARY
This table is designed to help the shareholder understand the costs of
investing in the fund. The fund's actual expenses may vary. For additional
information regarding the fees and expenses, please review Item 9 entitled
"Management" on page 22.
A. SHAREHOLDER TRANSACTION EXPENSES AMOUNT
Maximum Sales Charge (Load)
(as a percentage of offering price) None
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Management fees 0.80%
Other expenses* 0.59%
-----
Total annual fund operating expenses 1.39%
-----
- ----------------------------------------------------
*Other expenses are based on estimated amounts for the current fiscal year.
C. Example
Assume the fund's annual return is 5%, operating expenses are as
described above, and the shareholder sells its Common Shares after the number
of years shown. These are projected amounts the shareholder would pay for
each $1,000 that the shareholder invests in Common Shares.
1 YEAR 3 YEARS
------ -------
Assuming no tender of Common Shares
for repurchase by the fund $14 $44
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
the shareholder's account.
RESPONSES TO ITEMS 3.2, 4, 5, 6 AND 7 HAVE BEEN OMITTED PURSUANT TO PARAGRAPH
3 OF INSTRUCTION G OF THE GENERAL INSTRUCTIONS TO FORM N-2.
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT
ITEM 8.1. GENERAL
The Franklin Floating Rate Master Trust (the "Trust") was organized as a
Delaware business trust and filed its Certificate of Trust in the State of
Delaware on November 16, 1999. The Trust is registered as a closed-end
management investment company with the SEC and has one series of shares of
beneficial interest, the Franklin Floating Rate Master Series (the "fund").
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 that any adverse tax consequences would
arise.
ITEM 8.2. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE
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. This investment goal is a fundamental policy of the fund,
which means that the goal 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 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. 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. 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.
INVESTMENT POLICIES
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 senior
secured Corporate Loans and Corporate Debt Securities that are made to, or
issued by, 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 by an NRSRO with the equivalent
of a B or higher rating by S&P or Moody's, 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 such a B rating 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."
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 fund will invest primarily in Corporate Loans and Corporate Debt
Securities that will be secured by collateral, which has been pledged by the
corporation to the Lenders or securityholders of such debt obligations. 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 addition, these secured Corporate Loans and Corporate Debt Securities will
hold the most senior secured position in the capitalization structure of the
corporation. This means that, in case the corporation becomes insolvent, the
Lenders or securityholders of such debt obligations will be paid before other
creditors of the corporation from the assets of the corporation.
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 may invest up to 100% of its portfolio in Corporate Loans or
Corporate Debt Securities that may be high yield, high risk, debt securities
that 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 Baa or lower by 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.
Under normal conditions, the fund may invest up to 35% of its total assets in
certain types of debt obligations other than senior secured 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. 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.
NON-CONCENTRATION IN 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. 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. As a result, the fund is
subject to certain risks associated with such institutions, both individually
and as a group. 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.
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.
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 that are held by a large group of investors.
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. The manager has taken
measures that it believes significantly reduce the fund's exposure to such
risk.
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.
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 country other than the U.S.; (2) at least 50% of the revenue of the
Borrower is generated from goods produced or sold, investments made, or
services performed in a country other than the U.S.; (3) the Borrower is
organized under the laws of a country other than the U.S.; or (4) at least
50% of the assets of the Borrower are situated in a country other than the
U.S. The fund normally invests primarily in U.S. Borrowers, but may invest
up to 65% of its assets in foreign Borrowers in developed countries other
than the U.S. 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.
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.
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.
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 that 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 Part B 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 Part B
entitled "Investment Policies - 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 "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.
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.
ITEM 8.3. RISK FACTORS
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.
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
Repurchase Offer. This may make it difficult for the fund to raise proceeds
necessary to repurchase Common Shares in a Repurchase 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
Repurchase Offer. The Board will also consider the liquidity of the fund's
portfolio securities when it determines whether to suspend or postpone a
Repurchase Offer.
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. 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.
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. On November 12,
1999, the Gramm-Leach-Bliley Act was signed into law. This new law,
effective March 11, 2000, repealed the sections of the Glass-Steagall Act
prohibiting banks and bank holding companies, and their subsidiaries, from
engaging in the business of underwriting securities, distributing securities,
or sponsoring, organizing or controlling a registered open-end investment
company that continuously offers its shares. Banks and bank holding
companies that satisfy certain capitalization, managerial and other criteria
are now permitted to engage in such underwriting and distribution
activities. Recent business combinations have included insurance, finance
and securities brokerage under single ownership.
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 Repurchase Offers for Common Shares. 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.
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. 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.
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.
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.
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.
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. 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 such stock
cannot be pledged, the Corporate Loan or Corporate Debt Security will be
temporarily unsecured until the stock can be pledged or is exchanged for or
replaced by other assets, which will be pledged as security for the Corporate
Loan or Corporate Debt Security. However, the Borrower's ability to dispose
of such securities, other than in connection with a pledge or replacement,
will be strictly limited for the protection of the holders of Corporate Loans
or Corporate Debt Securities.
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 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.
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.
EURO. On January 1, 1999, the European Economic and Monetary Union
introduced a new single currency called the euro. By July 1, 2002, the euro
will have replaced the national currencies of the following countries:
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal and Spain. Currently, the exchange rate of the
currencies of each of these countries is fixed to the euro and the new
European Central Bank has control over each country's monetary policies. The
government of each of these countries, however, continues to have the
authority to set its own tax and spending policies and public debt levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers and issuers
in other regions whose securities the fund may hold, or the impact, if any,
on fund performance. The fund's non-U.S. dollar (euro or other) denominated
investments will still be exposed to currency risk due to fluctuations among
those currencies and versus the U.S. dollar.
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. Since 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.
ILLIQUIDITY OF COMMON SHARES. 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.
Under certain limited circumstances, the fund may suspend or postpone a
quarterly Repurchase 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 Repurchase
Offer.) In that event, shareholders will likely be unable to sell their
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.
ITEM 8.4. OTHER INVESTMENT POLICIES
The fund has adopted certain other policies set forth below:
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.
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 interests or securities on a when-issued basis with the intention of
acquiring the 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 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 Part B under the title
"Investment Policies - Interest Rate Swaps."
ITEM 8.5 SHARE PRICE DATA
TIMING OF PRICING. The fund engages in a continuous offering of its Common
Shares at a price equal to the Net Asset Value per share next determined
after a purchase order is received. No sales charge is imposed on Common
Shares. Consequently, sales commissions do not reduce the proceeds of the
offering available to the fund for investment. As of April 30, 2000, the Net
Asset Value per share for Common Shares was $10.01.
The fund calculates 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 Prospectus, 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.
