1940 Act File No. 811-5699
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 7
FRANKLIN PRINCIPAL MATURITY TRUST
Exact Name of Registrant as Specified in Charter
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(415) 312-3000
Registrant's Telephone Number including Area Code
Deborah R. Gatzek, Secretary, 777 Mariners Island Blvd., San Mateo, CA 94404
Name and Address (Number, Street, City, State, Zip Code)
of Agent for Service)
With a copy to:
Mark H. Plafker, Esq., Stradley, Ronon, Stevens & Young, LLP,
2600 One Commerce Square, Philadelphia, PA 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].
[] This Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is ____________.
<TABLE>
<CAPTION>
FRANKLIN PRINCIPAL MATURITY TRUST
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(A)
ITEM NUMBER AND HEADING
ITEM NUMBER - PART A CAPTION
<S> <C> <C> <C>
1. Outside Front Cover. *
2. Inside Front and Outside Back Cover Page. *
3. Fee Table and Synopsis. Item 3. Fee Table and Synopsis (Shareholder
Transaction Expenses; Annual
Expenses.)
4. Financial Highlights.
*
5. Plan of Distribution.
*
6. Selling Shareholders.
*
7. Use of Proceeds.
*
8. General Description of the Registrant. Item 8. General Description of the
Registrant (General; Investment
Objectives and Policies; Risk
Factors; Other Policies; Share Price
Data).
9. Management. Item 9. Management (Board of Directors;
Investment Advisers; Portfolio
Management; Administrators;
Custodians; Expenses; Affiliated
Brokerage; Non-resident Managers;
Control Persons).
10. Capital Stock, Long-Term Debt and Other Item 10. Capital Stock, Long-Term Debt and
Securities. Other Securities (Capital Stock;
Long-Term Debt; General; Taxes;
Outstanding Securities; Securities
Ratings).
11. Defaults and Arrears on Senior Item 11. Defaults and Arrears on Senior
Securities. Securities.
12. Legal Proceedings. Item 12. Legal Proceedings.
13. Table of Contents of the Statement of Item 13. Table of Contents of the Statement
Additional Information. of Additional Information.
ITEM NUMBER - PART B CAPTION
14. Cover Page. Item 14. Cover Page.
15. Table of Contents. Item 15. Table of Contents.
16. General Information and History. Item 16. General Information and History.
17. Investment Objective and Policies. Item 17. Investment Objectives and Policies.
18. Management. Item 18. Management.
19. Control Persons and Principal Holders of Item 19. Control Persons and Principal
Securities. Holders of Securities.
20. Investment Advisory and Other Services. Item 20. Investment Advisory and Other
Services.
21. Brokerage Allocation and Other Practices. Item 21. Brokerage Allocation and Other
Practices.
22. Tax Status. Item 22. Tax Status.
23. Financial Statements. Item 23. Financial Statements.
ITEM NUMBER - PART C CAPTION
24. Financial Statements and Exhibits. Item 24. Financial Statements and Exhibits.
25. Marketing Arrangements. Item 25. Marketing Arrangements.
26. Other Expenses of Issuance and Item 26. Other Expenses of Issuance and
Distribution. Distribution.
27. Persons Controlled by or Under Common Item 27. Persons Controlled by or under
Control. Common Control with Registrant.
28. Number of Holders of Securities. Item 28. Number of Holders of Securities.
29. Indemnification. Item 29. Indemnification.
30. Business and Other Connections of Item 30. Business and Other Connections of
Investment Adviser. Investment Adviser.
31. Location of Accounts and Records. Item 31. Location of Accounts and Records.
32. Management Services. Item 32. Management Services.
33. Undertakings. Item 33. Undertakings.
* Not required.
</TABLE>
PART A - INFORMATION REQUIRED IN A PROSPECTUS
ITEM 1. OUTSIDE FRONT COVER
Inapplicable
ITEM 2. INSIDE FRONT AND OUTSIDE BACK COVER PAGE
Inapplicable
ITEM 3. FEE TABLE AND SYNOPSIS
1. SHAREHOLDER TRANSACTION EXPENSES
Dividend Reinvestment and Cash Purchase Plan Fees. NONE%
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees................................... 0.60%
Interest Payments on Borrowed Funds............... 2.54%
Other Expenses........................................... 0.18%
Total Annual Expenses.................................... 3.32%
-------------------------------------- ------- --------- -------- ---------
Example 1 year 3 years 5 years 10 years
-------------------------------------- ------- --------- -------- ---------
You would pay the following expenses
on a $1,000 investment, assuming a $33 $102 $173 $361
5% annual return:
-------------------------------------- ------- --------- -------- ---------
The purpose of the table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly
or indirectly.
2. Inapplicable
3. Inapplicable
ITEM 4. FINANCIAL HIGHLIGHTS
Inapplicable
ITEM 5. PLAN OF DISTRIBUTION
Inapplicable
ITEM 6. SELLING SHAREHOLDERS
Inapplicable
ITEM 7. USE OF PROCEEDS
Inapplicable
ITEM 8. GENERAL DESCRIPTION OF THE REGISTRANT
1. General:
a. Franklin Principal Maturity Trust (the "Fund") is a business
trust created under the laws of the Commonwealth of
Massachusetts on November 22, 1988.
b. The Fund is a closed-end, diversified management investment
company registered under the Investment Company Act of 1940.
2. Investment Objectives and Policies:
a., b., c. and d.
The following sections of the Prospectus of the Fund dated
January 19, 1989 ("Fund Prospectus") are incorporated herein by
reference: "Investment Objective and Policies," "Zero Coupon
Securities," "Mortgage Backed Securities," "High Income Producing
Debt Securities," "Asset Backed Securities," "Other Investment
Practices," "Special Considerations" and Appendices A and B. In
addition, the third paragraph under the sub-heading "Leverage and
Borrowing" under the heading "Other Investment Practices" is
restated as follows:
Because few or none of the Fund's assets will
consist of margin securities, the Fund does not
expect to borrow on margin, although such
borrowing is not prohibited. The Fund may also
borrow by entering into reverse repurchase
agreements with the same parties with whom it may
enter into repurchase agreements (as discussed
below). Under a reverse repurchase agreement,
the Fund sells securities and agrees to
repurchase them at a mutually agreed upon date
and price. Reverse repurchase agreements involve
risk that the market value of the securities
retained in lieu of sale by the Fund may decline
below the price of the securities the Fund has
sold but is obligated to repurchase. In the
event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to
determine whether to enforce the Fund's
obligation to repurchase the securities and the
Fund's use of the proceeds of the reverse
repurchase agreement may effectively be
restricted pending such decision. Reverse
repurchase agreements can create leverage, a
speculative factor, and will be considered as
borrowings for purposes of the Fund's limitation
on borrowing.
In addition to the foregoing, the following reflects certain of
the Fund's non-fundamental investment policies. Franklin
Advisers, Inc. is defined hereafter as "Advisers" or "Manager."
LOAN PARTICIPATIONS
The Fund is permitted to invest up to 10% of the Fund's total
assets (at the time of investment) in loan participations, all of
which may have speculative characteristics or may be in default
at the time of purchase. Loan participations generally trade at
par value. The Fund may purchase loan participations which sell
at a discount because of the borrower's credit problems.
The Manager may acquire loan participations for the Fund from
time to time when it believes the investments offer the
possibility of long-term appreciation in value. An investment
in loan participations or other debt securities which are in
default carries a high degree of risk and may have the
consequence that interest payments with respect to such
securities may be reduced, deferred, suspended or eliminated
and may have the further consequence that principal payments
may likewise be reduced, deferred, suspended or canceled,
causing the loss of the entire amount of the investment. Loans
will generally be acquired by the Fund from a bank, finance
company or other similar financial services entity ("Lender").
Loan participations are interests in floating or variable rate
senior loans ("Loans") to United States corporations,
partnerships and other entities ("Borrowers") which operate in
a variety of industries and geographical regions. Loans in
which the Fund will purchase participation interests generally
will pay interest at rates which are periodically redetermined
on the basis of a base lending rate plus a premium. These base
lending rates are generally the Prime Rate offered by a major
United States bank, the London Inter-Bank Offered Rate, the
Certificate of Deposit rate or other base lending rates used by
commercial lenders. The Loans typically have the most senior
position in a Borrower's capital structure, although some Loans
may hold an equal ranking with other senior securities of the
Borrower. Although the Loans generally are secured by specific
collateral, the Fund may invest in Loans which are not secured
by any collateral. Uncollateralized Loans pose a greater risk
of nonpayment of interest or loss of principal than do
collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be
readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy fully a Borrower's
obligations under a Loan. The Fund is not subject to any
restrictions with respect to the maturity of the Loans in which
it purchases participation interest.
The Loans generally are not rated by nationally recognized
statistical rating organizations. Ratings of other securities
issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Loans. Therefore, although the
Manager may consider such ratings in determining whether to
invest in a particular Loan, such ratings will not be the
determinative factor in the Manager's analysis.
The Loans are not readily marketable and may be subject to
restrictions on resale. Participation interests in the Loans
generally are not listed on any national securities exchange or
automated quotation system and no regular market has developed
for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions
between buyers and sellers. Many of the Loans in which the Fund
expects to purchase interests are of a relatively large principal
amount and are held by a relatively large number of owners which
in the Manager's opinion, should enhance the relative liquidity
of such interests.
When acquiring a loan participation the Fund will have a
contractual relationship only with the Lender (typically an
entity in banking, finance or financial services industries), not
with the Borrower. The Fund has the right to receive payments of
principal and interest to which it is entitled only from the
Lender selling the loan participation and only upon receipt by
such Lender of such payments from the Borrower. In connection
with purchasing loan participations, the Fund generally will have
no right to enforce compliance by the Borrower with the terms of
the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower
and the Fund may not directly benefit from the collateral
supporting the Loan in which it has purchased the loan
participation. As a result, the Fund may assume the credit risk
of both the Borrower and the Lender selling the loan
participation. In the event of the insolvency of the Lender
selling a loan participation, the Fund may be treated as a
general creditor of such Lender, and may not benefit from any
set-off between such Lender and the Borrower. The Fund may
purchase loan participations with a maturity date beyond May 31,
2001, the date of distribution of the net assets of the Fund to
shareholders. The illiquidity of loan participations may impair
the Fund's ability to realize the full value of its assets when
the Fund attempts to liquidate its assets for distribution to
shareholders. Liquidity relates to the ability of the Fund to
sell an investment in a timely manner. The market for relatively
illiquid securities tends to be more volatile than the market for
more liquid securities. The portion of the Fund's assets invested
in relatively illiquid loan participations may restrict the
ability of the Fund to dispose of its investments in such loans
in a timely fashion and at fair price, and could result in losses
to the Fund.
CONVERTIBLE SECURITIES
The Fund is permitted to invest up to 10% of the Fund's total
assets (at the time of investment) in convertible debt securities
and up to 10% of the Fund's total assets (at the time of the
investment) in convertible preferred stocks.
A convertible security is a debt security (bond, debenture, note)
or preferred stock that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive
interest paid or accrued on debt or dividends paid on preferred
stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have unique
investment characteristics in that they generally (1) have higher
yields than common stocks, but lower yields than comparable
non-convertible securities, (2) are less subject to fluctuation
in value than the underlying stock because they have fixed-income
characteristics, and (3) provide the potential for capital
appreciation if the market price of the underlying common stock
increases. While no securities investment is without some risk,
investments in convertible securities generally entail less risk
than the issuer's common stock, although the extent to which such
risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed income
security. Debt securities that are convertible into or
exchangeable to preferred common stock are liabilities of the
issuer but are generally subordinated to more senior elements of
the issuer's balance sheet. Although such securities also
generally reflect an element of conversion value, their market
value also varies with interest rates and perceived credit risk.
The debt security investments are not limited to investment grade
fixed-income securities and may have speculative characteristics
or may even be in default. (See "Loan Participations" above for
risks associated with such securities).
PREFERRED STOCKS
The Fund is permitted to invest up to 10% of the Fund's total
assets (at the time of investment) in preferred stock (not
convertible into common stock).
Preferred stock may offer the possibility of capital appreciation
when the issuer performs below expectations at the time the
preferred stock was issued. The preferred stock will often trade
more like a common stock than a fixed-income security, with
appreciation in its value resulting when the company's
performance improves. Preferred stock has a preference over
common stock in liquidation (and generally dividends as well) but
is subordinated to the liabilities of the issuer in all respects.
As a general rule, the market value of preferred stock with a
fixed dividend rate and no conversion element varies inversely
with interest rates and perceived credit risk, while the market
price of convertible preferred stock generally also reflects some
element of conversion value. Because preferred stock is junior to
debt securities and other obligations of the issuer,
deterioration in the credit quality of the issuer will cause
greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
Preferred stocks have many of the same characteristics and risks
of debt securities described in the "High Income Producing Debt
Securities" section of the Fund's Prospectus.
COMMON STOCKS
The Fund is permitted to invest up to 10% of the Fund's total
assets (at the time of investment) in common stocks.
Common stocks represent the residual ownership interest in the
issuer and are entitled to the income and increase in the value
of the assets and business of the entity after all of its
obligations and preferred stocks increase in the value of the
assets and business of the entity after all of its obligations
and preferred stocks are satisfied. Common stocks generally have
voting rights. Common stocks fluctuate in price in response to
many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions,
interest rates, investor perceptions and market liquidity. The
Fund may invest in common stocks of companies of any size, in
terms of market capitalization, and in any industry. There is no
requirement that the common stocks have a history of paying
dividends. The Fund anticipates that the return from investments
in common stocks will consist primarily of capital appreciation
and secondarily of dividend income and, over time will contribute
to the Fund's ability to return $10.00 per share to each
shareholder and provide income to shareholders.
DEBT SECURITIES IN DEFAULT
The Fund is permitted to invest its assets in debt securities
which are in default.
Subject to the Fund's policies limiting investments in a
particular type of security to a certain percentage of the Fund's
assets at the time of investment, the Fund may invest without
limit in securities which are in default. An investment in debt
securities which are in default carries a high degree of risk and
may have the consequence that interest payments with respect to
such securities may be reduced, deferred, suspended or eliminated
and may have the further consequence that principal payments may
likewise be reduced, deferred, suspended or canceled, causing the
loss of the entire amount of the investment. The Fund may acquire
debt securities in default primarily in an attempt to achieve
appreciation in value which will contribute to the Fund's ability
to return $10.00 per share to each shareholder and provide income
to shareholders. Although the Fund may invest without limit in
securities in default, to the extent that such securities may be
illiquid, the acquisition of illiquid debt securities in default
is subject to the Fund's investment restriction limiting
investments in illiquid securities to 331/3% of the Fund's assets
(exclusive of any illiquid zero coupon securities). The
illiquidity of debt securities may impair the Fund's ability to
realize the full value of its assets when the Fund attempts to
liquidate its assets for distribution to shareholders. Liquidity
relates to the ability of the Fund to sell an investment in a
timely manner. The market for relatively illiquid securities
tends to be more volatile than the market for more liquid
securities. The portion of the Fund's assets invested in
relatively illiquid debt securities in default may restrict the
ability of the Fund to dispose of its investments in such loans
in a timely fashion and at fair price, and could result in losses
to the Fund.
TRADE CLAIMS
The Fund is permitted to purchase trade claims. Trade claims are
purchased from creditors of companies in financial difficulty who
seek to reduce the number of debts they are owed. Such trade
creditors generally sell their claims in an attempt to improve
their balance sheets and reduce uncertainty regarding payments.