VALUATION OF PORTFOLIO SECURITIES AFFECTING PRICING. 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 fund values Corporate Loan or Corporate Debt Securities traded in the
over-the-counter market at the last quoted sales price of the day, or if
there is no reported sale, within the range of the most recent bid and asked
prices. With the approval of the Board, the fund may use a pricing service,
bank or securities dealer to perform these functions.
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.
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.
LIQUIDITY OF COMMON SHARES AFFECTING PRICING. The fund may suspend the
continuous offering of Common Shares at any time without prior notice.
Similarly, the fund may resume the offering at any time. If there is a
suspension of the offering of Common Shares, shareholders that reinvest their
distributions in additional Common Shares will be permitted to continue to
make those reinvestments.
The fund issues Common Shares only in private placement transactions that do
not involve a public offering within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). This prospectus
is not offering to sell or soliciting any offer to buy, any security to the
public within the meaning of the Securities Act. Investments in the fund may
not be transferred, except upon exemption from the registration requirements
of the Securities Act of 1933, but an investor may withdraw all or any
portion of their investment at any time at net asset value. In the interest
of economy and convenience, certificates for fund shares will not be issued.
Only "accredited investors," as defined in Regulation D under the Securities
Act, may invest in the fund. Accredited investors include common or
commingled trust funds, investment companies and other institutional
investors.
It is expected that certain shareholders of the fund will be investment
companies that seek to achieve their investment objectives by investing all
of their investable assets in Common Shares of the fund (the "Feeder
Funds"). Each of the Feeder Funds will have the same investment objective,
policies and limitations as the fund. The master-feeder structure is unlike
many other investment companies that directly acquire and manage their own
portfolio of securities. The investment experience of each of the Feeder
Funds will correspond directly with the investment experience of the fund.
No market currently exists for Common Shares. It is not currently
anticipated that a secondary market will develop for Common Shares. The fund
and the manager do not intend to make a secondary market in Common Shares or
to list Common Shares on any securities exchange or arrange for their
quotation on any over-the-counter market. Common Shares are not readily
marketable and should be treated as an illiquid investment. This means that
shareholders may not be able to freely sell their Common Shares.
To provide shareholders a means to sell their Common Shares at Net Asset
Value, the fund will make quarterly Repurchase Offers to repurchase Common
Shares from shareholders. Each Repurchase Offer will be for a specified
percentage (between 5% and 25%) of the fund's outstanding Common Shares as
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 Repurchase Offer ends or within a maximum of fourteen days after the
Repurchase Offer ends as described in "Periodic Offers By the Fund to
Repurchase Common Shares From Shareholders." Each Repurchase Offer will last
for a period between six weeks and three weeks. The fund will send to its
shareholders a written notification about each Repurchase Offer at the
beginning of the Repurchase Offer. A Repurchase Offer is expected to
conclude near the end of every three months after the end of March 2000,
although the initial Repurchase Offer after the end of March 2000 may
conclude as late as September 22, 2000, with Repurchase Offers every three
months thereafter.
ITEM 9. MANAGEMENT
ITEM 9.1A. BOARD OF TRUSTEES
The Board of Trustees oversees the management of the Trust and the fund. The
Trustees are elected for an indefinite term and generally hold regular
meetings each calendar quarter. The Board elects the officers of the Trust.
The officers are responsible for the fund's day-to-day operations.
As required by Rule 23c-3 under 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.
ITEM 9.1B. INVESTMENT MANAGER
Franklin Advisers, Inc, 777 Mariners Island Blvd., P.O. Box 777, San Mateo,
CA 94404, 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 $233 billion in assets. Under its investment
management Agreement with the fund, the manager receives fees at an annual
rate of 0.80% of the average daily net assets of the fund.
ITEM 9.1C. PORTFOLIO MANAGEMENT
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).
ITEM 9.1D. ADMINISTRATORS
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. The fund may reimburse FT Services for certain out-of-pocket
expenses. The administrator may end this arrangement at any time upon notice
to the Board.
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
not compensated for its services, however, the fund may reimburse Investor
Services for certain out-of-pocket expenses.
ITEM 9.1E. 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.
ITEM 9.1F. EXPENSES
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, if any, 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.
ITEM 9.1G. AFFILIATED BROKERAGE
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.
Distributors is a wholly-owned subsidiary of Resources, a registered
broker-dealer and a member of the NASD. 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.
ITEM 9.2. NON-RESIDENT MANAGERS. Not applicable.
ITEM 9.3. CONTROL PERSONS.
As of May 1, 2000, the following two shareholders (while at that time were
the only shareholders of the Trust and were the original two subscribers to
the Common Shares of the Trust) were
(1) Franklin Resources, Inc. which owned 1,500,000 Common Shares or 75%
of the Common Shares issued and outstanding, and
(2) Templeton Investment Counsel, Inc., which owned 500,000 Common
Shares or 25% of the Common Shares, that were issued and outstanding.
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT, AND OTHER SECURITIES.
ITEM 10.1. CAPITAL STOCK
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 currently 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 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.
In addition, the fund expects that it will arrange with the Feeder Funds for
voting rights as provided in Section 12(d)(1)(E)(iii)(a) of the 1940 Act.
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, none of which 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 be held in book-entry form.
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.
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 Repurchase Offer to repurchase a portion of the
outstanding Common Shares from shareholders who request repurchases. (The
initial Repurchase Offer after the end of March 2000 may conclude as late as
September 22, 2000, with Repurchase Offers every three months thereafter.)
The fund will suspend or delay a Repurchase Offer only if certain regulatory
requirements (described in the notice of the Repurchase 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 Repurchase Offer ends or within a maximum of fourteen days after the
Repurchase Offer ends as described below.
REPURCHASE PROCEDURES. At the beginning of each Repurchase Offer, the fund
will send to its shareholders a written notification about the Repurchase
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
Repurchase 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 Repurchase 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 Repurchase Offer for
repurchase of Common Shares in addition to regular quarterly Repurchase
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
Repurchase 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
Repurchase 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 Repurchase 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 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 tender of Common Shares for repurchase
by the fund, (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 Repurchase Offer, and (iv) the procedures that will enable the
shareholder to withdraw or modify its tender 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. A
shareholder 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 Repurchase Offer. During the period from
notification to shareholders of a Repurchase 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 Repurchase 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 Repurchase 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. The fund has arranged a credit
facility with a bank under which it may borrow to finance the repurchase of
Common Shares through Repurchase Offers. Any such borrowings will comply
with the fund's investment restrictions on borrowing.
Because there likely will not be a secondary market for Common Shares,
quarterly and any additional discretionary Repurchase 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. Repurchase 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 Repurchase 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
Repurchase Offers (assuming the repurchases are not offset by the issuance of
additional Common Shares). Such Repurchase 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 Repurchase 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 Repurchase Offer over the minimum amount required by the
fund's fundamental policies regarding Repurchase Offers if the Board
determines that the repurchase is not in the fund's best interest.
Repurchases through Repurchase 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. Also,
the size of any particular Repurchase 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 Repurchase 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 Repurchase 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 Repurchase
Offer. 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.
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 outstanding and entitled to be cast as a whole or with respect to any
affected series of the Trust is required to approve the fund's or the series'
consolidation with another business entity, a merger of the fund with or into
another business trust or any other business entity, a statutory share
exchange and the sale, lease, or exchange of all or any substantial part of
the assets of the Trust. In addition, the affirmative vote of the holders of
at least 66 2/3% (which is higher than the vote required under Delaware law
or the 1940 Act) of the fund's outstanding Common Shares entitled to be cast
is required generally to authorize any of the following transactions:
o merger, consolidation or statutory share exchange of the fund
with or into any Principal Holder;
o issuance of any securities of the fund to any Principal Holder
for cash;
o sale, lease or exchange of all or any substantial part of the
fund's assets to any Principal Holder (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 all or any substantial part of the assets of any
Principal Holder (except assets having an aggregate fair market
value of less than $1,000,000).
A Principal Holder is any person or group (within the meaning of Rule 13d-5
under the Securities Exchange Act of 1934, as amended (the "1934 Act")), that
is the beneficial owner, directly or indirectly, of more than 10% of the
outstanding Common Shares of the Trust and shall include any affiliate or
associate (as such terms are defined in Rule 12b-2 under the 1934 Act) of a
Principal Holder, but shall not include Resources or any affiliated person of
Resources.
This type of vote is not required when, under certain conditions, the Board
approves the transaction. In certain cases involving merger, consolidation
or statutory share exchange, however, 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 a shareholder
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 Repurchase 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 10% 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.
ITEM 10.2. LONG-TERM DEBT. Not applicable.
ITEM 10.3. GENERAL (OTHER CLASSES OF SECURITIES). Not applicable.
ITEM 10.4. TAXES.
DIVIDENDS AND DISTRIBUTIONS
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 shareholders.
Capital gains, if any, are distributed at least annually to shareholders,
usually in December. Common Shares accrue dividends beginning the day the
fund receives the shareholder's money and continues to accrue up to and
including the Repurchase Pricing Date.
FEDERAL INCOME TAXES
As a partnership, the fund is not subject to U.S. federal income tax.
Instead, each shareholder reports separately on its own income tax return its
distributive share of the fund's income, gains, losses, deductions and
credits (including foreign tax credits or deductions for creditable or
deductible foreign taxes imposed on the fund). Each shareholder is required
to report its distributive share of such items regardless of whether it has
received or will receive a corresponding distribution of cash or property
from the fund. In general, cash distributions by the fund to a shareholder
will represent a non-taxable, downward basis adjustment up to the amount of
the shareholder's adjusted tax basis in the fund shares.
When a shareholder sells or exchanges shares of the fund, the shareholder may
have a capital gain or loss.
In general, a distribution in partial or complete redemption of a
shareholder's shares of the fund is taxable as a sale or exchange only to the
extent the amount of money received exceeds the tax basis of the
shareholder's entire interest in the fund. Any loss may be recognized only if
the shareholder redeems its entire interest in the fund for money.
An allocable share of a tax-exempt shareholder's income may be "unrelated
business taxable income" ("UBTI") to the extent that the fund borrows money
to acquire property or invests in assets that produce UBTI.
The fund will not be a "regulated investment company" for federal income tax
purposes.
For a more complete discussion of the federal income tax consequences of
investing in the fund, see Item 22 in Part B.
ITEM 10.5 OUTSTANDING SECURITIES.
NET ASSET VALUE AND SHARES OUTSTANDING
The Net Asset Value per share for Common Shares on April 30, 2000 was $10.01.
The following table sets forth certain information with respect to Common
Shares as of May 1, 2000:
(3) (4)
Amount Held Amount
By Outstanding
(1) (2) Fund or for Exclusive of
Title Amount Its Amount
of Class Authorized Own Account Shown Under (3)
-------------------------------------------------------------
Common Shares
of beneficial Unlimited None 2,000,000
interest
ITEM 10.6 SECURITIES RATINGS. Not applicable.
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES. Not applicable.
ITEM 12. LEGAL PROCEEDINGS. Not applicable.
ITEM 13. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.
Item 14. Cover Page..........................Cover page
Item 15. Table of Contents............................2
Item 16. General Information and History..............2
Item 17. Investment Objectives and Policies...........2
Item 18. Management...................................8
Item 19. Control Persons and Principal Holders
of Securities...............................13
Item 20. Investment Advisory and Other Services......13
Item 21. Brokerage Allocation and Other Practices....15
Item 22. Tax Status..................................16
Item 23. Financial Statements........................18
FORM N-2 PART B
ITEM 14. COVER PAGE
WHEN READING THIS PART B, YOU WILL SEE CERTAIN TERMS BEGINNING WITH
CAPITAL LETTERS. THIS MEANS THE TERM IS EXPLAINED UNDER "USEFUL
TERMS AND DEFINITIONS."
Franklin Floating Rate Master Trust (the "Trust") is a non-diversified
closed-end management investment company that has one series of shares of
beneficial interest, the Franklin Floating Rate Master Series (the "fund").
The fund's 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.
The Prospectus, which is the foregoing Part A, dated May 15, 2000, and which
the Trust may amend from time to time, contains the basic information a
shareholder should know before investing in the fund. For a free copy, call
1-800/DIAL BEN.
This Part B is not a prospectus. It contains information in addition to and
in more detail than set forth in the Prospectus. This Part B 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.
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.
ITEM 15. TABLE OF CONTENTS
Item 14. Cover Page..........................Cover page
Item 15. Table of Contents............................2
Item 16. General Information and History..............2
Item 17. Investment Objectives and Policies...........2
Item 18. Management...................................8
Item 19. Control Persons and Principal Holders of Securities13
Item 20. Investment Advisory and Other Services......13
Item 21. Brokerage Allocation and Other Practices....15
Item 22. Tax Status..................................16
Item 23. Financial Statements........................18
ITEM 16. GENERAL INFORMATION AND HISTORY. Not applicable.
ITEM 17. INVESTMENT OBJECTIVES AND POLICIES
How Does the Fund Invest Its Assets?
INVESTMENT GOAL. The fund's 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.
ITEM 17.1 INVESTMENT POLICIES.
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 by an NRSRO with the equivalent of a B or
higher rating by S&P or Moody's, or, if unrated, determined to be of
comparable quality by the manager.
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 "Investment Policies" in the Prospectus.