For purchasers such as the Fund, trade claims offer the potential
for profits since they are often purchased at a significantly
discounted value and, consequently, may generate capital
appreciation in the event that the value of the claim increases
as the debtor's financial position improves. Further, in the
event that the debtor is able to pay the full obligation on the
face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims
offer the potential for higher income due to the difference in
the face value of the claim as compared to the discounted
purchase price. The Fund's investment in trade claims will be
limited by a policy to invest only up to 10% of its net assets in
trade claims. While Advisers believes that trade claims are
liquid because there is a secondary market for such claims, the
liquidity of trade claims will be monitored by Advisers under
supervision of the Board of Trustees. The Fund is not permitted
to commit more than 331/3% of its assets to illiquid investments.
An investment in trade claims is speculative and carries a high
degree of risk. There can be no guarantee that the debtor will
ever be able to satisfy the obligation on the trade claim.
Further, trading in claims is not regulated by federal securities
laws or the Securities and Exchange Commission. Currently,
trading in claims is regulated primarily by bankruptcy laws and
because trade claims are unsecured, holders of trade claims may
have a lower priority in terms of payment than most of the
creditors in the bankruptcy proceeding.
With respect to the policies of the Fund that may not be changed
without the vote of a majority of the outstanding voting
securities, including those policies the Fund deems to be
fundamental, the "Investment Restrictions" section of the Fund's
Prospectus is incorporated herein by reference.
3. Risk Factors:
a. General: The "Special Considerations" section of the Fund's
Prospectus is incorporated herein by reference. Also, see
response to Item 8.2.
b. Effects of Leverage:
(1) The average annual rate of interest or dividend
payments on the Fund's investment in reverse repurchase
agreements for the fiscal year ended November 30, 1995
was 5.85%.
(2) The annual return that the Fund's portfolio must
experience in order to cover annual interest payments
on reverse repurchase agreements is 1.66%.
(3) The table below illustrates the effect on return to a
common stockholder of leverage (using senior
securities), assuming annual returns on the Fund's
portfolio (net of expenses) of minus ten, minus five,
zero, five and ten percent:
- ------------------------- -------- ------- ------- ------ -------
Assumed return on -10% -5% 0% 5% 10%
portfolio (net of
expenses)
- ------------------------- -------- ------- ------- ------ -------
- ------------------------- -------- ------- ------- ------ -------
Corresponding return to (1) (1) (1) (1) (1)
common stockholder -16.59 -9.51 -2.42 4.67 11.76
- ------------------------- -------- ------- ------- ------ -------
(1) In percent.
The purpose of the table is to assist the investor in
understanding the effects of leverage. The figures appearing
in the table are hypothetical and actual returns may be
greater or lesser than those appearing in the table.
4. Other Policies:
See response to Item 8.2.
5. Share Price Data
a. The Fund issued shares of beneficial interest which are
listed on the New York Stock Exchange ("NYSE").
b. The following table sets forth (1) the high and low net
asset values per share of beneficial interest for the
quarters indicated; (2) the high and low market prices per
share of beneficial interest for the quarters indicated; and
(3) the percentage of premium or discount to net asset value
represented by such market values shown in the table for the
quarters indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
DISCOUNT TO NET
NET ASSET VALUE MARKET PRICE ASSET VALUE
- --------------------- ---------------- ----- ------------------ ---- ----------------------
QUARTER ENDED HIGH LOW HIGH LOW % HIGH % LOW
------------- ---- --- ---- --- ------ -----
<S> <C> <C> <C> <C> <C> <C>
February 28, 1994 $10.32 $ 9.64 $ 9.00 $ 8.375 12.79 13.12
May 31, 1994 $10.08 $ 9.05 $ 9.375 $ 8.00 6.99 11.60
August 31, 1994 $ 9.14 $ 8.59 $ 8.25 $ 7.50 9.74 12.69
November 30, 1994 $ 8.75 $ 7.70 $ 7.75 $ 6.875 11.43 10.71
February 28, 1995 $ 7.88 $ 7.52 $ 7.125 $ 6.375 9.58 15.23
May 31, 1995 $ 8.17 $ 7.68 $ 7.25 $ 6.625 11.26 13.74
August 31, 1995 $ 8.50 $ 8.17 $ 7.50 $ 7.00 11.76 14.32
November 30, 1995 $ 8.68 $ 8.42 $ 7.50 $ 7.125 13.59 15.38
</TABLE>
The shares of beneficial interest have traded at a discount
from net asset value from time to time since January 1991.
On March 11, 1996, the shares traded at a market price of
$7.625 with a net asset value of $8.63, which is an 11.65%
discount from net asset value.
6. Inapplicable
ITEM 9. MANAGEMENT
1. a. Board of Directors:
The first two sentences of the "Trustees and Officers"
section of the Fund's Prospectus is incorporated herein by
reference.
b. Investment Advisers:
(1) The Fund employs Advisers to manage the investment and
reinvestment of the Fund's assets and administer the
affairs of the Fund, subject to the supervision of the
Fund's Board of Trustees. The Manager is a registered
investment adviser and a wholly owned subsidiary of
Franklin Resources, Inc. ("Resources").
Resources is a publicly held company whose shares are listed
on the NYSE. Charles B. Johnson and Rupert H. Johnson, Jr.,
Trustees and/or officers of the Fund, are the principal
shareholders of Resources and own, respectively,
approximately 22% and 17% of the outstanding shares.
Resources is engaged in various aspects of the financial
services industry through its various subsidiaries (the
"Franklin Templeton Group").
Advisers acts as investment manager or administrator to 36
U.S. registered investment companies, with aggregate assets
(as of December 31, 1995) over $80 billion. The Manager,
through its predecessors and affiliates, has been providing
investment advisory and management services to investment
companies and private accounts since 1947. The Manager's
abilities in widely varied market conditions have enabled it
to become one of the largest independent investment advisory
organizations in the United States. The Manager currently
advises several specialized funds which emphasize investment
in debt securities, and it manages the nation's largest
publicly offered mutual fund specializing in U.S. Government
and mortgage-backed securities. The Manager pioneered one of
the first mutual funds investing in adjustable rate
mortgage-backed securities. It maintains a large staff of
professional portfolio managers, securities analysts and
administrative specialists to continuously select
investments, monitor its portfolios and furnish timely
reports to shareholders. The Manager's address is 777
Mariners Island Boulevard, San Mateo, California 94404.
(2) The fifth paragraph of the "Management of the Fund"
section of the Fund's Prospectus is incorporated herein
by reference.
(3) The fourth paragraph of the "Management of the Fund"
section of the Fund's Prospectus is incorporated herein
by reference.
c. Portfolio Management:
Chauncey Lufkin, the portfolio manager and a vice president
of the Fund, is primarily responsible for the day-to-day
management of the Fund's portfolio and has been since
September 1991. He joined Advisers in 1990 as a specialist
in restructuring and distressed securities. Prior to 1990,
Mr. Lufkin worked for the special finance group of
Manufacturers Hanover Trust Co. and in the leveraged finance
division at Security Pacific National Bank. Mr. Lufkin
received his bachelor of arts degree from St. Lawrence
University.
d. Administrators:
Inapplicable
e. Custodians:
(1) The custodian of the Fund's portfolio securities is
Bank of New York (the "Custodian"), Mutual Funds
Division, 90 Washington Street, New York, NY 10286.
(2) First Data Investor Services Group, 53 State Street,
Boston, MA 02109-2873, serves as dividend disbursing
agent, transfer agent and registrar.
f. Expenses:
The seventh paragraph of the "Management of the Fund"
section of the Fund's Prospectus is incorporated herein by
reference.
g. Affiliated Brokerage:
The fourth paragraph of the "Portfolio Transactions and
Brokerage" section of the Fund's Prospectus is incorporated
herein by reference.
2. Non-resident Managers:
Inapplicable
3. Control Persons:
Inapplicable
ITEM 10. CAPITAL STOCK, LONG-TERM DEBT, AND OTHER SECURITIES
1. Capital Stock:
a., b., c., d., and f.
The "Description of Shares" and "Dividends and
Distributions" sections of the Fund's Prospectus are
incorporated herein by reference.
e. The "Dividend Reinvestment Plan" section of the Fund's
Prospectus is incorporated herein by reference.
First Data Investor Services Group ("Plan Agent"), c/o
Corporate Securities, 53 State Street, Boston, Massachusetts
02109, acts as the Plan Agent in administering the Plan. All
reinvestments are in full and fractional shares, carried to
two decimal places. The complete Terms and Conditions of the
Dividend Reinvestment Plan are contained in the Fund's
Prospectus, which may be obtained from the Fund. Additional
information about the Plan may be obtained from the Plan
Agent at the address shown above or by telephone at (800)
331-1710.
A shareholder is automatically enrolled in the Plan unless
the shareholder elects to receive dividends or distributions
in cash. If a shareholder owns shares in his/her own name,
such shareholder should notify the Plan Agent, in writing,
if he/she wishes to receive dividends or distributions in
cash.
If the Fund declares a dividend or capital gain
distribution, a participant in the Plan will automatically
receive an equivalent amount of shares of the Fund purchased
on behalf of the participant by the Plan Agent in the open
market. All reinvestments are in full and fractional shares.
The Fund does not issue new shares in connection with the
Plan.
There is no direct charge to participants for reinvesting
dividends and distributions, since the Plan Agent's fees are
paid by the Fund. Whenever shares are purchased through the
exchange on which they are listed, each participant will pay
a pro rata portion of brokerage commissions. The automatic
reinvestment of dividends and distributions does not relieve
shareholders of liability for any taxes which may be payable
on dividends or distributions. Generally, income and capital
gains resulting from dividends and distributions received in
the form of shares of the Fund, are realized notwithstanding
the fact that cash is not received by shareholders.
A participant will receive a monthly account statement from
the Plan Agent, showing total dividends and distributions,
date of investment, shares acquired and price per share, and
total shares of record held by the participant and by the
Plan Agent for the participant. A participant is entitled to
vote all shares of record, including shares purchased for
the participant by the Plan Agent, and, if the participant
votes by proxy, the proxy will include all such shares.
As long as the participant participates in the Plan, the
Plan Agent will hold the shares it has acquired for the
participant in safekeeping, in non-certificated form. This
convenience provides added protection against loss, theft or
inadvertent destruction of certificates.
A participant may withdraw from the Plan at any time by
notifying the Plan Agent in writing. There is a $5 fee to
withdraw from the reinvestment plan. If a participant
withdraws from the Plan, such participant will receive a
certificate issued in his/her name for all full shares and
the Plan Agent will convert any fractional shares so held at
the time of withdrawal to cash at the then current market
price and send the participant a check for the proceeds. If
a participant prefers, the Plan Agent will sell all of
his/her full and fractional shares upon such withdrawal and
send the participant the proceeds.
If a participant holds shares in his/her own name, all
notices, correspondence, questions, or other communications
regarding the Plan should be addressed to the Plan Agent at
the address noted above. If shares are not held in a
participant's name, such participant should contact his/her
brokerage firm, bank, or other nominee for more information.
A participant in the Dividend Reinvestment Plan holding
shares in a brokerage account may not be able to transfer
the shares to another broker and continue to participate in
the Dividend Reinvestment Plan if such broker does not allow
for dividend reinvestment plans.
2. Long-Term Debt:
Inapplicable
3. General:
There is no other class of authorized securities of the Fund.
4. Taxes:
The Fund has qualified and intends to continue to so qualify for
treatment under Subchapter M of the Internal Revenue Code of 1986
for federal income tax purposes. The Fund will distribute all of
its net investment income and gains to shareholders and these
distributions are taxable as ordinary income or capital gains;
shareholders may be proportionately liable for taxes on income
and gains of the Fund, but shareholders not subject to tax on
their income will not be required to pay tax on amounts
distributed to them; and the Fund will inform shareholders of the
amount and nature of the income or gains.
Shareholders will not be subject to the alternative minimum tax.
5. Outstanding Securities:
The following information for each class of the authorized
securities of the Trust is furnished as of February 29, 1996:
<TABLE>
<CAPTION>
(3) (4)
AMOUNT HELD BY AMOUNT OUTSTANDING
(1) (2) REGISTRANT OR EXCLUSIVE OF
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS ACCOUNT AMOUNT SHOWN UNDER (3)
<S> <C> <C> <C>
Shares of Beneficial Unlimited shares of -0- 20,462,600
Interest, par value beneficial interest
$.01 per share
</TABLE>
6. Securities Ratings:
Inapplicable
ITEM 11. DEFAULTS AND ARREARS ON SENIOR SECURITIES
Inapplicable
ITEM 12. LEGAL PROCEEDINGS
To the knowledge of the Fund, there are no material pending legal
proceedings to which the Fund or Advisers is a party.
ITEM 13. TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Inapplicable
PART B - INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
ITEM 14. COVER PAGE
Inapplicable
ITEM 15. TABLE OF CONTENTS
Inapplicable
ITEM 16. GENERAL INFORMATION AND HISTORY
Inapplicable
ITEM 17. INVESTMENT OBJECTIVES AND POLICIES
See response to Item 8.
ITEM 18. MANAGEMENT
1. and 2. Trustees who are deemed to be "interested persons" of the
Fund, as defined in the Investment Company Act of 1940, are
indicated by an asterisk (*). For each Trustee and officer of the
Fund, any positions held with affiliated persons of the Fund are
indicated.
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS HELD WITH FUND DURING PAST FIVE YEARS
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott
Age 74 Corporation (an investment company);
1045 Sansome St. and director, trustee or managing
San Francisco, CA 94111 general partner, as the case may be, of
31 of the investment companies in the
Franklin Group of Funds.
Harris J. Ashton Trustee President, Chief Executive Officer and
Age 63 Chairman of the Board, General Host
General Host Corporation Corporation (nursery and craft
Metro Center, 1 Station Place centers); Director, RBC Holdings Inc.
Stamford, CT 06904-2045 (a bank holding company) and Bar-S
Foods; and director, trustee or
managing general partner, as the case
may be, of 56 of the investment
companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato Trustee Member of the law firm of Pitney,
Age 63 Hardin, Kipp & Szuch; Director of
Park Avenue at Morris County General Host Corporation; director,
P.O. Box 1945 trustee or managing general partner, as
Morristown, NJ 07962-1945 the case may be, of 58 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano Trustee Private Investor; Assistant
Age 81 Secretary/Treasurer and Director,
111 New Montgomery St., #402 Berkeley Science Corporation (a venture
San Francisco, CA 94105 capital company); and director, trustee
or managing general partner, as the
case may be, of 30 of the investment
companies in the Franklin Group of
Funds.
*Edward B. Jamieson President and Senior Vice President and Portfolio
Age 47 Trustee Manager, Franklin Advisers, Inc; and
777 Mariners Island Blvd. officer and/or director or trustee of
San Mateo, CA 94404 five of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson Chairman of the President and Director, Franklin
Age 63 Board and Trustee Resources, Inc.; Chairman of the Board
777 Mariners Island Blvd. and Director, Franklin Advisers, Inc.
San Mateo, CA 94404 and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General
Host Corporation; and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. Vice President Executive Vice President and Director,
Age 55 and Trustee Franklin Resources, Inc. and Franklin
777 Mariners Island Blvd. Templeton Distributors, Inc; President
San Mateo, CA 94404 and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin
Resources, Inc. and of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates
Age 66 and Miller & LaHaye, which are General
20833 Stevens Creek Blvd. Partners of Peregrine Ventures and
Suite 102 Peregrine Ventures II (venture capital
Cupertino, CA 95014 firms); Chairman of the Board and
Director, Quarterdeck Office Systems,
Inc.; Director, FischerImaging
Corporation; and director or trustee,
as the case may be, of 26 of the
investment companies in the Franklin
Group of Funds.