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 33 1/3% 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.
INTEREST RATE SWAPS. The fund may enter into interest rate swaps in order to
limit the exposure of its fixed rate Corporate Loans and Corporate Debt
Securities against fluctuations in interest rates. Interest rate swaps
involve the exchange by the fund with another party of their respective
commitments or rights to pay or receive interest, such as an exchange of
fixed rate payments for Floating Interest Rate payments. 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.
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.
There is no limit on the amount of interest rate 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 payment 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 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 that
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.
SHORT-TERM INVESTMENTS. Based on the terms of a SEC order that granted
exemptive relief from certain provisions of the 1940 Act, the fund may invest
its short term cash in shares of one or more money market funds managed by
the manager or its affiliates.
ITEM 17.2. 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. As a matter of fundamental
policy, 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 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.
ITEM 17.3 ADDITIONAL NON-FUNDAMENTAL INVESTMENT POLICIES.
In addition, the fund has adopted the following non-fundamental investment
policies, which may be changed without shareholder approval:
1. The fund requires that at the end of the close of each business quarter
not more than 25% of its total assets will be invested in securities of a
single issuer (including corporate loans but excluding US government
securities or the securities of regulated investment companies) and in
respect of 50% of its total assets, not more than 5% of its assets will be
invested in the securities of any one issuer and securities held by the fund
will not consist of more than 10% of any single issuer's outstanding voting
securities.
2. The fund does not intend to invest more than 20% of its assets in the
obligations of entities in any single industry.
3. The fund may not invest more than 20% of its net assets in illiquid
securities. Illiquid securities for these purposes are securities which may
not be converted to cash for a period of 10 days.
4. The fund may not invest more than 10% of its net assets in securities that
are not listed, traded or dealt in on Recognized Markets.
5. Subject to (6) and (7) below, the fund may not invest more than 10% of its
net assets in securities issued by a single issuer. Related
companies/institutions are regarded as a single issuer for the purpose of
this restriction.
6. The fund may not maintain more than 10% of its net assets on deposit with
any one institution. This limit is increased to 30% for deposits with, or
securities evidencing deposits issued by, or securities guaranteed by; (i) an
EU credit institution; (ii) a bank authorized in a member state of the
European Free Trade Association (EFTA); (iii) a bank authorized by a
signatory state (other than an EU Member State of EFTA) to the Basle Capital
Convergence Agreement of July 1998 (Canada, Japan, United States); or (iv)
the Custodian of the Company or a bank that is an affiliate of the Custodian
of the Company. Related companies and institutions are regarded as a single
issuer for the purposes of this restriction.
7. The fund may invest up to 100% of its net assets in different securities
issued or guaranteed by any EU member state or any local authority of an EU
member state or by Australia, Canada, Japan, New Zealand, Norway, Switzerland
and the United States of America or by any of the following public
international bodies of which one or more EU member states are members: the
European Investment Bank, the Asian Investment Bank, the World Bank, Euratom,
the European Coal and Steel Community, the European Bank for Reconstruction
and Development; the International Finance Corporation, the International
Bank for Reconstruction and Development and the Inter-American Development
Bank. In such circumstances the fund must hold securities from at least six
different issues with securities from any one issue not exceeding 30% of its
Net Asset Value.
8. The fund may not own more than 10% of any class of security issued by any
single issuer, unless the issuer is an open-ended collective investment
scheme. The fund may not invest more than 20% of it net assets in another
open-ended collective investment scheme. Where investment is made into
another collective investment scheme managed by the same management company
or by an associated or related company, the manager of the scheme in which
the investment is being made will waive the preliminary/initial charge which
it is entitled to charge for its own account in relation to the acquisition
of units. If a commission is received by the Manager by virtue of an
investment in the shares of another collective investment scheme and that
other collective investment scheme is managed by a related company then this
commission will be paid into the property of the fund.
9. The fund may not make short sales of securities or trade securities not
owned by it or for its account or otherwise maintain a short position.
10. The fund' borrowings may not exceed 25% of its net asset value.
Repurchase and securities lending agreements used for efficient portfolio
management purposes shall not be regarded as borrowings for the purposes of
this limitation.
11. The fund may not invest more than 5% of its net assets in warrants.
The non-fundamental investment restrictions referred to above, except with
respect to borrowing, apply at the time of the purchase of the investments.
If the limits set out above are exceeded for reasons beyond the control of
the fund, or as a result of the exercise of subscription rights, the fund
must adopt as a priority objective the remedying of that situation, taking
due account of the interests of shareholders. For the avoidance of doubt the
fund will not take or seek to take legal or management control of the issuer
of any of its underlying investments.
ITEM 17.4 PORTFOLIO TURNOVER.
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 Repurchase 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.
ITEM 18. MANAGEMENT
ITEM 18.1 OFFICERS AND TRUSTEES AND ITEM 18.2 POSITIONS HELD WITH
AFFILIATED PERSONS OR PRINCIPAL UNDERWRITERS OF THE TRUST.
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 (79)
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 28 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 48 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 50 of the investment companies in the
Franklin Templeton Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and 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. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Chairman of the Board,
Franklin Advisers, Inc.; Vice President, 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 49
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
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director,
The California Center for Land Recycling (redevelopment); director or
trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, General Partner, Miller &
LaHaye and Peregrine Associates, the general partners of Peregrine Venture
funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 48 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Chairman, White River Corporation (financial services) (until
1998) and Hambrecht & Quist Group (investment banking) (until 1992), and
President, National Association of Securities Dealers, Inc. (until 1987).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc. and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin 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 52 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
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, 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.; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial
Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Chauncey F. Lufkin (42)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer of two of the investment companies in the Franklin Templeton Group of
Funds.
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 29 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
- ----------------------------
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
ITEM 18.3 NON-RESIDENT TRUSTEES. Not applicable.
ITEM 18.4 COMPENSATION.
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
Total Fees Received the Franklin
From Franklin Templeton Group of
Templeton FUNDS ON WHICH EACH
NAME GROUP OF FUNDS* SERVES**
---- -------------- ------
Frank H. Abbott, III $156,060 28
Harris J. Ashton $363,165 48
S. Joseph Fortunato $363,238 50
Edith E. Holiday $237,265 25
Frank W.T. LaHaye $156,060 28
Gordon S. Macklin $363,165 48
- ------------------------------------------
*For the calendar year ended December 31, 1999.
**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 157 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 RECEIVES 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 May 1, 2000 the officers and Board members, as a group, owned of record
and beneficially 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.
ITEM 18.5 CODES OF ETHICS.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The code of ethics is on file with, and can be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. The codes of ethics are also available on the EDGAR Database
on the SEC's Internet website at http://www.sec.gov. Copies of the codes of
ethics may be obtained, after paying a duplicating fee, by electronic request
at the following E-mail address: [email protected], or by writing the SEC's
Public Reference Section, Washington, D.C. 20549-0102.