Gordon S. Macklin Trustee Chairman, White River Corporation
Age 67 (information services); Director, Fund
8212 Burning Tree Road American Enterprises Holdings, Inc.,
Bethesda, MD 20817 Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune,
Inc. (biotechnology), InfoVest
Corporation (information services), and
Fusion Systems Corporation (industrial
technology); and director, trustee or
managing general partner, as the case
may be, of 53 of the investment
companies in the Franklin Templeton
Group of Funds; and formerly held the
following positions: Chairman,
Hambrecht and Quist Group; Director,
H&Q Healthcare Investors; and
President, National Association of
Securities Dealers Inc.
Harmon E. Burns Vice President Executive Vice President, Secretary and
Age 51 since 1988 Director, Franklin Resources, Inc.;
777 Mariners Island Blvd. Executive Vice President and Director,
San Mateo, CA 94404 Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the
case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer
and/or director or trustee of 61 of the
investment companies of the Franklin
Templeton Group of Funds.
Kenneth V. Domingues Vice Senior Vice President, Franklin
Age 63 President-Financial Resources, Inc., Franklin Advisers,
777 Mariners Island Blvd. Reporting and Inc., and Franklin Templeton
San Mateo, CA 94404 Accounting Distributors, Inc.; officer and/or
Standards director, as the case may be, of other
subsidiaries of Franklin Resources,
Inc., and officer and/or managing
general partner, as the case may be, of
37 of the investment companies in the
Franklin Group of Funds.
Martin L. Flanagan Vice President Senior Vice President, Chief Financial
Age 35 and Chief Officer and Treasurer, Franklin
777 Mariners Island Blvd. Financial Officer Resources, Inc.; Executive Vice
San Mateo, CA 94404 President, Templeton Worldwide, Inc.;
Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton
Investor Services, Inc.; officer of
most other subsidiaries of Franklin
Resources, Inc.; and officer of 61 of
the investment companies of the
Franklin Templeton Group of Funds.
Deborah R. Gatzek Secretary and Senior Vice President and General
Age 47 Vice President Counsel, Franklin Resources, Inc. and
777 Mariners Island Blvd. Franklin Templeton Distributors, Inc.;
San Mateo, CA 94404 Vice President, Franklin Advisers,
Inc.; and officer of 61 of the
investment companies in the Franklin
Group of Funds.
Charles E. Johnson Vice President Senior Vice President and Director,
Age 39 Franklin Resources, Inc.; Senior Vice
500 East Broward Blvd. President, Franklin Templeton
Fort Lauderdale, FL 33394-3091 Distributors, Inc.; President and
Director, Templeton Worldwide Inc. and
Franklin Institutional Services
Corporation; and officer and/or
director or trustee, as the case may
be, of 40 of the investment companies
of the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam Treasurer and Employee of Franklin Advisers, Inc.;
Age 57 Principal and officer of 37 of the investment
777 Mariners Island Blvd. Accounting Officer companies in the Franklin Group of
San Mateo, CA 94404 Funds.
Chauncey Lufkin Vice President Employee of Franklin Advisers, Inc.
Age 38 since 1990. Formerly an employee of
777 Mariners Island Blvd. Manufacturers Hanover Trust Co. and
San Mateo, CA 94404 Security Pacific Bank.
Edward V. McVey Vice President Senior Vice President/National Sales
Age 58 Manager, Franklin Templeton
777 Mariners Island Blvd. Distributors, Inc.; and officer of 32
San Mateo, CA 94404 of the investment companies in the
Franklin Group of Funds.
R. Martin Wiskemann Vice President Senior Vice President, Portfolio
Age 69 Manager and Director, Franklin
777 Mariners Island Blvd. Advisers, Inc.; Senior Vice President,
San Mateo, CA 94404 Franklin Management, Inc.; Vice
President, Treasurer and Director, ILA
Financial Services, Inc. and Arizona
Life Insurance Company of America; and
officer and/or director, as the case
may be, of 21 of the investment
companies in the Franklin Group of
Funds.
</TABLE>
Charles E. Johnson is the son and nephew, respectively, of Charles B. Johnson
and Rupert H. Johnson, Jr., who are brothers. Chauncey Lufkin is the son-in-law
and brother-in-law, respectively, of Charles B. Johnson and Charles E. Johnson.
3. No director or officer of the Fund is a non-resident director or
officer.
4. (a) and (b)
Trustees not affiliated with the Manager ("nonaffiliated
trustees") are currently paid fees of $1,200 per year and
$100 per meeting attended. As indicated above, certain of
the Fund's nonaffiliated trustees also serve as directors,
trustees or managing general partners of other investment
companies in the Franklin Group of Funds_ and the Templeton
Group of Funds (the "Franklin Templeton Group of Funds")
from which they may receive fees for their services. The
following table indicates the total fees paid to
nonaffiliated trustees by the Fund and by other funds in the
Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
COMPENSATION TABLE
TOTAL COMPENSATION NUMBER OF BOARDS
RECEIVED FROM THE IN THE FRANKLIN
AGGREGATE FRANKLIN TEMPLETON TEMPLETON GROUP
COMPENSATION GROUP OF FUNDS, OF FUNDS ON WHICH
NAME FROM FUND* INCLUDING THE FUND** EACH SERVES***
---- ---------- -------------------- --------------
<S> <C> <C> <C>
Frank H. Abbott, III $2,400 $162,420 31
Harris J. Ashton 2,400 327,925 56
S. Joseph Fortunato 2,400 344,745 58
David W. Garbellano 2,400 146,100 30
Frank W.T. LaHaye 2,400 143,200 26
Gordon S. Macklin 2,400 321,525 53
* For the fiscal year ended November 30, 1995.
** For the calendar year ended December 31, 1995.
*** The number of boards is based on the number of registered investment companies in the
Franklin Templeton Group of Funds and does not include the total number of series or
funds within each investment company for which the directors are responsible. The
Franklin Templeton Group of Funds currently includes 61 registered investment
companies, consisting of more than 162 U.S.-based funds or series.
</TABLE>
Nonaffiliated trustees are also reimbursed for expenses
incurred in connection with attending Board meetings, paid
pro rata by all Franklin Templeton Funds for which they
serve as trustees, directors or managing general partners.
No officer or trustee received any other compensation
directly from the Fund. Certain officers of the Fund are
shareholders of Franklin Resources, Inc. and may be deemed
to receive indirect remuneration by virtue of their
participation in the management fees received by the
Manager.
(c) Inapplicable
ITEM 19. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
1. Inapplicable
2. As of February 29, 1996, to the Fund's knowledge, no person
beneficially owns 5% or more of the Fund's outstanding shares.
3. As of February 29, 1996, the Trustees and officers as a group
owned less than 1% of the Fund's outstanding shares of beneficial
interest.
ITEM 20. INVESTMENT ADVISORY AND OTHER SERVICES
1. a. See response to Item 9.1.b.
b. See response to Item 18.1 and 18.2.
c. The fourth paragraph of the "Management of the Fund"
section of the Fund's Prospectus is incorporated by
reference herein.
(1) The total dollar amounts paid to the Manager by the
Fund for the fiscal years ended November 30, 1993, 1994
and 1995, were $1,239,833, $1,127,460 and $999,478,
respectively.
(2) There were no credits that reduced the advisory fee for
any of the last fiscal years.
(3) The Fund has not been, and it is presently anticipated
that the Fund will not be, subject to any expense
limitation under state law.
2. The fifth paragraph of the "Management of the Fund" section of
the Prospectus is incorporated herein by reference.
3. Inapplicable
4. Inapplicable
5. Inapplicable
6. See response to Item 9.e. The Custodian maintains a separate
account or accounts for the Fund; receives, holds and releases
portfolio securities on account of the Fund; makes receipts and
disbursements of money on behalf of the Fund; and collects and
receives income and other payments and distributions on account
of the Fund's portfolio securities.
7. Coopers & Lybrand L.L.P. ("C&L"), 333 Market Street, San
Francisco, CA 94105, serves as the Fund's independent accountants
and audits the Fund's financial statements on an annual basis.
8. Inapplicable
ITEM 21. BROKERAGE ALLOCATION AND OTHER PRACTICES
1., 2. and 3.
The "Portfolio Transactions and Brokerage" section of the Fund's
Prospectus is incorporated herein by reference. For the fiscal
years ended November 30, 1993, 1994 and 1995, the Fund paid total
brokerage commissions of $63,428, $81,613 and $87,497,
respectively. No commissions were paid by the Fund to any broker
that is an affiliated person of the Fund or the Manager during
the Fund's three most recent fiscal years.
4. The Fund and the Manager did not direct the Fund's brokerage
transactions to a broker or brokers pursuant to an agreement or
understanding with a broker or otherwise through an internal
allocation procedure because of research services provided.
5. During the fiscal year ended November 30, 1995, the Fund did not
acquire securities of its regular broker-dealers or their
parents.
ITEM 22. TAX STATUS
The "Dividends and Distributions," "Dividend Reinvestment Plan"
and "Taxation" sections of the Fund's Prospectus are incorporated
herein by reference, except for the following:
(i) The first sentence of the first paragraph of the text that
now appears under the heading "Taxation of the Fund" is
replaced by the following sentence:
The Fund has qualified and elected to be treated as a
regulated investment company for federal income tax purposes
and intends to continue to so qualify.
(ii) The second sentence of the fourth paragraph under the
heading "Taxation of the Fund" in the section "Taxation" is
revised to replace "97%" with "98%."
(iii) The following new paragraph is added as paragraph 4 under
the heading "Taxation of the Fund" in the section
"Taxation":
The federal income tax rules governing the taxation of
interest rate swaps, caps and floors may require the Fund to
treat payments received under such arrangements as ordinary
income and to amortize such payments under certain
circumstances. The Fund will limit its activity in this
regard in order to maintain its qualification as a regulated
investment company.
(iv) The ninth paragraph under the heading "Taxation of
Shareholders" in the section "Taxation" is deleted in its
entirety.
(v) The last three sentences of the first paragraph under the
heading "Taxation of the Fund" in the section "Taxation" are
deleted.
(vi) The first sentence of the tenth paragraph under the heading
"Taxation of Shareholders" in the section "Taxation" is
revised to replace "20%" with "31%."
ITEM 23. FINANCIAL STATEMENTS
Pages 8 through 20 of the Fund's Annual Report to Shareholders for the
fiscal year ended November 30, 1995, are incorporated herein by
reference.
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
1) The following financial statements have been incorporated by reference to the
Registrant's filing on Form N-30D on January 25, 1996:
(a) Report of Independent Auditors - January 2, 1996
(b) Statement of Investments in Securities and Net Assets - November
30, 1995
(c) Statement of Assets and Liabilities - November 30, 1995
(d) Statement of Operations - for the year ended November 30, 1995
(e) Statements of Changes in Net Assets - for the years ended November
30, 1995 and 1994.
(f) Statement of Cash Flow for the year ended November 30, 1995
(g) Notes to Financial Statements
2) Exhibits:
The following exhibits are attached herewith except for exhibit e(ii) which is
incorporated by reference:
(a) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust As Amended and restated
December 13, 1988
(b) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
(c) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(d) copies of all instruments defining the rights of the holders of the
securities being registered including, where applicable, the
relevant portion of the articles of incorporation or by-laws of the
registrant;
Not Applicable
(e) a copy of the document setting forth the Registrant's dividend
reinvestment plan, if any;
(i) Prospectus for Franklin Principal Maturity Trust dated
January 19, 1989
(ii) The section of the Annual Report of the Registrant dated
November 30, 1995, entitled "Dividend Reinvestment Plan," is
incorporated herein by reference to the Registrant's filing on
Form N-30D on January 25, 1996.
(f) copies of the constituent instruments defining the rights of the
holders of long-term debt of all subsidiaries for which consolidated
or unconsolidated financial statements are required to be filed;
Not Applicable
(g) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Investment Management Agreement dated January 19, 1989
between the Registrant and Franklin Advisers, Inc.
(h) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
Not Applicable
(i) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as such (A
reasonably detailed description of any plan that is not set forth in
a formal document should be furnished;
Not Applicable
(j) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Custody Agreement between Registrant and Bank of America
National Trust and Savings Association dated January 18,
1989
(ii) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
(iii)Terminal Link Agreement between Registrant and The Bank of
New York dated February 16, 1996
(k) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the registration statement;
Not Applicable
(l) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(m) if a non-resident director, officer, investment adviser, or expert
named in the registration statement has executed a consent to
service of process within the United States, a copy of that consent
to service;
Not Applicable
(n) copies of any other opinions, appraisals or rulings and consents to
their use, relied on in the preparation of this registration
statement, and consents to the use of accountants reports relating
to audited financial statements required by Section 7 of the 1933
Act;
Not Applicable
(o) all financial statements omitted from Items 8.6 or 23;
Not Applicable
(p) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of reselling;
(i) Letter of Understanding dated January 11, 1989
(q) Copies of the model plan used in the establishment of any retirement
plan in conjunction with which the Registrant offers its securities,
any instructions to it, and any other documents making up the model
plan;
Not Applicable
(r) Power of Attorney
(i) Power of Attorney dated December 14, 1995
(ii) Certificate of Secretary dated December 14, 1995
(s) Electronic Filers. A Financial Data Schedule meeting the
requirements of rule 483 under the Securities Act of 1933
(i) Financial Data Schedule
ITEM 25. MARKETING ARRANGEMENTS
None
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
None
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of February 29, 1996, the number of shareholders of record of the only class
of the Registrant's shares were as follows:
(1) (2)
Title of Class Number of Record Holders
Franklin Principal Maturity Trust
Shares of Beneficial Interest ($.01 par value) 2,934
ITEM 29. INDEMNIFICATION
Under Section 3 of Article VII of the Fund's Amended and Restated Agreement and
Declaration of Trust and Article VI of the Fund's By-Laws, any past or present
trustee or officer of the Fund and each of the Fund's employees and agents will
be indemnified to the fullest extent permitted under the laws of the
Commonwealth of Massachusetts and the Investment Company Act of 1940, as those
statutes are now or hereafter in force, against liability and all expenses
reasonably incurred by any such person in connection with any action, suit or
proceedings to which such person may be a party or otherwise involved by reason
of being or having been a trustee, officer, employee or agent of the Fund. This
provision does not authorize indemnification when it is determined, in the
manner specified by law, that the trustee, officer, employee or agent would
otherwise be liable to the Fund or its shareholders by reason or willful
misfeasance, bad faith, gross negligence or reckless disregard of such person's
duties.
Paragraph 13 of the Underwriting Agreement for the shares of beneficial interest
provide for indemnification of trustees, officers and controlling persons of the
Fund.
The trustees and officers of the Fund and the personnel of the Fund's Investment
Manager are insured under an errors and omission's liability insurance policy.
The Fund and its officers are also insured under the fidelity bond required by
Rule 17g-1 under the Investment Company Act of 1940.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 as amended (the "Act") may be permitted to the Trustees, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a Trustee, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer or controlling person in connection with securities being
registered, the Fund will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Franklin Advisers, Inc.
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group of
Funds. In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B and Schedules A and D
of Form ADV of the Fund's Investment Manager (SEC File 801-26292), incorporated
herein by reference, which sets forth the officers and directors of the
Investment Manager and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Fund are located at the office of the Fund and
at additional locations, as follows:
NAME ADDRESS
Franklin Advisers, Inc. 777 Mariners Island Blvd.
San Mateo, CA 94404
First Data Investor Services Group 53 State Street
Boston, MA 02109
Bank of America NT & SA 555 California Street,
Fourth Floor
San Francisco, CA 94104
Bank of New York Mutual Funds Division
90 Washington Street
New York, New York 10286
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, 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
and the State of California, on the XXth day of March, 1996.
FRANKLIN PRINCIPAL MATURITY TRUST
(Registrant)
By: /s/ Edward B. Jamieson*
President
*By: /s/ Larry L. Greene
(Attorney-in-Fact)
Pursuant to Powers of Attorney filed herewith.
FRANKLIN PRINCIPAL MATURITY TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
IN SEQUENTIAL
NUMBERING SYSTEM
EX-99.2a(i) Agreement and Declaration of Trust Attached
as amended and restated December
13, 1988
EX-99.2b(i) By-Laws Attached
EX-99.2e(i) Prospectus for Franklin Principal Attached
Maturity Trust dated January 19,
1989
EX-99.2e(ii) "Dividend Reinvestment Plan" *
section of Annual Report dated
November 30, 1995
EX-99.2g(i) Investment Management Agreement Attached
dated January 19, 1989 between the
Registrant and Franklin Advisers,
Inc.
EX-99.2j(i) Custody Agreement between Attached
Registrant and Bank of America
National Trust and Savings
Association dated January 18, 1989
EX-99.2j(ii) Master Custody Agreement between Attached
Registrant and Bank of New York
dated February 16, 1996
EX-99.2j(iii) Terminal Link Agreement between Attached
Registrant and The Bank of New York
dated February 16, 1996
EX-99.2p(i) Letter of Understanding dated Attached
January 11, 1989
EX-99.2r(i) Power of Attorney dated December Attached
14, 1995
EX-99.2r(ii) Certificate of Secretary dated Attached
December 14, 1995
EX-27.2s(i) Financial Data Schedule Attached
*Incorporated by Reference
AGREEMENT AND DECLARATION OF TRUST
of
FRANKLIN PRINCIPAL MATURITY TRUST
(Formerly Franklin Principal Preservation Trust)
a Massachusetts Business Trust
As Amended and Restated December 13, 1988
TABLE OF CONTENTS
FRANKLIN PRINCIPAL MATURITY TRUST
AGREEMENT AND DECLARATION OF TRUST
PAGE
ARTICLE I Name and Definitions ..................... 1
1. Name ............................................ 1
2. Definitions ..................................... 1
(a) By-Laws..................................... 1
(b) Commission and Principal Underwriter ....... 1
(c) Declaration of Trust ....................... 2
(d) Interested Person .......................... 2
(e) Investment Manager ......................... 2
(f) 1940 Act ................................... 2
(g) Person ..................................... 2
(h) Shareholder ................................ 2
(i) Shares ..................................... 2
(j) Series ..................................... 2
(k) Trust ...................................... 2
(1) Trust Property ............................. 2
(m) Trustees ................................... 2
ARTICLE II Purpose of Trust ........................... 3
ARTICLE III Shares ..................................... 3
1. Division of Beneficial Interest ................. 3
2. Ownership of Shares ............................. 4
3. Investments in the Trust ........................ 4
4. Status of Shares and Limitation of
Personal Liability .............................. 4
5. Power of Board of Trustees to Change
Provisions Relating to Shares ................... 4
6. Establishment and Designation of Series ......... 5
(a) Assets Belonging to Series ................. 6
(b) Liabilities Belonging to Series ............ 6
(c) Dividends, Distributions, Redemptions,
and Repurchases ............................ 7
(d) Voting ..................................... 7
(e) Equality ................................... 8
(f) Fractions .................................. 8
(g) Exchange Privilege ......................... 8
(h) Combination of Series ...................... 8
(i) Elimination of Series ...................... 8
7. Indemnification of Shareholders ................. 8
PAGE
ARTICLE IV The Trustees ................................ 9
1. Number, Election and Tenure ..................... 9
2. Effect of Death, Resignation, etc.
of a Trustee .................................... 10
3. Powers .......................................... 13
4. Payment of Expenses by the Trust ................ 13
5. Payment of Expenses by Shareholders ............. 14
6. Ownership of Assets of the Trust ................ 14
7. Service Contracts ............................... 14
ARTICLE V Shareholders' Voting Powers and Meetings.
1 Voting Powers .................................... 16
2. Voting Power and Meetings ....................... 17
3. Quorum and Required Vote ........................ 17
4. Action by Written Consent ....................... 18
5. Record Dates .................................... 18
6. Additional Provisions ........................... 19
ARTICLE VI Net Asset Value, Distributions,
and Redemptions ............................ 19
1. Determination of Net Asset Value, Net
Income and Distributions ........................ 19
2. Redemptions and Repurchases ..................... 19
3. Redemptions at the Option of the Trust .......... 20
ARTICLE VII Compensation and Limitation of
Liability of Trustees ...................... 21
1. Compensation .................................... 21
2. Limitation of Liability ......................... 21
3. Indemnification ................................. 21
ARTICLE VIII Miscellaneous
1. Trustees, Shareholders, etc.
Not Personally Liable; Notice .................... 22
2. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety ........................ 23
3. Liability of Third Persons Dealing
with Trustees .................................... 23
4. Termination of Trust or Series ................... 23
5. Conversion to Open-End Company ................... 24
6. Merger and Consolidation ......................... 24
7. Amendments to Rights, Preferences
and Par Value of Shares .......................... 24
8. Filing of Copies, References, Headings ........... 25
9. Applicable Law .................................. 25
10. Provisions in Conflict with Law or Regulations.... 25
11. Evidence of Amendment ............................ 26
12. Trust Only ....................................... 26
13. Use of the Name "Franklin" ....................... 26
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN PRINCIPAL MATURITY TRUST
THIS AGREEMENT AND DECLARATION OF TRUST, originally made and entered
into as of November 22, 1988, is hereby amended and restated this 13th day
of December 1988 by the Trustees named hereunder.
WHEREAS the Trustees desire and have agreed to manage all property
coming into their hands as trustees of a Massachusetts business trust in
accordance with the provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that this amended and
restated Agreement and Declaration of Trust be filed with the Secretary of
The Commonwealth of Massachusetts and do hereby declare that they will hold
all cash, securities and other assets, which they may from time to time
acquire in any manner as Trustees hereunder, IN TRUST, and manage and
dispose of the same upon the following terms and conditions for the pro
rata benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
SECTION 1. NAME. This Trust shall be known as the FRANKLIN PRINCIPAL
MATURITY TRUST and the Trustees shall conduct the business of the Trust
under that name or any other name as they may from time to time determine.
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from
time to time;
(b) The terms "Commission" and "Principal Underwriter" shall have
the meanings given them in the 1940 Act;
(c) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(d) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the 1940 Act.
(e) "Investment Manager" means a party furnishing services to the
Trust pursuant to any contract described in Article IV, Section 7(a)
hereof.
(f) The "1940 Act" refers to the Investment Company Act of 1940
and the Rules and Regulations thereunder, all as amended from time to
time;
(g) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and
political subdivisions thereof, whether domestic or foreign;
(h) "Shareholder' means a record owner of outstanding Shares;
(i) "Shares" means the equal proportionate units of interest into
which the beneficial interest in the Trust or in the Trust property
belonging to any series of the Trust (as the context may require)
shall be divided from time to time and includes fractions of Shares as
well as whole Shares. If the Shares in any series shall be divided
into classes, "Shares" means the Shares belonging to a particular
class (as the context may require);
(j) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III.
If no Series of Shares shall be so established and designated, all
references to Series shall be construed (as the context may require)
to refer to the Trust.
(k) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended
from time to time;
(1) The Trust Property means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the
account of the Trust or the Trustees.
(m) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office
in accordance with the terms hereof, and all other persons who may
from time to time be duly elected or appointed to serve on the Board
of Trustees in accordance with the provisions hereof, and reference
herein to a Trustee or the Trustees shall refer to such person or
persons in their capacity as trustees hereunder;
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a managed investment company registered under the 1940 Act through one or
more portfolios invested primarily in securities.
ARTICLE III
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a
par value of $ .01 per Share. The Trustees may authorize the division of Shares
into separate Series and the division of Series into separate classes of Shares.
The different Series, if any, (and classes, if any, within such Series) shall be
established and designated, and the variations in the relative rights and
preferences as between the different Series (and classes) shall be fixed and
determined, by the Trustees. If no Series shall be established, the Shares shall
have the rights and preferences provided for herein and in Article III, Section
6 hereof to the extent relevant and not otherwise provided for herein, and all
references to Series shall be construed (as the context may require) to refer to
the Trust.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and holders of the
Shares of any Series shall be entitled to receive dividends, when, if and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same class of the same Series with respect to dividends or distributions
upon termination of the Trust or of such Series made pursuant to Article VIII,
Section 4 hereof. All dividends and distributions shall be made ratably among
all Shareholders of a particular class of a particular Series from the assets
belonging to such Series according to the number of Shares of such class of such
Series held of record by such Shareholder on the record date for any dividend or
distribution or on the date of termination, as the case may be. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust or any Series. The Trustees may from time
to time divide or combine the Shares of any particular Series into a greater or
lesser number of Shares of that Series without thereby changing the
proportionate beneficial interest of the Shares of that Series in the assets
belonging to that Series or in any way affecting the rights of Shares of any
other Series.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series. No
certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series and similar matters. The record books of the Trust as kept by the Trust
or any transfer or similar agent, as the case may be, shall be conclusive as to
who are the Shareholders of each Series and as to the number of Shares of each
Series held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. The Trustees may accept investments in
the Trust from such Persons, at such times, on such terms, and for such
consideration as they from time to time authorize.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the existence of the
Trust shall not operate to terminate the Trust, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor, except as specifically provided herein, to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
SECTION 5. POWER OF BOARD OF TRUSTEES TO CHANGE PROVISIONS RELATING TO
SHARES. Notwithstanding any other provision of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders or that Shareholder approval is
not otherwise required by the 1940 Act or other applicable law. Shareholder
approval shall be required to convert the Trust to an "open-end company" as
provided for in Article VIII, Section 5 hereof, and to adopt any proposal for
the merger or consolidation of any Series of the Trust as provided for in
Article VIII, Section 6 hereof, to adopt any amendments to this Declaration of
Trust which would adversely affect the rights or preferences of the Shares of
any Series of the Trust or to increase or decrease the amount of the par value
of the Shares of any Series as provided for in Article VIII, Section 7 hereof.
Shareholder approval may be required to terminate the Trust or any Series as
provided for in Article VIII, Section 4 hereof.
Without limiting the generality of the foregoing, the Board of Trustees
may, for the above-stated purposes, amend the Declaration of Trust to amend any
of the provisions set forth in paragraphs (a) through (i) of Section 6 of this
Article III.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES. The establishment and
designation of any Series or class of Shares shall be effective upon the
resolution by a majority of the then Trustees, setting forth such establishment
and designation and the relative rights and preferences of such Series or class
of Shares, or as otherwise provided in such resolution.
Shares of each Series established pursuant to this Section 6, unless
otherwise provided in the resolution establishing such Series, shall be of a
single class and shall have the following relative rights and preferences:
(a) ASSETS BELONGING TO SERIES. All consideration received by the
Trust for the issue or sale of any securities of a particular Series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds
derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to that Series for
all purposes, subject only to the rights of creditors, and shall be so
recorded upon the books of account of the Trust. Such consideration,
assets, income, earnings, profits and proceeds thereof, from whatever
source derived, including, without limitation, any proceeds derived from
the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, in whatever form the same
may be, are herein referred to as "assets belonging to" that Series. In the
event that there are any assets, income, earnings, profits and proceeds
thereof, funds or payments which are not readily identifiable as belonging
to any particular Series (collectively "General Assets"), the Trustees
shall allocate such General Assets to, between or among any one or more of
the Series in such manner and on such basis as they, in their sole
discretion, deem fair and equitable, and any General Asset so allocated to
a particular Series shall belong to that Series. Each such allocation by
the Trustees shall be conclusive and binding upon the Shareholders of all
Series for all purposes.
(b) LIABILITIES BELONGING TO SERIES. The assets belonging to each
particular Series shall be charged with the liabilities of the Trust in
respect to that Series and all expenses, costs, charges and reserves
attributable to that Series, and any general liabilities of the Trust which
are not readily identifiable as belonging to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the
Series in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs,
charges, and reserves so charged to a Series are herein referred to as
"liabilities belonging to" that Series. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive
and binding upon the holders of all Series for all purposes. Under no
circumstances shall the assets allocated or belonging to any particular
Series be charged with liabilities attributable to any other Series. All
Persons who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated to any
particular Series, shall look only to the assets of that particular Series
for payment of such credit, claim, or contract.
(c) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS, AND REPURCHASES.
Notwithstanding any other provisions of this Declaration of Trust,
including, without limitation, Article VI, no dividend or distribution
(including, without limitation, any distribution paid upon termination of
the Trust or of any Series) with respect to, nor any redemption or
repurchase of, the Shares of any Series shall be effected by the Trust
other than from the assets belonging to such Series, nor, except as
specifically provided in Section 7 of this Article III, shall any
Shareholder of any particular Series otherwise have any right or claim
against the assets belonging to any other Series except to the extent that
such Shareholder has such a right or claim hereunder as a Shareholder of
such other Series. If the Trust shall have outstanding a class of senior
security (as defined in the 1940 Act), any dividend or distribution on or
purchase of the Shares shall be in compliance with Section 18 of the 1940
Act and, if applicable, any indenture with respect to such senior security.
The Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and
which items as capital; and each such determination and allocation shall be
conclusive and binding upon the Shareholders.
(d) VOTING. All Shares of the Trust entitled to vote on a matter shall
vote separately by Series (and, if applicable, by class): that is, the
Shareholders of each Series shall have the right to approve or disapprove
matters affecting the Trust and each respective Series as if the Series
were separate companies. There are, however, two exceptions to voting by
separate Series (or classes). First, if the 1940 Act requires all Shares of
the Trust to be voted in the aggregate without differentiation between the
separate Series (or classes), then all the Trust's Shares shall be entitled
to vote on a one-vote-per-Share basis. Second, if any matter affects only
the interests of some but not all Series (or classes), then only the
Shareholders of such affected Series (or classes) shall be entitled to vote
on the matter.
(e) EQUALITY. All the Shares of each particular Series shall represent
an equal proportionate interest in the assets belonging to that Series
(subject to the liabilities belonging to that Series and such rights and
preferences as may have been established and designated with respect to
classes of Shares within such Series), and each Share of any particular
Series shall be equal to each other Share of that Series.
(f) FRACTIONS. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that
Series, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) EXCHANGE PRIVILEGE. The Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by
the Trustees.
(h) COMBINATION OF SERIES. The Trustees shall have the authority,
without the approval of the Shareholders of any Series unless otherwise
required by applicable law, to combine the assets and liabilities belonging
to any two or more Series into assets and liabilities belonging to a single
Series.
(i) ELIMINATION OF SERIES. At any time that there are no Shares
outstanding of any particular Series (or class) previously established and
designated, the Trustees may by resolution of a majority of the then
Trustees abolish that Series (or class) and rescind the establishment and
designation thereof.
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having been a Shareholder and not because of his or her acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators, or other legal representatives or
in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets of the Trust to be held harmless
from and indemnified against all loss and expense arising from such liability.