ITEM 19. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of May 1, 2000, the following two shareholders (which at that time were
the only shareholders of the Trust and were the original two subscribers to
the Common Shares of the Trust) were:
(1) Franklin Resources, Inc. which owned 1,500,000 Common Shares or 75%
of the Common Shares issued and outstanding, and
(2) Templeton Investment Counsel, Inc, which owned 500,000 Common
Shares or 25% of the Common Shares, that were issued and outstanding.
ITEM 20. INVESTMENT ADVISORY 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.
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.
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.
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.
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. The auditor's services
will consist of rendering an opinion on the financial statements of the fund
included in the fund's Annual Report to Shareholders for each fiscal year.
ITEM 21. BROKERAGE ALLOCATION AND OTHER PRACTICES
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.
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.
Due to the nature of the primary investments by the fund, the fund will
generally pay no brokerage commissions or very little brokerage commissions.
As of May 1, 2000, the fund did not own securities of its regular broker
dealers.
ITEM 22. TAX STATUS
CLASSIFICATION OF THE FUND
The fund will be treated as a separate partnership for federal income tax
purposes and not as an association taxable as a corporation. The fund will
not be a "regulated investment company." The fund intends to monitor the
number of its shareholders so as not to be treated as a "publicly traded
partnership" under certain safe harbors provided in Treasury Regulations.
TAXATION OF PARTNERSHIP OPERATIONS GENERALLY
As a partnership, the fund will not be subject to U.S. federal income tax.
Instead, each shareholder in the fund will be required to report separately
on its own income tax return its distributive share of items of the fund's
income, gain, losses, deductions and credits, and to do so regardless of
whether it has received or will receive corresponding distributions of cash
or property from the fund. In general, cash distributions by the fund to a
shareholder will represent a non-taxable, downward basis adjustment up to the
amount of such shareholder's adjusted tax basis in its fund shares.
CALCULATION OF INVESTOR'S "ADJUSTED BASIS" AND "AT RISK BASIS"
Each shareholder's adjusted basis in its fund shares will equal its purchase
price for the shares, increased by the amount of its share of items of income
and gain of the fund and reduced, but not below zero, by: (a) the amount of
its share of fund deductions and losses; (b) expenditures which are neither
properly deductible nor properly chargeable to its capital account; and (c)
the amount of any distributions received by such shareholder.
CURRENT DISTRIBUTIONS BY THE FUNDS; REDEMPTIONS
CURRENT DISTRIBUTIONS/PARTIAL REDEMPTIONS. A current cash distribution by
the fund with respect to shares held by a shareholder will result in taxable
gain to the distributee shareholder only to the extent that the amount of
cash distributed exceeds the shareholder's adjusted basis in its fund
shares. Gain recognized as a result of such distributions is considered gain
from the sale or exchange of the shareholder's shares in the fund. Loss is
not recognized by a shareholder as a result of a current distribution by the
fund. A current distribution reduces the distributee shareholder's adjusted
basis in its fund shares, but not below zero.
LIQUIDATION OF A SHAREHOLDER'S ENTIRE INTEREST IN THE FUND. Generally, a
distribution or series of distributions by the fund to a shareholder that
results in termination of its entire interest in the fund results in gain to
the distributee shareholder to the extent that cash, if any, distributed
exceeds the shareholder's adjusted basis in its fund shares. When only cash
is distributed, loss is recognized to the extent that the shareholder's
adjusted basis in its fund shares exceeds the amount of cash distributed.
Any gain or loss recognized as a result of such distributions is considered
gain or loss from the sale or exchange of the distributee shareholder's fund
shares and generally is capital gain or loss.
PRE-CONTRIBUTION GAIN. Certain tax rules limit the use of partnerships such
as the fund to eliminate taxation of built-in gain on appreciated assets
contributed to a partnership. Under these rules, pre-contribution gain or
loss is recognized by a shareholder that contributes property to the fund if
the property is subsequently distributed to another shareholder within seven
years after the date of the original contribution. A similar seven-year
limitation applies to a redeeming shareholder if the fund distributes
appreciated property to the shareholder and the shareholder had previously
contributed different property to the fund. In the latter case,
pre-contribution gain (but not loss) is recognized by the redeeming
shareholder to the extent of the lesser of the amount of appreciation in the
property on the distribution date and amount of pre-contribution gain.
TAX TREATMENT OF CAPITAL GAINS AND LOSSES
Amounts realized from the sale or exchange of assets of the fund will
generally be treated as capital gains or losses. A net capital loss
allocated to a shareholder may be used to offset other capital gains.
Present law taxes both long-term and short-term capital gains of corporations
at the rates applicable to ordinary income. Shareholders other than
corporations are generally subject to the tax rules applicable to
individuals.
U.S. GOVERNMENT OBLIGATIONS
States grant tax-free status to a shareholder's allocable share of interest
earned by the fund 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
Because the fund's income primarily consists of interest rather than
dividends, none of its income allocated to a U.S. corporate shareholder will
generally be eligible for the dividends-received deduction.
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. In turn, these rules may affect the
amount, timing or character of the income allocated to shareholders of the
fund. If the fund purchases shares in certain foreign investment entities
called "passive foreign investment companies," shareholders of the fund may
be subject to U.S federal income tax and a related interest charge on a
portion of any "excess distribution" or gain from the disposition of these
shares even if the fund distributes such income to its shareholders.
TAX-EXEMPT INVESTORS
Certain tax-exempt organizations are subject to a tax on "unrelated business
taxable income" ("UBTI"). Income from certain types of investments made by
the fund which is allocated to tax-exempt shareholders could be treated as
UBTI subject to tax. In addition, to the extent that the fund borrows in
connection with the acquisition of any property, income from such
debt-financed property may be subject to the tax on UBTI. If the fund incurs
UBTI, it intends to furnish annually to each tax-exempt shareholder after the
end of the fund's fiscal year the information necessary to enable the
shareholder to determine the portion of its distributive share of each item
of income, gain and deduction that is to be taken into account in determining
UBTI.
FOREIGN INCOME TAXES
The fund may pay or accrue foreign income taxes in connection with its
investments. Such amounts will be deemed to be paid to the foreign
government by the shareholders of the fund. A shareholder may (subject to
certain limitations) elect each taxable year to treat its share of these
foreign income taxes as a credit against its U.S. income tax liability or to
deduct such amount from its U.S. taxable income. However, a shareholder's
ability to obtain a credit or deduction for such taxes depends on the
particular circumstances applicable to that shareholder, and it is possible
that a shareholder may get little or no benefit with respect to its share of
foreign taxes paid or accrued by the fund.