ARTICLE IV
The Board of Trustees
SECTION 1. NUMBER, ELECTION AND TENURE. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument
signed or by resolution approved at a duly constituted meeting by a majority of
the Board of Trustees, provided, however, that the number of Trustees shall in
no event be less than three (3) nor more than fifteen (15). The Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he dies, resigns, is declared bankrupt or incompetent by a court of
appropriate jurisdiction, or is removed, or, if sooner, until the next meeting
of Shareholders called for the purpose of electing Trustees and until the
election and qualification of his successor. Any Trustee may resign at any time
by written instrument signed by him and delivered to any officer of the Trust or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his resignation or removal, or any right to damages on account of such
removal. The Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC., OF A TRUSTEE. The death,
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
As conclusive evidence of such vacancy, a written instrument certifying the
existence of such vacancy may be executed by an officer of the Trust or by a
majority of the Board of Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to fill vacancies, the Trust's
investment adviser or investment advisers jointly, if there is more than one,
are empowered to appoint new Trustees subject to the provisions of Section 16(a)
of the 1940 Act.
SECTION 3. POWERS. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such
Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Without limiting the foregoing, the Trustees may:
adopt By-Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust and may amend and repeal
them to the extent that such By-Laws do not reserve that right to the
Shareholders; fill vacancies in or remove from their number, and may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate; appoint from their own number and establish and terminate one or
more committees consisting of two or more Trustees which may exercise the powers
and authority of the Board of Trustees to the extent that the Trustees
determine; employ one or more custodians of the assets of the Trust and may
authorize such custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of securities or
with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing
agent, or both; provide for the issuance and distribution of securities,
including Shares and debt obligations in the form of senior fixed-rate notes, by
the Trust directly or through one or more Principal Underwriters or otherwise;
redeem, repurchase and transfer securities issued by the Trust pursuant to
applicable law; set record dates for the determination of Shareholders with
respect to various matters; declare and pay dividends and distributions to
Shareholders of each Series from the assets of such Series; pay interest on and
the principal amount of any notes or other debt obligations issued by the Trust;
and in general delegate such authority as they consider desirable to any officer
of the Trust, to any committee of the Trustees and to any agent or employee of
the Trust or to any such custodian, transfer or shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees.
Without limiting the foregoing, the Board of Trustees shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and to
subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options
on, lend or otherwise deal in or dispose of contracts for the future
acquisition or delivery of fixed income or other securities, and securities
of every nature and kind, including, without limitation, all types of
bonds, notes, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers'
acceptances, and other securities of any kind, issued, created, guaranteed,
or sponsored by any and all Persons, including, without limitation, states,
territories, and possessions of the United States and the District of
Columbia and any political subdivision, agency, or instrumentality thereof,
any foreign government or any political subdivision of the U.S. Government
or any foreign government, or any international instrumentality, or any
bank or savings institution, or any corporation or organization organized
under the laws of the United States or of any state, territory, or
possession thereof, or any corporation or organization organized under any
foreign law, or in "when issued" contracts for any such securities, or in
foreign currencies, or in forward delivery contracts, contracts for future
delivery, options and similar instruments, to change the investments of the
assets of the Trust, and to exercise any and all rights, powers, and
privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation,
the right to consent and otherwise act with respect thereto, with power to
designate one or more Persons, to exercise any of said rights, powers, and
privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or
write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which
is held in the Trust; to consent to any contract, lease, mortgage, purchase
or sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit
any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority
with relation to any security (whether or not so deposited or transferred)
as the Trustees shall deem proper, and to agree to pay, and to pay, such
portion of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited
to claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and
any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(1) To issue one or more classes of senior securities (as defined in
the 1940 Act) including general unsecured obligations of the Trust, and to
enter into indentures or agreements relating thereto.
(m) To purchase and pay for entirely out of Trust Property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters, or independent contractors of the Trust, individually against
all claims and liabilities of every nature arising by reason of holding,
being or having held any such office or position, or by reason of any
action alleged to have been taken or omitted by any such Person as Trustee,
officer, employee, agent, investment adviser, principal underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have
the power to indemnify such Person against liability; and
(n) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and
agents of the Trust.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust or one or more of its Series. The
Trustees shall not in any way be bound or limited by any present or future law
or custom in regard to investment by fiduciaries. The Trustees shall not be
required to obtain any court order to deal with any assets of the Trust or take
any other action hereunder.
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of the principal and partly out of income, as they deem fair, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including, but not limited
to, the Trustees' compensation and such expenses and charges for the services of
the Trust's officers, employees, investment adviser or manager, principal
underwriter, auditors, counsel, custodian, transfer agent, registrar, dividend
disbursing agent, indenture trustee, shareholder servicing agent, and such other
agents or independent contractors and such other expenses and charges as the
Trustees may deem necessary or proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series, to pay directly, in advance or arrears,
for charges of the Trust's custodian or transfer, Shareholder servicing or
similar agent, an amount fixed from time to time by the Trustees, by setting off
such charges due from such Shareholder from declared but unpaid dividends owed
such Shareholder and/or by reducing the number of shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trustees as joint
tenants except that the Trustees shall have power to cause legal title to any
Trust Property to be held by or in the name of one or more of the Trustees, or
in the name of the Trust, or in the name of any other Person as nominee, on such
terms as the Trustees may determine. The right, title and interest of the
Trustees in the Trust Property shall vest automatically in each Person who may
hereafter become a Trustee. Upon the resignation, removal or death of a Trustee
he shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
SECTION 7. SERVICE CONTRACTS.
(a) Subject to such requirements and restrictions as may be set forth
in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management, fiduciary
and/or administrative services for the Trust or for any Series with any
corporation, trust, association or other organization; and any such
contract may contain such other terms as the Trustees may determine,
including without limitation, authority for the Investment Manager,
Investment Adviser or Administrator to determine from time to time without
prior consultation with the Trustees what investments shall be purchased,
held, sold or exchanged and what portion, if any, of the assets of the
Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to
such party.
(b) The Trustees may also, at any time and from time to time, contract
with any corporation, trust, association or other organization, appointing
it exclusive or nonexclusive distributor or Principal Underwriter for the
Shares of one or more of the Series or other securities to be issued by the
Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to
time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent,
registrar, dividend disbursing agent, indenture trustee, corporate finance
services agent, and/or shareholder servicing agent for the Trust or one or
more of its Series. Every such contract shall comply with such requirements
and restrictions as may be set forth in the By-Laws or stipulated by
resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from time to
time, to contract with any entity to provide such other services to the
Trust or one or more of the Series, as the Trustees determine to be in the
best interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter, distributor, or affiliate 6r
agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization with
which an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder
servicing or other type of service contract may have been or may
hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust,
or that
(ii) any corporation, trust, association or other organization
with which an advisory, management or administration contract or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have been
or may hereafter be made also has an advisory, management or
administration contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service contract
with one or more other corporations, trust, associations, or other
organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
ARTICLE V
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. Subject to the provisions of Article III, Section
6(d), the Shareholders shall have power to vote only (i) for the election of
Trustees as provided in Article IV, Section 1, (ii) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(iii) on any matter requiring Shareholder approval under applicable state or
federal law, including all matters requiring shareholder approval under the 1940
Act, (iv) with respect to the termination of the Trust or any Series to the
extent and as provided in Article VIII, Section 4 hereof, (v) with respect to
the conversion of the Trust to an open-end company as provided in Article VIII,
Section 5 hereof, (vi) with respect to any proposal for the merger or
consolidation of any Series of the Trust as provided in Article VIII, Section 6
hereof, (vii) with respect to any amendment to this Declaration of Trust or any
other action adversely affecting the rights and preferences of the Shares of any
Series of the Trust or increasing or decreasing the amount of the par value of
the Shares of any Series as provided in Article VIII, Section 7 hereof, and
(viii) with respect to such additional matters relating to the Trust as may be
required by this Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy with respect to Shares held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to exercise of
the proxy the Trust receives a specific written notice to the contrary from any
one of them. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger. At any time when no
Shares of a Series are outstanding, the Trustees may exercise all rights of
Shareholders of that Series with respect to matters affecting that Series, take
any action required by law, this Declaration of Trust or the By-Laws, to be
taken by the Shareholders.
SECTION 2. VOTING POWER AND MEETINGS. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven (7) days
before such meeting, postage prepaid, stating the time and place of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or class) is to vote as a
single class separate from any other Shares which are to vote on the same
matters as a separate class or classes, forty percent (40%) of the Shares of
each such Series (or class) entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series. Any meeting of Shareholders may be
adjourned from time to time by a majority of the votes properly cast upon the
question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d), when a quorum is present at any
meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders may
be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series entitled to vote separately on the matter consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the Shareholders of
any Series who are entitled to vote or act at any meeting or any adjournment
thereof, the Trustees may from time to time fix a time, which shall be not less
than ten (10) or more than ninety (90) days before the date of any meeting of
Shareholders, as the record date for determining the Shareholders of such Series
(or class) having the right to notice of and to vote at such meeting and any
adjournment thereof, and in such case only Shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date. For the purpose of determining the
Shareholders of any Series who are entitled to receive payment of any dividend
or of any other distribution, the Trustees may from time to time fix a date,
which shall be before the date for the payment of such dividend or such other
payment, as the record date for determining the Shareholders of such Series
having the right to receive such dividend or distribution. Without fixing a
record date the Trustees may for voting and/or distribution purposes close the
register or transfer books for one or more Series for all or any part of the
period between a record date and a meeting of Shareholders or the payment of a
distribution. Nothing in this Section shall be construed as precluding the
Trustees from setting different record dates for different Series.
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions, and Redemptions
SECTION 1. DETERMINATION OF NET ASSET VALUE, NET INCOME, AND DISTRIBUTIONS.
Subject to Article III, Section 6 hereof, the Trustees, in their absolute
discretion, may prescribe and shall set forth in the By-laws or in a duly
adopted vote of the Trustees such bases and time for determining the per Share
or net asset value of the Shares of any Series or net income attributable to the
Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
SECTION 2. REDEMPTIONS AND REPURCHASES.
(a) The Trust may repurchase on the open market or make a tender offer
for an unlimited number of Shares, from time to time as determined by the
Trustees, for the purpose of reducing or eliminating the amount of any
discount in the trading prices of such Shares relative to their net asset
values or to increase the net asset values of such Shares. The Trust may
not repurchase or tender for Shares if, as a result of such repurchase or
tender, the asset coverage (as defined in Section 18(h) of the 1940 Act) on
any senior security (as defined in the 1940 Act) then outstanding would be
reduced to less than the minimum asset coverage required with respect to
that senior security under Section 18 of the 1940 Act or would violate any
asset coverage or other requirements contained in any indenture with
respect to such senior security.
(b) If the Board of Trustees and the Shareholders shall approve the
conversion of the Trust from a "closed-end company" to an "open-end
company" as those terms are defined in the 1940 Act, then following such
conversion, the Trust shall purchase such Shares (and Shares of any
subsequent Series or class) as are offered by any Shareholder for
redemption upon the presentation of a proper instrument of transfer
together with a request directed to the Trust or a person designated by the
Trust that the Trust purchase such Shares or in accordance with such other
procedures for redemption as the Trustees may from time to time authorize;
and the Trust will pay therefor the net asset value thereof, as determined
in accordance with the By-Laws and applicable law, next determined. Payment
for said Shares shall be made by the Trust to the Shareholder within seven
days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that, in
the event that at any time the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the Rules of the Commission
during periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of
the net assets belonging to the applicable class or Series or during any
other period permitted by order of the Commission for the protection of
investors, such obligations may be suspended or postponed by the Trustees.
(c) The redemption price for Shares redeemed pursuant to Paragraph (b)
of this Section 2 may in any case or cases be paid wholly or partly in kind
if the Trustees determine that such payment is advisable in the interest of
the remaining Shareholders of the class or Series for which the Shares are
being redeemed. Subject to the foregoing, the fair value, selection and
quantity of securities or other property so paid or delivered as all or
part of the redemption price may be determined by or under authority of the
Trustees. In no case shall the Trust be liable for any delay of any
corporation or other person in transferring securities selected for
delivery as all or part of any payment in kind.
SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST. If the Board of Trustees
and the Shareholders shall approve the conversion of the Trust from a
"closed-end company" to an "open-end company" as those terms are defined in the
1940 Act, the Trust shall have the right at its option and at any time to redeem
Shares of any Shareholder at the net asset value thereof as described in Section
1 of this Article VI: (i) if at such time such Shareholder owns Shares of any
class or Series having an aggregate net asset value of less than an amount
determined from time to time by the Trustees, but not to exceed the stated
minimum purchase amount with respect to such class of Shares, or (ii) to the
extent that such Shareholder owns Shares equal to or in excess of a percentage,
determined from time to time by the Trustees, of the outstanding Shares of the
Trust or of any class or Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
SECTION 2. LIMITATION OF LIABILITY. The Trustees shall not be responsible
or liable in any event for any neglect or wrong-doing of any officer, agent,
employee, manager or Principal Underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
SECTION 3. INDEMNIFICATION. The Trustees shall be entitled and empowered to
the fullest extent permitted by law to purchase with Trust assets insurance for
and to provide by resolution or in the By-Laws for indemnification out of Trust
assets for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any claim,
action, suit or proceeding in which he becomes involved by virtue of his
capacity or former capacity with the Trust. The provisions, including any
exceptions and limitations concerning indemnification, may be set forth in
detail in the By-Laws or in a resolution of the Board of Trustees.
ARTICLE VIII
Miscellaneous
SECTION 1. TRUSTEES, SHAREHOLDERS, ETC., NOT PERSONALLY LIABLE; NOTICE. All
Persons extending credit to, contracting with or having any claim against the
Trust or any Series shall look only to the assets of the Trust, or, to the
extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series, only to the assets belonging to
the relevant Series, for payment under such credit, contract or claim; and
neither the Shareholders nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, shall be personally liable
therefor. Nothing in this Declaration of Trust shall protect any Trustee against
any liability to which such Trustee would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued on behalf of the Trust by the Board of Trustees, by any officers or
officer or otherwise may include a notice that this Declaration of Trust is on
file with the Secretary of The Commonwealth of Massachusetts and may recite that
the note, bond, contract, instrument, certificate, or undertaking was executed
or made by or on behalf of the Trust or by them as Trustee or Trustees or as
officers or officer or otherwise and not individually and that the obligations
of such instrument are not binding upon any of them or the Shareholders
individually but are binding only upon the assets and property of the Trust or
upon the assets belonging to the Series for the benefit of which the Trustees
have caused the note, bond, contract, instrument, certificate or undertaking to
be made or issued, and may contain such further recital as he or they may deem
appropriate, but the omission of any such recital shall not operate to bind any
Trustee or Trustees or officer or officers or Shareholders or any other person
individually.
SECTION 2. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable solely for his own
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and shall not be liable
for errors of judgment or mistakes of fact or law. The Trustees may take advice
of counsel or other experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act or omission in
accordance with such advice nor for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.
SECTION 3. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
SECTION 4. TERMINATION OF TRUST OR SERIES. Unless otherwise terminated as
provided herein, the Trust shall continue until May 31, 2001 and thereafter only
for such limited period of time as shall be required to wind up the affairs of
the Trust as specified herein. The Trust and any Series may be terminated at any
time on or after May 31, 2001 by the Trustees by written notice to the
Shareholders of the Trust or the affected Series. If the 1940 Act shall require
Shareholder approval of such termination, such termination shall be effective if
approved by vote of a majority of the outstanding Shares of the Trust entitled
to vote, voting as a whole (or by Series with respect to the termination of a
Series), or 67% of the outstanding Shares voting at a meeting if more than 50%
of such Shares are present and represented by proxy, whichever is less. If such
Shareholder vote shall be required and shall not be obtained, the Trust or the
Series shall continue under the direction of the Board of Trustees. The Trust
shall not be terminated prior to May 31, 2001, unless such termination has been
authorized by vote of at least two-thirds (66-2/3%) of the Shares the Trust
entitled to vote, voting as a whole. Notwithstanding any other provision of this
Declaration of Trust, the Shareholder voting requirements contained in this
Section may not be reduced except by the vote of at least two-thirds (66-2/3%)
of the Shares of the Trust entitled to vote on such termination.
Upon termination of the Trust (or any Series, as the case may be), after
paying or otherwise providing for all charges, taxes, expenses and liabilities
belonging, severally, to each Series (or the applicable Series, as the case may
be), whether due or accrued or anticipated as may be determined by the Trustees,
the Trust shall, in accordance with such procedures as the Trustees consider
appropriate, reduce the remaining assets belonging, severally, to each Series
(or the applicable Series, as the case may be), to distributable form in cash or
shares or other securities, or any combination thereof, and distribute the
proceeds belonging to each Series (or the applicable Series, as the case may
be), to the Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders on the date of
termination.
SECTION 5. CONVERSION TO OPEN-END COMPANY. The Trust shall not be converted
from a "closed-end company" to an "open-end company," as those terms are defined
in Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act if such
conversion is approved by a majority of the Board of Trustees and authorized by
the vote of a majority of the outstanding Shares of each Series of the Trust
entitled to vote, voting separately by Series, or 67% of the outstanding Shares
of each such Series voting by Series at a meeting if more than 50% of the Shares
of each such Series are present and represented by proxy, whichever is less;
provided that any such conversion prior to May 31, 2001, shall require approval
by at least two-thirds of the Board of Trustees and must be authorized by vote
of at least two-thirds (66-2/3%) of the Shares of the Trust entitled to vote,
voting as a whole. Notwithstanding any other provision of this Declaration of
Trust, the Shareholder voting requirement contained in this Section may not be
reduced except by the vote of at least two-thirds (66-2/3%) of the Shares of the
Trust entitled to vote on such conversion.
SECTION 6. MERGER AND CONSOLIDATION. The Trustees may cause the Trust or
one or more of its Series to be merged into or consolidated with another Trust
or company or the Shares exchanged under or pursuant to any state or federal
statute, if any, or otherwise to the extent permitted by law. Such merger or
consolidation or Share exchange must be authorized by vote of a majority of the
outstanding Shares of the Trust, as a whole, or any affected Series, as may be
applicable, or 67% of the outstanding Shares voting at a meeting if more than
50% of such Shares are present and represented by proxy, whichever is less;
provided that in all respects not governed by statute or applicable law, the
Trustees shall have power to prescribe the procedure necessary or appropriate to
accomplish a sale of assets, merger or consolidation.
SECTION 7. AMENDMENTS TO RIGHTS, PREFERENCES AND PAR VALUE OF SHARES. Any
amendment to this, Declaration of Trust or any other action adversely affecting
to a material degree the rights and preferences of the Shares of any Series of
the Trust or increasing or decreasing the amount of the par value of the Shares
of any Series must be authorized by the vote of a majority of the outstanding
Shares of the Trust, as a whole, or any affected Series, as may be applicable,
or 67% of the outstanding Shares voting at a meeting if more than 50% of such
Shares are present and represented by proxy, whichever is less.
SECTION 8. FILING OF COPIES, REFERENCES, HEADINGS. The original or a copy
of this instrument and of each restatement and/or amendment hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder. A copy
of this instrument and of each restatement and/or amendment hereto shall be
filed by the Trust with the Secretary of The Commonwealth of Massachusetts and
with any other governmental office where such filing may from time to time be
required. Anyone dealing with the Trust may rely on a certificate by an officer
of the Trust as to whether or not any such restatement and/or amendments have
been made and as to any matters in connection with the Trust hereunder; and,
with the same effect as if it were the original, may rely on a copy certified by
an officer of the Trust to be a copy of this instrument or of any such
restatement and/or amendments. In this instrument and in any such restatement
and/or amendment, references to this instrument, and all expressions like
"herein", "hereof" and "hereunder", shall be deemed to refer to this instrument
as amended or affected by any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
This instrument may be executed in any number of counterparts each of which
shall be deemed an original.
SECTION 9. APPLICABLE LAW. This Agreement and Declaration of Trust is
created under and is to be governed by and construed and administered according
to the laws of The Commonwealth of Massachusetts. The Trust shall be of the type
commonly called a Massachusetts business trust, and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
SECTION 10. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code or with other applicable
laws and regulations, the conflicting provision shall be deemed never to
have constituted a part of the Declaration of Trust; provided, however,
that such determination shall not affect any of the remaining provisions of
the Declaration of Trust or render invalid or improper any action taken or
omitted prior to such determination.
(b) If any provision of the Declaration of Trust shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability
shall attach only to such provision in such jurisdiction and shall not in
any manner affect such provision in any other jurisdiction or any other
provision of the Declaration of Trust in any jurisdiction.
SECTION 11. EVIDENCE OF AMENDMENT. This Declaration of Trust may be
restated and/or amended at any time and shall be so evidenced by an instrument
in writing signed by a majority of the then Trustees.
SECTION 12. TRUST ONLY. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other than a trust.
Nothing in this Agreement and Declaration of Trust shall be construed to make
the Shareholders, either by themselves or with the Trustees, partners or members
of a joint stock association.
SECTION 13. USE OF THE NAME "FRANKLIN." Franklin Advisers, Inc., as the
proposed Manager of the Trust's assets, has consented to the use by the Trust of
the identifying word "Franklin" as part of the name of the Trust and in the name
of any Series of Shares. Such consent is conditioned upon the employment of the
Manager, or an affiliate of said Company, as Manager of the Trust and said
Series. The name or identifying words "Franklin" or any variation thereof may be
used from time to time in other connections and for other purposes by the
Manager or affiliated entities. The Manager has the right to require the Trust
to cease using "Franklin" in the name of the Trust and in the names of its
Series if the Trust and said Series cease to employ, for any reason, the
Manager, or an affiliate of said Company, as the Manager or adviser of the Trust
or such Series. Future names adopted by the Trust for itself and its Series
shall be the property of the Manager and its affiliates, and the use of such
names shall be subject to the same conditions set forth in this Section insofar
as such name or identifying words require the consent of the Manager.
IN WITNESS WHEREOF, the Trustees hereby set their hands as of the 13th day
1988.
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III Harris J. Ashton
/s/ Zadoc W. Brown /s/ David W. Garbellano
Zadoc W. Brown David W. Garbellano
/s/ Henry L. Jamieson
Samuel G. Hanson Henry L. Jamieson
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson Rupert H. Johnson, Jr.
/s/ Frank W. T. LaHaye
Frank W. T. LaHaye
BY-LAWS
for the regulation, except as
otherwise provided by statute or
the Agreement and Declaration of Trust of
FRANKLIN PRINCIPAL PRESERVATION TRUST
a Massachusetts Business Trust
Dated: November 22, 1988
TABLE OF CONTENTS
BY-LAWS
FRANKLIN PRINCIPAL PRESERVATION TRUST
Page
ARTICLE I Offices ................................... 1
1. Principal Office ................................ 1
2. Other Offices ................................... 1
ARTICLE II Meetings of Shareholders .................. 1
1. Place of Meetings ............................... 1
2. Call of Meeting ................................. 1
3. Notice of Shareholders' Meeting ................. 1
4. Manner of Giving Notice; Affidavit of Notice .... 1
5. Adjourned Meeting; Notice ....................... 2
6. Voting .......................................... 2
7. Waiver of Notice of Consent by
Absent Shareholders ............................. 3
8. Shareholder Action by Written Consent
without a Meeting ............................... 3
9. Record Date for Shareholder Notice,
Voting and Giving Consents ...................... 4
10. Proxies ......................................... 4
11. Inspectors of Election .......................... 5
ARTICLE III Trustees .................................. 5
1. Powers .......................................... 5
2. Number of Trustees .............................. 5
3. Vacancies ....................................... 5
4. Place of Meetings and Meetings by Telephone ..... 6
5. Regular Meetings ................................ 6
6. Special Meetings ................................ 6
7. Quorum .......................................... 7
8. Waiver of Notice ................................ 7
9. Adjournment ..................................... 7
10. Notice of Adjournment ........................... 7
11. Action Without a Meeting ........................ 7
12. Fees and Compensation of Trustees ............... 7
13. Delegation of Power to Other Trustees ........... 8
ARTICLE IV Committees ................................ 8
1. Committees of Trustees .......................... 8
2. Meetings and Action of Committees ............... 8
ARTICLE V Officers .................................. 8
1. Officers ........................................ 8
2. Election of Officers ............................ 9
3. Subordinate Officers ............................ 9
4. Removal and Resignation of Officers ............. 9
5. Vacancies in Offices ............................ 9
6. Chairman of the Board ........................... 9
7. President ....................................... 9
8. Vice Presidents ................................. 10
9. Secretary ....................................... 10
10. Treasurer ....................................... 10
ARTICLE VI Indemnification of Trustees, Officers
Employees and Other Agents ................ 11
1. Agents, Proceedings and Expenses ................ 11
2. Actions Other than by Trust ..................... 11
3. Actions by the Trust ............................ 11
4. Exclusion and Indemnification ................... 12
5. Successful Defense by Agent ..................... 12
6. Required Approval ............................... 13
7. Authorization of Indemnification and
Determination of Reasonableness ................. 13
8. Advance of Expenses ............................. 13
9. Other Contractual Rights ........................ 13
10. Limitations ..................................... 14
11. Insurance ....................................... 14
12. Fiduciaries of Corporate Employee Benefit Plan .. 14
ARTICLE VII Records and Reports ....................... 14
1. Maintenance and Inspection of Share Register .... 14
2. Maintenance and Inspection of By-laws ........... 14
3. Maintenance and Inspection of Other Records ..... 14
4. Inspection by Trustees .......................... 15
5. Financial Statements ............................ 15
ARTICLE VIII Custodian ................................. 15
1. Appointment and Duties .......................... 15
2. Central Certificate System ...................... 16
3. Acceptance of Receipts in Lieu of Certificates .. 16
ARTICLE IX General Matters ........................... 17
1. Checks, Drafts, Evidence of Indebtedness ........ 17
2. Contracts and Instruments; How Executed ......... 17
3. Certificate of Shares ........................... 17
4. Lost Certificates ............................... 17
5. Representation of Shares of Other Entities ...... 18
6. Fiscal Year ..................................... 18
ARTICLE X Amendments ................................ 18
1. Amendment by Shareholders ....................... 18
2. Amendment by Trustees ........................... 18
BY-LAWS
OF
FRANKLIN PRINCIPAL PRESERVATION TRUST
A Massachusetts Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from time
to time, may change the location of the principal executive office of the Trust
at any place within or outside The Commonwealth of Massachusetts.
Section 2. OTHER OFFICES. The Board of Trustees may at any time establish
branch or subordinate offices at any place or places where the Trust intends to
do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any
place within or outside The Commonwealth of Massachusetts designated by the
Board of Trustees. In the absence of any such designation, shareholders'
meetings shall be held at the principal executive office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called at
any time by the Board of Trustees or by the chairman of the Board or by the
president.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than ten (10) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which Trustees are to be elected also
shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Declaration of Trust, (iii) a reorganization
of the Trust, or (iv) a voluntary dissolution of the Trust, the notice shall
also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the Trust is returned to the Trust by the United
States Postal Service marked to indicate that the Postal Service is unable to
deliver the notice to the shareholder at that address, all future notices or
reports shall be deemed to have been duly given without further mailing if these
shall be available to the shareholder on written demand of the shareholder at
the principal executive office of the Trust for a period of one year from the
date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting, whether or
not a quorum is present, may be adjourned from time to time by the vote of the
majority of the shares represented at that meeting, either in person or by
proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Declaration of Trust, as in effect at such time. The shareholders' vote may be
by voice vote or by ballot, provided, however, that any election for Trustees
must be by ballot if demanded by any shareholder before the voting has begun. On
any matter other than elections of Trustees, any shareholder may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, but if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
the total shares that the shareholder is entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be filed with the Secretary of
the Trust and shall be maintained in the Trust's records. Any shareholder giving
a written consent or the shareholder's proxy holders or a transferee of the
shares or a personal representative of the shareholder or their respective proxy
holders may revoke the consent by a writing received by the Secretary of the
Trust before written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS.
For purposes of determining the shareholders entitled to notice of any meeting
or to vote or entitled to give consent to action without a meeting, the Board of
Trustees may fix in advance a record date which shall not be more than ninety
(90) days nor less than seven (7) days before the date of any such meeting as
provided in the Declaration of Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given or
if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held. (b) The record date
for determining shareholders entitled to give consent to action in
writing without a meeting, (i) when no prior action by the Board of
Trustees has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board of Trustees
has been taken, shall be at the close of business on the day on which
the Board of Trustees adopt the resolution relating to that action or
the seventy-fifth day before the date of such other action, whichever
is later.
Section 10. PROXIES. Every person entitled to vote for Trustees or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Trust. A proxy shall be deemed signed if the shareholder's name
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of the New York Business
Corporation Law.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders, the
Board of Trustees may appoint any persons other than nominees for office to act
as inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy shall, appoint inspectors of election
at the meeting. The number of inspectors shall be either one (1) or three (3).
If inspectors are appointed at a meeting on the request of one or more
shareholders or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one (1) or three (3) inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy, shall appoint a person to fill the
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum
and the authenticity, validity and effect of proxies; (b) Receive
votes, ballots or consents; (c) Hear and determine all challenges and
questions in any way arising in connection with the right to vote; (d)
Count and tabulate all votes or consents; (e) Determine when the polls
shall close; (f) Determine the result; and (g) Do any other acts that
may be proper to conduct the election or vote with fairness to all
shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the Declaration
of Trust and these By-Laws relating to action required to be approved by the
shareholders or by the outstanding shares, the business and affairs of the Trust
shall be managed and all powers shall be exercised by or under the direction of
the Board of Trustees.
Section 2. NUMBER OF TRUSTEES. The number of Trustees shall be that set
forth in the Agreement and Declaration of Trust and shall be such, until changed
by a duly adopted amendment to the Declaration of Trust or action of the
Trustees as set forth in the Declaration of Trust.
Section 3. VACANCIES. Subject to the Declaration of Trust, vacancies in the
Board of Trustees may be filled by a majority of the remaining Trustees, though
less than a quorum, or by a sole remaining Trustee, unless the Board of Trustees
calls a meeting of shareholders for the purposes of electing Trustees. In the
event that at any time less than a majority of the Trustees holding office at
that time were so elected by the holders of the outstanding voting securities of
the Trust, the Board of Trustees shall forthwith cause to be held as promptly as
possible, and in any event within sixty (60) days, a meeting of such holders for
the purpose of electing Trustees to fill any existing vacancies in the Board of
Trustees, unless such period is extended by order of the United States
Securities and Exchange Commission.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of the
Board of Trustees may be held at any place within or outside The Commonwealth of
Massachusetts that has been designated from time to time by resolution of the
Board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the Trust. Any meeting, regular or special,
may be held by conference telephone or similar communication equipment, so long
as all Trustees participating in the meeting can hear one another and all such
Trustees shall be deemed to be present in person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees for
any purpose or purposes may be called at any time by the chairman of the board
or the president or any vice president or the secretary or any two (2) Trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each Trustee at that Trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. In case the notice is delivered personally
or by telephone or to the telegraph company, it shall be given at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
Trustee or to a person at the office of the Trustee who the person giving the
notice has reason to believe will promptly communicate it to the Trustee. The
notice need not specify the purpose of the meeting or the place if the meeting
is to be held at the principal executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of Trustees shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the Trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Declaration of Trust. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
Trustees if any action taken is approved by a least a majority of the required
quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to any
Trustee who either before or after the meeting signs a written waiver of notice,
a consent to holding the meeting, or an approval of the minutes. The waiver of
notice or consent need not specify the purpose of the meeting. All such waivers,
consents, and approvals shall be filed with the records of the Trust or made a
part of the minutes of the meeting. Notice of a meeting shall also be deemed
given to any Trustee who attends the meeting without protesting before or at its
commencement the lack of notice to that Trustee.