NON-U.S. INVESTORS
Non-U.S. shareholders in the fund will generally not be subject to U.S.
federal income tax or U.S. withholding tax on their distributive share of
U.S. source "portfolio" interest and capital gains and foreign source income
of the fund. Non-U.S. shareholders will be subject to a 30% withholding tax
(unless reduced by an applicable treaty and not otherwise subject to
limitation of benefits under the Internal Revenue Code) on their distributive
share, if any, of other fixed and determinable income from U.S. sources that
is not effectively connected with the conduct of a U.S. trade or business.
Non-U.S. shareholders who are individuals may also be subject to U.S. estate
tax as a result of an investment in the fund.
STATE AND LOCAL TAXATION
A shareholder's distributive share of the fund's taxable income or loss
generally is taken into account in determining the shareholder's state and
local income tax liability in a jurisdiction in which such shareholder is a
resident or does business.
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL INCOME TAX
PLANNING. PROSPECTIVE FUND SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE EFFECTS OF THIS INVESTMENT IN THEIR OWN TAX
SITUATION.
ITEM 23. FINANCIAL STATEMENTS
As of the date of this Part A and Part B the Trust has not had a fiscal year
end and no financial statements are required by the Form N-2 or Rule 3-18 of
Regulation S-X.
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
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., is a wholly owned
subsidiary of Resources, a registered broker-dealer and member of the NASD.
This Part B lists the fund's officers and Board members who are affiliated
with Distributors.
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
Recognized Market - Includes the following Stock Exchanges: (i) all stock
exchanges in a Member State of the European Union; (ii) all stock exchanges
in a Member State of the European Economic Area (EEA) (Norway, Iceland and
Liechtenstein); and (iii) a stock exchange located in any of the following
countries: Australia, Canada, Japan, Hong Kong, New Zealand, Switzerland and
USA. It also includes the following Markets: (i) the market organized by the
International Securities Markets Association; (ii) the market conducted by
the "listed money market institutions" as described in the Bank of England
publication "The Regulation of the Wholesale Cash and OTC Derivatives (in
Sterling, foreign currency and bullion); (iii) AIM - the Alternative
Investment Market in the UK, regulated and operated by the London Stock
Exchange; (iv) the over-the-counter market in Japan regulated by the
Securities Dealers Association of Japan; (v) NASDAQ in the United States;
(vi) the market in U.S. government securities conducted by primary dealers
regulated by the Federal Reserve Bank of New York; (vii) the over-the-counter
market in the United States regulated by the National Association of
Securities Dealers Inc. (May also be described as: the over-the-counter
market in the United States conducted by primary and secondary dealers by the
Securities and Exchanges Commission and by the National Association of
Securities Dealers (and by banking institutions regulated by the U.S.
Comptroller of the Currency, the Federal Reserve System or Federal Deposit
Insurance Corporation)); (viii) the French market for "Titres de Creance
Negotiable (over-the-counter market in negotiable debt instruments); (ix)
EASDAQ (European Association of Securities Dealers Automated Quotation); and
(x) the over-the-counter market in Canadian Government Bonds, regulated by
the Investment Dealers Association of Canada.
Repurchase 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 Repurchase Offer in addition to the regular
quarterly Repurchase Offers.
Repurchase Payment Deadline - The date by which the fund must pay
shareholders for Common Shares repurchased in a Repurchase 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 Repurchase 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.
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 Repurchase Offer, as stated in the
shareholder notification.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Ratings Group(R)
SEC - U.S. Securities and Exchange Commission
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, 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 MASTER TRUST
FORM N-2
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
1) Financial Statements
Included in Part A: None.
Included in Part B: None.
2) Exhibits:
(a) Charter
(i) Certificate of Trust dated November 16, 1999 is
hereby incorporated by reference to EX-99.(a)(i) to
the Registrant's Registration Statement on Form N-2
as filed on March 24, 2000
(ii) Amendment to the Certificate of Trust dated March
21, 2000 is hereby incorporated by reference to
EX-99.(a)(ii) to the Registrant's Registration
Statement on Form N-2 as filed on March 24, 2000
(iii)Agreement and Declaration of Trust dated November
16, 1999 is hereby incorporated by reference to
EX-99.(a)(iii) to the Registrant's Registration
Statement on Form N-2 as filed on March 24, 2000
(iv) Amendment to Agreement and Declaration of Trust
dated March 21, 2000 is hereby incorporated by
reference to EX-99.(a)(iv) to the Registrant's
Registration Statement on Form N-2 as filed on March
24, 2000
(b) By-Laws
(i) By-Laws dated March 21, 2000 are hereby incorporated
by reference to EX-99.(b)(i) to the Registrant's
Registration Statement on Form N-2 as filed on March
24, 2000
(c) Voting Trust Agreements
Not Applicable
(d) (i) Specimen of Stock Certificate: Not Applicable
(ii) Agreement and Declaration of Trust
ARTICLE III, SHARES.
SECTIONS 3.01 - 3.07.
ARTICLE V - HOLDERS' VOTING POWERS AND
MEETINGS.
SECTIONS 5.01 - 5.02.
ARTICLE VI - NET ASSET VALUE, DISTRIBUTIONS,
AND REPURCHASE OF SHARES.
ARTICLE VIII - MISCELLANEOUS.
SECTIONS 8.02 - 8.03.
By-Laws
ARTICLE II - MEETINGS OF HOLDERS.
ARTICLE III - DIVIDENDS.
ARTICLE IX - GENERAL MATTERS:
SECTIONS 3 - 7.
PART A: Prospectus
ITEM 10.1.