Section 9. ADJOURNMENT. A majority of the Trustees present, whether or not
constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given unless the meeting is adjourned for more
than forty-eight (48) hours, in which case notice of the time and place shall be
given before the time of the adjourned meeting in the manner specified in
Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Trustees may be taken without a meeting if a majority
of the members of the Board of Trustees shall individually or collectively
consent in writing to that action. Such action by written consent shall have the
same force and effect as a majority vote of the Board of Trustees. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
Trustee from serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration of Trust except as otherwise expressly provided
herein or by resolution of the Board of Trustees.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by resolution
adopted by a majority of the authorized number of Trustees designate one or more
committees, including but not limited to an Executive Committee, an Audit
Committee, an Investment Committee, a Pricing Committee and a Nominating
Committee, each consisting of two (2) or more Trustees, to serve at the pleasure
of the Board, and such ex officio members as the Trustees shall designate. The
Board may designate one or more Trustees as alternate members of any committee
who may replace any absent member at any meeting of the committee. The powers of
each committee shall be provided in the resolution of the Board establishing
such committee, provided that in no event may any Committee be delegated powers
which by law, by the terms of the Trust's Agreement and Declaration of Trust, or
by the terms of these By-Laws may not be so delegated.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by 'and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees. Alternate members shall be given notice
of meetings of committees and shall have the right to attend all meetings of
committees. The Board of Trustees may adopt rules for the government of any
committee not inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a president, a
secretary, and a treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and may
empower the president to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Trustees at any regular or special
meeting of the Board of Trustees or by the principal executive officer or by
such other officer upon whom such power of removal may be conferred by the Board
of Trustees.
Any officer may resign at any time by giving written notice to the Trust.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in that notice; and unless otherwise specified in
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or other cause shall be filled in the
manner prescribed in these By-Laws for regular appointment to that office. The
president may make temporary appointments to a vacant office pending action by
the Board of Trustees.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer is elected, shall if present preside at meetings of the Board of
Trustees and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Trustees or prescribed by the
By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the Board of Trustees to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the Trust and
shall, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the officers of the
Trust. He shall preside at all meetings of the shareholders and in the absence
of the chairman of the board or if there be none, at all meetings of the Board
of Trustees. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the Board of
Trustees or if not ranked, the executive vice president (who shall be considered
first ranked) and such other vice presidents as shall be designated by the Board
of Trustees, shall perform all the duties of the president and when so acting
shall have all powers of and be subject to all the restrictions upon the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Trustees or the president or the chairman of the board or by these
By-Laws.
Section 9. SECRETARY. The secretary shall keep or cause to be kept at the
principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of Trustees,
committees of Trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at Trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
a share register or a duplicate share register showing the names of all
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same and the number and date
of cancellation of every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of the
shareholders and of the Board of Trustees required to be given by these By-Laws
or by applicable law and shall have such other powers and perform such other
duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial officer
of the Trust and shall keep and maintain or cause to be kept and maintained
adequate and correct books and records of accounts of the properties and
business transactions of the Trust, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any Trustee.
The treasurer shall deposit all monies and other valuables in the name and
to the credit of the Trust with such depositaries as may be designated by the
Board of Trustees. He shall disburse the funds of the Trust as may be ordered by
the Board of Trustees, shall render to the president and Trustees, whenever they
request it, an account of all of his transactions as chief financial officer and
of the financial condition of the Trust and shall have other powers and perform
such other duties as may be prescribed by the Board of Trustees or these
By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed: (a) in the case of conduct in his official
capacity as a Trustee of the Trust, that his conduct was in the Trust's best
interests and (b), in all other cases, that his conduct was at least not opposed
to the Trust's best interests and (c) in the case of a criminal proceeding, that
he had no reasonable cause to believe the conduct of that person was unlawful.
The termination of any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of this Trust or that the
person had reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of this Trust to procure a judgment in
its favor by reason of the fact that that person is or was an agent of this
Trust, against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of that action if that person acted in
good faith, in a manner that person believed to be in the best interests of this
Trust and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to
the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue, or matter as to which that person
shall have been adjudged to be liable on the basis that personal
benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's official capacity; or
(b) In respect of any claim, issue or matter as to which that person shall
have been adjudged to be liable in the performance of that person's
duty to this Trust, unless and only to the extent that the court in
which that action was brought shall determine upon application that in
view of all the circumstances of the case, that person was not liable
by reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity for the
expenses which the court shall determine; or
(c) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval, or of expenses
incurred in defending a threatened or pending action which is settled
or otherwise disposed of without court approval, unless the required
approval set forth in Section 6 of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this
Trust has been successful on the merits in defense of any proceeding referred to
in Sections 2 or 3 of this Article or in defense of any claim, issue or matter
therein, before the court or other body before whom the proceeding was brought,
the agent shall be indemnified against expenses actually and reasonably incurred
by the agent in connection therewith, provided that the Board of Trustees,
including a majority who are disinterested, non-party Trustees, also determines
that based upon a review of the facts, the agent was not liable by reason of the
disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not parties
to the proceeding and are not interested persons of the Trust (as
defined in the Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
Section 7. AUTHORIZATION OF INDEMNIFICATION AND DETERMINATION OF
REASONABLENESS. An authorization of indemnification and determination as to
reasonableness of expenses must be made in the same manner as set forth in
Section 6 of this Article for the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by independent legal counsel, authorization of
indemnification and determination as to reasonableness of expenses must be made
by a majority vote of a quorum consisting of Trustees who, at the time of the
vote, are not named defendants or respondents in the proceeding; or if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Trustees, designated to act in the matter by a majority vote of all Trustees,
consisting solely of two or more Trustees who, at the time of the vote, are not
named defendants or respondents in the proceeding.
Section 8. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding (a) receipt of a written affirmation by the Trustee of his good faith
belief that he has met the standard of conduct necessary for indemnification
under this Article and a written undertaking by or on behalf of the agent, such
undertaking being an unlimited general obligation to repay the amount of the
advance if it is ultimately determined that he has not met those requirements,
and (b) a determination that the facts then known to those making the
determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.
Section 9. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 10. LIMITATIONS. No indemnification or advance shall be made under
this Article, except as provided in Sections 5 or 6 in any circumstances where
it appears:
(a) That it would be inconsistent with a provision of the Declaration of
Trust, a resolution of the shareholders, or an agreement in effect at
the time of accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were
paid which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
Section 11. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article.
Section 12. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust shall
keep at its principal executive office or at the office of its transfer agent or
registrar, if either be appointed and as determined by resolution of the Board
of Trustees, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class or series of shares held by each
shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep at
its principal executive office the original or a copy of these By-Laws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive office of the Trust. The
minutes shall be kept in written form and the accounting books and records shall
be kept either in written form or in any other form capable of being converted
into written form. The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate at any reasonable time during usual business hours for a
purpose reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate, or as otherwise provided in the
requirements for listing of any securities exchange on which shares of the Trust
are listed for trading. The inspection may be made in person or by an agent or
attorney and shall include the right to copy and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Trust. This inspection by a
Trustee may be made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts of documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and any
income statement of the Trust for each quarterly period of each fiscal year and
accompanying balance sheet of the Trust as of the end of each such period that
has been prepared by the Trust shall be kept on file in the principal executive
office of the Trust for at least twelve (12) months and each such statement
shall be exhibited at all reasonable times to any shareholder demanding an
examination of any such statement or a copy shall be mailed to any such
shareholder.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
CUSTODIAN
Section 1. APPOINTMENT AND DUTIES. The Trustees shall at all times employ a
bank, trust company or other qualified person as custodian with authority as its
agent, but subject to such restrictions, limitations and other requirements, if
any, as may be contained in the Declaration, these By-Laws and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the same
upon written order;
(2) to receive and receipt for any monies due to the Trust and deposit
the same in its own banking department or elsewhere as the Trustees may
direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of
the Trust and furnish clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income
of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be subject to such restrictions, limitations
and other requirements, if any, as may be contained in the Declaration, these
By-Laws and the 1940 Act.
Section 2. CENTRAL CERTIFICATE SYSTEM. Subject to such rules, regulations
and orders as the Securities and Exchange Commission may adopt, the Trustees may
direct the custodian to deposit all or any part of the securities owned by the
Trust in a system for the central handling of securities established by a
national securities exchange or a national securities association registered
with the Securities and Exchange Commission under the Securities Exchange Act of
1934, or such other person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all securities of any
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust or its custodian.
Section 3. ACCEPTANCE OF RECEIPTS IN LIEU OF CERTIFICATES. Subject to such
rules, regulations and orders as the Securities and Exchange Commission may
adopt, the Trustees may direct the custodian to accept written receipts or other
written evidence indicating purchases of securities held in book-entry form in
the Federal Reserve System in accordance with regulations promulgated by the
Board of Governors of the Federal Reserve System and the local Federal Reserve
Banks in lieu of receipt of certificates representing such securities.
ARTICLE IX
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or
other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed in
such manner and by such person or persons as shall be designated from time to
time in accordance with the resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Trustees,
except as otherwise provided in these By-Laws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the Trust and this authority may be general or
confined to specific instances; and unless so authorized or ratified by the
Board of Trustees or within the agency power of an officer, no officer, agent,
or employee shall have any power or authority to bind the Trust by any contract
or engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust, or class thereof, may
be issued to a shareholder upon his request when such shares are fully paid. All
certificates shall be signed in the name of the Trust by the chairman of the
board or the president or vice president and by the treasurer or an assistant
treasurer or the secretary or any assistant secretary, certifying the number of
shares and the series of shares owned by the shareholders. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent, or
registrar before that certificate is issued, it may be issued by the Trust with
the same effect as if that person were an officer, transfer agent or registrar
at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use
a system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the Trust and cancelled at the same time. The Board of
Trustees may in case any share certificate or certificate for any other security
is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The
chairman of the board, the president or any vice president or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts, or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees.
ARTICLE X
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote, except as otherwise provided by applicable
law or by the Declaration of Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders as
provided in Section 1 of this Article to adopt, amend or repeal By-Laws, and
except as otherwise provided by applicable law or by the Declaration of Trust,
these By-Laws may be adopted, amended, or repealed by the Board of Trustees.
17,700,000 Shares of Beneficial Interest
FRANKLIN PRINCIPAL MATURITY TRUST
The Franklin Principal Maturity Trust (the "Fund") is a newly organized
diversified, closed-end management investment company managed by Franklin
Advisers, Inc. (the "Manager"). The Fund's investment objective is to manage a
portfolio of securities that may return $10.00 per Share (the initial public
offering price per Share) to investors on or shortly before May 31, 2001 while
providing high monthly income. No assurance can be given that the Fund's
investment objective will be achieved, and the Fund may return less than $10.00
per Share. On a present value basis, $10.00 will be worth substantially less in
2001.
The Fund will seek to achieve its objective by investing primarily in a
combination of mortgage-backed securities, zero coupon securities and high
income producing debt securities. Initially zero coupon securities are expected
to represent approximately 30% of the Fund's assets. The remainder of the Fund's
assets initially will be invested in approximately equal proportions in
mortgage-backed securities and high income producing debt securities. All of the
Fund's zero coupon securities will mature on or shortly before May 31, 2001 and
their stated principal amount is expected to be equal to $10.00 for each Share
outstanding on such date. The market prices of the securities in which the Fund
invests are expected to fluctuate with changes in interest rates, and a
substantial portion of such securities have a high degree of market price
volatility, which will affect the net asset value per Share and market price of
the Fund's Shares. The Fund may invest a substantial portion of its assets in
illiquid securities. The Fund may use various investment techniques and engage
in hedging transactions. See "Investment Objective and Policies" and "Special
Considerations."
(CONTINUED ON FOLLOWING PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions (1)(2) Fund (1)(2)
<S> <C> <C> <C>
Per Share............. $10.00 $.70 $9.30
Total Minimum......... $177,000,000 $12,390,000 $164,610,000
Total Maximum (3)..... $203,550,000 $14,248,500 $189,301,500
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE.)
The Fund's Shares are offered by the several Underwriters, subject to the
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York City on or about January 26,
1989.
PaineWebber Incorporated
A. G. Edwards & Sons, Inc.
Thomson McKinnon Securities Inc.
Dain Bosworth
Incorporated
Gruntal & Co., Incorporated
Stifel, Nicolaus & Company
Incorporated
The date of this Prospectus is January 19, 1989.
(CONTINUED FROM PREVIOUS PAGE.)
For tax reasons the Fund must distribute substantially all of its net
investment income, including tax-exempt interest income and the accrued income
on zero coupon securities for which it receives no payments in cash prior to
their maturity and on other non-cash income. In order to generate sufficient
cash to pay monthly dividends and distributions required for tax reasons, the
Fund will be required to liquidate substantially all of its assets other than
zero coupon securities over time and will be required to limit reinvestment of
principal returned on investments. Such liquidations may require the Fund to
sell such securities at a loss or at a time when it would otherwise be
disadvantageous to do so, and there may also be adverse tax consequences with
respect to such liquidations (see "Taxation"). The Manager believes that it will
be able to manage the Fund's assets so that the Fund will have sufficient cash
to pay required dividends and distributions. without liquidating any zero coupon
securities. This result, although it cannot be guaranteed by either the Fund or
the Manager, should permit the Fund, on or shortly before May 31, 200 1, to have
available for distribution to its shareholders $10.00 for each Share then
outstanding. The distribution and the termination of the Fund on May 31, 2001
may require shareholder approval. For circumstances in which the Fund might have
to liquidate zero coupon securities, see "Zero Coupon Securities."
The Fund's address is 777 Mariners Island Boulevard, San Mateo, California
94404 and its telephone number is (415) 570-3000. Investors should read this
Prospectus carefully and retain it for future reference.
No market presently exists for the Shares. The Shares have been approved
for listing on the New York Stock Exchange under the symbol "FPT."
(FOOTNOTES FROM PREVIOUS PAGE.)
(1) The Fund may enter into reverse repurchase agreements and/or engage in bank
borrowings at prevailing interest rates in order to borrow from unrelated
third parties an amount approximately equal to the underwriting discount
and the organization and offering expenses, so that initially it will have
available for investment approximately $10.00 per Share. The amount of any
such borrowings will be approximately $13,210,000 (approximately $.75 per
Share), or up to approximately $15,068,500 (approximately $.74 per Share)
if the over-allotment option discussed below is exercised. See "Use of
Proceeds" and "Other Investment Practices - Leverage and Borrowing."
(2) Before deduction of offering and organization expenses payable by the Fund,
estimated at $770,000 and $50,000, respectively. Offering expenses will be
deducted from net proceeds and organization expenses will be amortized and
charged over the term of the Fund as expenses against the Fund's income.
See "Statement of Assets and Liabilities."