(e) Dividend Reinvestment Plan
Not Applicable
(f) Long-Term Debt Instruments
Not Applicable
(g) Investment Advisory Contracts
(i) Investment Advisory Agreement between the Registrant
and Franklin Advisers, Inc. is filed herewith as
Exhibit No. EX-99.(g)(i)
(h) Underwriting Agreement
Not Applicable
(i) Bonus, Profit Sharing, Pension Plans
Not Applicable
(j) Custodian Agreements and Depository Contracts
(i) Master Custody Agreement dated February 16, 1996 is
hereby incorporated by reference to EX-99.(j)(i) to
the Registrant's Registration Statement on Form N-2
as filed on March 24, 2000
(ii) Amendment dated May 7, 1997 to Master Custody
Agreement dated February 16, 1996 is hereby
incorporated by reference to EX-99.(j)(ii) to the
Registrant's Registration Statement on Form N-2 as
filed on March 24, 2000
(iii)Amendment dated February 27, 1998 to Master Custody
Agreement dated February 16, 1996 is hereby
incorporated by reference to EX-99.(j)(iii) to the
Registrant's Registration Statement on Form N-2 as
filed on March 24, 2000
(iv) Amendment dated March 21, 2000, to Exhibit A of the
Master Custody Agreement dated February 16, 1996 is
hereby incorporated by reference to EX-99.(j)(iv) to
the Registrant's Registration Statement on Form N-2
as filed on March 24, 2000
(v) Terminal Link Agreement between Registrant and Bank
of America dated February 16, 1996 is hereby
incorporated by reference to EX-99.(j)(v) to the
Registrant's Registration Statement on Form N-2 as
filed on March 24, 2000
(vi) Foreign Custody Manager Agreement made as of July
30, 1998, effective as of February 27, 1998 is
hereby incorporated by reference to EX-99.(j)(vi) to
the Registrant's Registration Statement on Form N-2
as filed on March 24, 2000
(vii)Amendment dated March 21, 2000 to Schedule 1 of the
Foreign Custody Manager Agreement dated July 30,
1998 is hereby incorporated by reference to
EX-99.(j)(vii) to the Registrant's Registration
Statement on Form N-2 as filed on March 24, 2000
(k) Other Material Contracts
(i) Administration Agreement between Registrant and
Franklin Templeton Services, Inc. is filed herewith
as Exhibit No. EX-99.(k)(i)
(l) Opinions of Counsel and Consent
Not Applicable
(m) Non-Resident Officers/Directors - Consent to Service of
Process
Not Applicable
(n) Other Opinions and Consents
Not Applicable
(o) Omitted Financial Statements
Not Applicable
(p) Agreements Regarding Initial Capital
(i) Subscription Agreement dated March 24, 2000 between
the Registrant and Franklin Resources, Inc. is filed
herewith as EX-99.(p)(i)
(ii) Subscription Agreement dated March 24, 2000 between
the Registrant and Templeton Investment Counsel,
Inc. is filed herewith as EX-99.(p)(ii)
(q) Model Retirement Plans
Not Applicable
(r) Codes of Ethics
(i) Code of Ethics of the Registrant and Franklin
Advisers, Inc. is hereby incorporated by reference
to EX-99.(r)(i) to the Registrant's Registration
Statement on Form N-2 as filed on March 24, 2000
(s) (i) Power of Attorney dated March 21, 2000 is hereby
incorporated by reference to EX-99.(s)(i) to the
Registrant's Registration Statement on Form N-2 as
filed on March 24, 2000
(ii) Certificate of Secretary dated March 21, 2000 is
hereby incorporated by reference to EX-99.(s)(ii) to
the Registrant's Registration Statement on Form N-2
as filed on March 24, 2000
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 Common Shares of the Registrant being registered in this registration
statement under the Investment Company Act of 1940, other than underwriting
discounts and commissions.
Federal Taxes $0
State Taxes and Fees $440
Trustees' Expenses $0
Printing and Mailing $1,000
Expenses
Rating Agency Expenses $0
Legal Audit & Accounting
Services Fees Expenses $80,030
Administrative Services $30,000
Fees
-----------
Total $111,030
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL.
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
As of May 1, 2000:
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common shares,
per value $0.01
per share 2
ITEM 29. INDEMNIFICATION.
Under Article III, Section 3.07 of Registrant's Agreement and
Declaration of Trust, as amended, if any Holder or former Holder shall be
exposed to liability by reason of a claim or demand relating solely to his or
her being or having been a Holder of the Trust (or by having been a Holder of
a particular Series), and not because of such Person's acts or omissions, the
Holder or former Holder (or, in the case of a natural person, his or her
heirs, executors, administrators, or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from, and indemnified out of
the assets of the Trust or out of the assets of the applicable Series (as the
case may be) against, all loss and expense arising from such claim or demand;
provided that such indemnification shall be limited in amount to no more than
the net assets held with respect to such Series or the Trust (where there is
no Series).
Under Article VII, Section 7.02 of the Registrant's Agreement and
Declaration of Trust, as amended, the Trustees of the Registrant shall not be
responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or Principal Underwriter of the Registrant,
nor shall any Trustee be responsible for the act or omission of any other
Trustee, and the Registrant out of its assets may indemnify and hold harmless
each and every Trustee and officer of the Registrant from and against any and
all claims, demands, costs, losses, expenses and damages whatsoever arising
out of or related to the performance of his or her duties as a Trustee or
officer of the Registrant; provided that nothing contained in Registrant's
Agreement and Declaration of Trust shall indemnify, hold harmless or protect
any Trustee or officer from or against any liability to the Registrant or any
Holder 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.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The officers and directors of the Registrant's investment adviser,
Franklin Advisers, Inc., 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) which are
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.
Not Applicable.
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Mateo, the State of California, on the 12th day of May, 2000.
FRANKLIN FLOATING RATE MASTER TRUST
Registrant
/s/ RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
*By: /s/ DAVID P. GOSS
David P. Goss, Attorney-in-Fact
(pursuant to Power of Attorney previously filed.)
FRANKLIN FLOATING RATE MASTER TRUST
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(g)(i) Investment Advisory Agreement Attached
between the Registrant and
Franklin Advisers, Inc.
EX-99.(k)(i) Administration Agreement between Attached
Registrant and Franklin
Templeton Services, Inc.
EX-99.(p)(i) Subscription Agreement dated Attached
March 24, 2000 between the
Registrant and Franklin
Resources, Inc.
EX-99.(p)(ii) Subscription Agreement dated Attached
March 24, 2000 between the
Registrant and Templeton
Investment Counsel, Inc.
FRANKLIN FLOATING RATE MASTER TRUST
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN FLOATING RATE
MASTER TRUST, a Delaware business trust (the "Trust"), on behalf of FRANKLIN
FLOATING RATE MASTER SERIES (the "Fund"), a series of the Trust, and FRANKLIN
ADVISERS, INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statement under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment adviser and to have an investment
adviser perform various management, statistical, research, investment
advisory and other services for the Trust; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment
companies and other investment counseling clients, and desires to provide
these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the
officers of the Trust, for the period and on the terms hereinafter set
forth. The Adviser hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Adviser shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Adviser to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Adviser in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Adviser may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Adviser agree that the Adviser
shall select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its affiliates
which the Adviser or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Adviser in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Adviser and its affiliates in managing
other portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided that
the Trust's officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be
considered as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
(c) When the Adviser has determined that the Fund should
tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Adviser nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Adviser or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Adviser and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Adviser, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the
allocation has been accomplished.
(e) The Adviser agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES REGISTRATION
STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its officers and
employees will make available and provide accounting and statistical information
required by the Fund in the preparation of registration statements, reports and
other documents required by federal and state securities laws and with such
information as the Fund may reasonably request for use in the preparation of
such documents or of other materials necessary or helpful for the underwriting
and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers and
employees available to the Board of Trustees and officers of the Trust for
consultation and discussions regarding the administration and management of the
Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its own
expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Adviser
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Adviser, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses
to compute the value of its net assets in connection with the determination
of the net asset value of its shares, all as set forth more fully in the
Fund's current prospectus and statement of additional information. The rate
of the advisory fee payable by the Fund shall be calculated daily at the
following annual rates:
0.80% of the average daily net assets of the Fund
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Adviser may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Adviser shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the
Trust hereunder are not to be deemed exclusive, and the Adviser and any of
its affiliates shall be free to render similar services to others. Subject
to and in accordance with the Agreement and Declaration of Trust and By-Laws
of the Trust and Section 10(a) of the 1940 Act, it is understood that
trustees, officers, agents and shareholders of the Trust are or may be
interested in the Adviser or its affiliates as directors, officers, agents or
stockholders; that directors, officers, agents or stockholders of the Adviser
or its affiliates are or may be interested in the Trust as trustees,
officers, agents, shareholders or otherwise; that the Adviser or its
affiliates may be interested in the Fund as shareholders or otherwise; and
that the effect of any such interests shall be governed by said Agreement and
Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Adviser, the Adviser shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Adviser
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Adviser or any of its affiliates or any of
their officers, directors, employees or stockholders. The Adviser shall not
be obligated pursuant to the provisions of this Subparagraph 6.B., to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Adviser or any of its affiliates from the sale of his
shares of the Adviser, or similar matters. So long as this Agreement is in
effect, the Adviser shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6.B. within thirty (30) days after a bill or
statement has been received by the Adviser therefor. This provision shall
not be deemed to be a waiver of any claim the Trust may have or may assert
against the Adviser or others for costs, expenses or damages heretofore
incurred by the Trust or for costs, expenses or damages the Trust may
hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or director or officer of the Adviser,
from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of the Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of
any penalty either by vote of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Fund on sixty (60)
days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Adviser on sixty (60) days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the other party at
any office of such party.
E. Unless otherwise agreed by the Adviser, upon
termination of this Agreement, the Trust shall cease to use the "Franklin"
name and logo.
8. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 24th day of March, 2000.
FRANKLIN FLOATING RATE MASTER TRUST on behalf of
FRANKLIN FLOATING RATE MASTER SERIES
By: /s/ DAVID P. GOSS
David P. Goss
Title: Vice President &
Assistant Secretary
FRANKLIN ADVISERS, INC.
By: /s/ H.E. BURNS
Harmon E. Burns
Title: Executive Vice President
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of March 24, 2000 between FRANKLIN FLOATING RATE
MASTER TRUST (the "Investment Company"), an investment company registered
under the Investment Company Act of 1940 ("1940 Act"), on behalf of FRANKLIN
FLOATING RATE MASTER SERIES (the "Fund"), and Franklin Templeton Services,
Inc. ("Administrator").
In consideration of the mutual agreements herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual Fund shareholders when asked to do so by the Fund's
shareholder servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by
the Fund; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and
the rules and regulations thereunder, supervising compliance with
recordkeeping requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; the Fund's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Investment Company's
Board of Trustees ("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed
to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation,
NSARs, proxy statements, and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund
to pay any compensation to the officers of the Investment Company. Nothing
in this Agreement shall obligate the Administrator to pay for the services of
third parties, including attorneys, auditors, printers, pricing services or
others, engaged directly by the Fund to perform services on behalf of the
Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 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.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of the affected Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved
by the vote of a majority of the Board of the Investment Company in office at
the time or by the vote of a majority of the outstanding voting securities of
the Investment Company (as defined by the 1940 Act); and shall automatically
and immediately terminate in the event of its assignment (as defined by the
1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN FLOATING RATE MASTER TRUST on behalf of
FRANKLIN FLOATING RATE MASTER SERIES
By: /s/ DAVID P. GOSS
David P. Goss
Title: Vice President &
Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ H.E. BURNS
Harmon E. Burns
Title: Executive Vice President
March 24, 2000
FRANKLIN FLOATING RATE MASTER TRUST
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire 1,500,000 shares of beneficial interest (the
"Shares") of the Franklin Floating Rate Master Series (the "Fund"), a series
of Franklin Floating Rate Master Trust (the "Trust"), at a purchase price of
$10.00 per share for a total of $15,000,000. We will purchase the Shares in
a private offering prior to the effectiveness of the Form N-2 registration
statement filed by the Trust on behalf of the Fund under the Securities Act
of 1933. The Shares are being purchased as the initial advance in connection
with the operation of the Fund.
In connection with such purchase, we understand that: (i) we, the
purchaser, intend to acquire the Shares for our own account as the initial
beneficial owner thereof and have no present intention of redeeming or
reselling the Shares so acquired; and (ii) in the event any of the initial
10,000 Shares are redeemed or repurchased during the first five years, the
Trust may charge against our redemption or repurchased proceeds a pro rata
portion of any unamortized organizational expenses which would be borne by
such Shares during the balance of the initial five-year period were they not
to be redeemed or repurchased.
We consent to the filing of this Investment Letter as an exhibit to the
form N-2 registration statement of the Trust.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/ MURRAY L. SIMPSON
Murray L. Simpson
Executive Vice President and General Counsel
March 24, 2000
FRANKLIN FLOATING RATE MASTER TRUST
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire 500,000 shares of beneficial interest (the
"Shares") of the Franklin Floating Rate Master Series (the "Fund"), a series
of Franklin Floating Rate Master Trust (the "Trust"), at a purchase price of
$10.00 per share for a total of $5,000,000. We will purchase the Shares in a
private offering prior to the effectiveness of the Form N-2 registration
statement filed by the Trust on behalf of the Fund under the Securities Act
of 1933. The Shares are being purchased as the initial advance in connection
with the operation of the Fund.
In connection with such purchase, we understand that: (i) we, the
purchaser, intend to acquire the Shares for our own account as the initial
beneficial owner thereof and have no present intention of redeeming or
reselling the Shares so acquired; and (ii) in the event any of the initial
10,000 Shares are redeemed or repurchased during the first five years, the
Trust may charge against our redemption or repurchased proceeds a pro rata
portion of any unamortized organizational expenses which would be borne by
such Shares during the balance of the initial five-year period were they not
to be redeemed or repurchased.
We consent to the filing of this Investment Letter as an exhibit to the
form N-2 registration statement of the Trust.
Sincerely,
TEMPLETON INVESTMENT COUNSEL, INC.
By: /s/ MARTIN L. FLANAGAN
Martin L. Flanagan
Executive Vice President