(3) The Fund has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 2,655,000 additional
Shares solely to cover over-allotments. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FUND'S SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
The Fund
FRANKLIN PRINCIPAL MATURITY TRUST (the "Fund") is a newly organized
diversified, closed-end management investment company. The Fund will
distribute substantially all of its net assets on or shortly before
May 31, 2001 and will then terminate. The distribution and termination
may require Shareholder approval pursuant to the current policy of the
Securities and Exchange Commission (the "SEC"). See "The Fund" and
"Investment Objective and Policies."
The Offering
The Fund is offering 17,700,000 shares of beneficial interest, par
value $.Ol per share (the "Shares"), through a group of underwriters
represented by: PaineWebber Incorporated; A. G. Edwards & Sons, Inc.;
Thomson McKinnon Securities Inc.; Dain Bosworth Incorporated; Gruntal
& Co., Incorporated; and Stifel, Nicolaus & Company, Incorporated
(collectively, the "Underwriters"). The Underwriters have been granted
an option to purchase up to 2,655,000 additional Shares solely to
cover over-allotments. The minimum investment is 100 Shares ($1,000).
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters are committed to purchase and pay for all
Shares offered hereby if any are purchased. The Underwriting Agreement
may be terminated by the Underwriters if certain market conditions or
developments render the payment and delivery of the Shares
impracticable or inadvisable in the judgment of the Underwriters. See
"Underwriting."
Investment Objective and Policies
The Fund's investment objective is to manage a portfolio of securities
that may return $10.00 per Share (the initial public offering price
per Share) to investors on or shortly before May 31, 2001 while
providing high monthly income. No assurance can be given that the
Fund's investment objective will be achieved, and the Fund may return
less than $10.00 per Share. On a present value basis, $10.00 will be
worth substantially less in 2001. See "Investment Objective and
Policies."
The Fund will seek to achieve its objective by investing primarily in
a combination of mortgage-backed securities (including stripped
mortgage-backed securities), zero coupon securities (including
municipal zero coupon securities and stripped securities of municipal
issuers), and high income producing debt securities. The Manager
estimates that initially zero coupon securities will represent
approximately 30% of the Fund's assets. The remainder of the Fund's
assets initially will-be invested in approximately equal proportions
in mortgage-backed securities and high income producing debt
securities. All of the Fund's zero coupon securities will mature on or
shortly before May 31, 2001 and their stated principal amount is
expected to be equal to $10.00 for each Share outstanding on such
date. Although the Fund may invest in asset-backed securities which
are not mortgage related, under current conditions it does not expect
to do so. See "Investment Objective and Policies" and "Special
Considerations."
Investment Manager
Franklin Advisers, Inc., a wholly owned subsidiary of Franklin
Resources, Inc., is the Fund's investment manager (the "Manager").
Franklin Advisers and its affiliates have been providing advisory and
management services to investment companies and private accounts for
over 40 years. Franklin Advisers currently manages over 77 investment
funds with combined assets (as of December 31, 1988) in excess of $36
billion, representing over 1.6 million shareholder accounts. Franklin
Advisers manages the nation's largest publicly offered mutual fund
specializing in U.S. Government and mortgage-backed securities, and
pioneered one of the first mutual funds investing in adjustable rate
mortgage-backed securities. Franklin Advisers also manages several
specialized funds which emphasize investment in fixed-income debt
securities. As of December 31, 1988, Franklin Advisers managed over
$14 billion in U.S. corporate, U.S. Government and mortgage-backed
securities. See "The Fund" and "Management of the Fund."
Investment Strategies
The Fund may use various investment techniques including engaging in
hedging transactions and short sales, selling covered call options to
enhance income or reduce fluctuations in net asset value, investing in
restricted or illiquid securities, making forward commitments
(including forward currency exchange contracts), entering into
repurchase agreements and reverse repurchase agreements, investing in
Eurodollar instruments and lending its portfolio securities. For
further discussion of these practices and the associated special
considerations, see "Other Investment Practices."
Under current market conditions, the Fund intends to borrow an amount
equal to approximately 15%-25% of its total assets, although its
investment restrictions permit such borrowings in amounts not
exceeding 331/3% of its total assets (including the amount borrowed).
The Fund will only borrow when there is an expectation that it will
benefit the Fund. In this regard, the Fund intends initially to borrow
money sufficient to pay the organization, offering and underwriting
costs and expenses so that following the close of the offering an
amount approximately equal to $10.00 per Share will be available for
investment by the Manager. Borrowing by the Fund creates an
opportunity for increased income, but, at the same time, creates
special risks. See "Other Investment Practices-Leverage and
Borrowing."
Zero Coupon Securities
"Zero coupon securities" are debt obligations which do not entitle the
holder to periodic interest payments prior to maturity and are issued
and traded at a discount from their face amounts. The discount varies
depending on the time remaining until maturity, prevailing interest
rates, liquidity of the security and the perceived credit quality of
the issuer. The Fund may invest in, among other types of zero coupon
securities, municipal zero coupon securities. See "Zero Coupon
Securities" and "Special Considerations."
Mortgage-Backed Securities
"Mortgage-backed securities" are securities that directly or
indirectly represent a participation in, or are secured by and payable
from, mortgage loans on real property, including pass-through
securities, such as Ginnie Mae, Fanny Mae and Freddie Mac Certificates
(as defined herein), collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). The yield and
credit characteristics of mortgage-backed securities differ in a
number of respects from traditional debt securities. The Fund may
invest a substantial portion of its assets in stripped mortgage-backed
securities which are illiquid and have greater market volatility than
zero coupon and high income producing securities. The Fund will not
invest in "residual interests" of CMOs or REMICs. See "Mortgage-Backed
Securities" and "Special Considerations."
High Income Producing Debt Securities
"High income producing debt securities" include corporate debt
securities issued by U.S. corporations and foreign government
obligations that generally pay interest at a rate that is effectively
higher than U.S. Government securities. Such debt securities entitle
the holder thereof to regular scheduled payments of principal and
interest. The Fund does not impose any minimum credit quality ratings
on the debt obligations in which it will invest. The U.S. corporate
debt securities in which the Fund will invest, if rated, will
typically be rated in categories below investment grade. Debt
securities rated below the investment grade categories established by
Standard & Poor's Corporation and Moody's Investors Service frequently
reflect a greater possibility that the issuer may be more sensitive to
adverse economic conditions and are regarded by the rating services as
predominantly speculative with respect to their capacity to pay
interest and repay principal as scheduled. The market value of such
securities May fluctuate more than the market value of higher quality
fixed income securities. The foreign government obligations in which
the Fund will invest will generally be denominated in non-U.S.
currencies and their value (and, therefore the Fund's net asset value)
will be affected by changes in foreign currency exchange rates. The
Fund will only invest in the obligations of foreign governments of
countries the economies of which the Manager considers stable. See
"High Income Producing Debt Securities" and "Special Considerations."
Asset-Backed Securities
"Asset-backed securities" have similar structural characteristics to
mortgage-backed securities. However, the underlying assets are not
mortgage loans or interests in mortgage loans but include assets such
as motor vehicle installment sales or installment loan contracts,
leases of various types of real and personal property, and receivables
from revolving credit (credit card) agreements. The Fund will not
invest in residual interests of asset-backed securities. See
"Asset-Backed Securities" and "Special Considerations."
Tax Considerations
In order to maintain its tax status as a pass-through entity, the Fund
will be required to distribute substantially all of its net investment
income each year, including the accrued income on its zero coupon
securities, for which it receives no payments in cash prior to their
maturity, and other non-cash income. See "Taxation." The Fund will
declare distributions only in cash. In order to generate sufficient
cash to pay these distributions, the Fund will be required over time
to liquidate substantially all of its assets other than zero coupon
securities and will be required to limit reinvestment of principal
returned on investments. To the extent the Fund realizes and retains
net capital gains, the Fund will be required to pay corporate income
tax on such undistributed gains at the corporate rate on long-term
capital gains and may elect to treat such capital gains as distributed
to shareholders (who will also receive a credit on a pro rata basis
for any such tax paid by the Fund). Such amounts would be taxable as
long-term capital gains to shareholders. If the Fund realizes capital
losses on the sale of portfolio securities (which could occur if the
Fund is required to liquidate portfolio securities at disadvantageous
times), such losses can only be used to offset capital gains and
cannot be used to reduce the Fund's ordinary income.
The Manager believes that it will be able to manage the Fund's assets
and that the Fund will operate so that the Fund will have sufficient
cash to pay monthly dividends and the distributions required for tax
purposes without liquidating any zero coupon securities and without
realizing capital losses that are not offset, for federal income tax
purposes, by capital gains over the life of the Fund on liquidations
of its other assets. This result, although it cannot be guaranteed by
either the Fund or the Manager, should permit the Fund, on or shortly
before May 31, 2001, to have available for distribution to the holders
of its Shares ("Shareholders") an amount equal to $10.00 for each
Share then outstanding. For circumstances in which the Fund might have
to liquidate zero coupon securities, see "Zero Coupon Securities" and
"Investment Objective and Policies."
Dividends and Distributions
All or a portion of the Fund's net investment income (including all or
a portion of net short-term capital gains) will be distributed to
Shareholders in the form of monthly dividends. The Fund currently
intends to retain income, until the final liquidating distribution, in
an amount approximately equal to the net tax-exempt income
attributable to its municipal zero coupon securities, but in no event
greater than one-tenth of Fund's net income per year. Such retained
income is expected to constitute a portion of the liquidating
distribution returned to investors on or shortly before May 31, 2001.
See "Dividends Distributions." All or a portion of net realized
long-term capital gains, if any, will be distributed at least
annually. The Fund's income and dividends, expressed as a percentage
of the initial offering price, are expected to decline over the term
of the Fund. Various factors will affect the level of the Fund's
income, including the asset mix, the scheduled reduction in the
Manager's fee, the amount of leverage utilized by the Fund and the
Fund's use of hedging. Dividends and capital gains distributions will
be reinvested in additional Shares purchased on each Shareholder's
behalf in the open market unless a Shareholder elects to receive cash.
The Fund expects that a final liquidating distribution will be made on
or shortly before May 31, 2001. This distribution may require
Shareholder approval pursuant to the current policy of the SEC. See
"Dividends and Distributions" and "Dividend Reinvestment Plan."
Automatic Dividend Reinvestment Plan
Dividends and distributions will be automatically reinvested in
additional Shares purchased on each Shareholder's behalf in the open
market, unless a Shareholder elects to receive cash. Such open market
purchases may have the effect of increasing the market price of the
Shares. See "Dividend Reinvestment Plan."
Listing and Symbol
The Shares have been approved for listing on the New York Stock
Exchange under the symbol "FPT."
Repurchase of Shares and Tender Offers
The Fund may, in accordance with applicable law, from time to time
repurchase or make a tender offer for Shares of the Fund in such
amounts as may be deemed advantageous to the Fund and its
Shareholders. Subject to its borrowing restrictions, the Fund may
incur debt to finance repurchases. There are certain risks associated
with repurchases. See "Repurchase of Shares and Tender Offers."
Fees and Expenses
The Fund will pay the Manager a monthly fee based on Fund's average
weekly net assets (as defined). Through May 31, 1993, the management
fee will be computed at an initial annual rate of 0.75% of the Fund's
average weekly net assets, with scheduled reductions as follows: 0.60%
of the Fund's average weekly net assets from June 1, 1993 through May
31, 1997; and 0.45% from that date until termination of the Fund. See
"Management of the Fund." The management fee, which also covers
various administrative, bookkeeping and related services to be
rendered by the Manager to the Fund, initially is higher than the fees
paid by many management investment companies, although it is
comparable to fees paid by recently-organized, publicly-offered,
closed-end management investment companies.
The Fund intends to enter into a separate agreement with PaineWebber
Incorporated to receive certain corporate finance services and will
pay PaineWebber Incorporated for performing such services an annual
fee at a fixed rate not to exceed 0.10% of the Fund's initial net
assets.
The Manager may retain others to perform additional administrative
and/or shareholder related services for the Fund and will compensate
these persons for such services out of its own resources. See
"Management of the Fund."
Special Considerations
Investment in the Fund involves special considerations as the Fund is
a closed-end investment company with no history of operations and
invests in securities with special risk characteristics. For its
investors, the Fund is intended to be a long-term investment and not a
short-term trading vehicle.
ZERO COUPON SECURITIES. Zero coupon securities are debt obligations
which do not entitle the holder to any periodic payments of interest
prior to maturity and are issued and traded at a discount from their
face amounts. This discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the security
and the perceived credit quality of the issuer. The market prices of
zero coupon securities are generally more volatile than the market
prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do
non-zero coupon securities having similar maturities and credit
quality. See "Zero Coupon Securities" and "Special Considerations."
YIELD CONSIDERATIONS. The yield characteristics of mortgage-backed and
asset-backed securities differ from those of traditional debt
securities. The major differences typically include more frequent
interest and principal payments, usually monthly, and the possibility
that prepayments of principal may be made at any time. Prepayment
rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors. In general,
changes in the rate of prepayments on a security will change the yield
to maturity of the security.
The Fund expects to invest a substantial portion of its assets in
derivative mortgage-backed securities, such as stripped
mortgage-backed securities, which are highly sensitive to changes in
prepayment and interest rates. Under certain interest rate or
prepayment rate scenarios, the Fund may fail to fully recoup its
investment in such securities notwithstanding the high quality credit
ratings typically assigned to such securities.
Amounts available for reinvestment by the Fund in portfolio securities
are likely to be greatest during a period of declining interest rates
and, as a result, likely to be reinvested at lower interest rates than
during a period of rising interest rates. Mortgage-backed and
asset-backed securities may decrease in value as a result of increases
in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of
prepayment. The Fund's income, dividends and distributions, expressed
as a percentage of the initial offering price, are expected to decline
over the term of the Fund. See "Investment Objective and Policies,"
"Mortgage-Backed Securities," and "Special Considerations."
LOWER-RATED SECURITIES. The Fund may invest a significant portion of
its portfolio in lower-rated U.S. corporate debt securities that have
high income producing characteristics. Lower credit ratings frequently
reflect a greater possibility that the financial condition of the
issuers may deteriorate, or that adverse changes in general economic
conditions, or both, may impair the ability of the issuers to make
timely payments of interest and principal. The values of such
securities will typically fluctuate in response to general economic
conditions and to business conditions affecting the specific
industries in which such issuers are engaged. In addition, the market
values of such securities will typically fluctuate inversely with
changes in interest rates. In each case, the market value of high
income producing securities, which are generally more volatile than
higher quality securities, may fluctuate more than the market value of
such higher quality securities. See "High Income Producing Debt
Securities," "Investment Objective and Policies" and "Special
Considerations."
FOREIGN GOVERNMENT SECURITIES. The Fund may invest in the debt
obligations of foreign governmental issuers. Such obligations are
generally denominated in non-U.S. currencies, and their value will be
affected favorably or unfavorably by changes in foreign currency
exchange rates as well as changes in U.S. and foreign interest rates.
The Fund may engage in certain foreign currency hedging transactions
designed to minimize the effects of these changes. Investment in
foreign government obligations involves certain other risks and
special costs not present when investing in U.S. securities, including
the possible imposition of foreign withholding taxes on the interest
income from such obligations. Because the Fund seeks high income, the
foreign government obligations purchased by the Fund may involve
exposure to inflationary economies with high prevailing interest rates
and may have more market price volatility, although the Manager will
only invest in the obligations of foreign governments of countries in
which the economies are considered stable by the Manager. See "High
Income Producing Debt Securities" and "Special Considerations."
LIQUIDATION OF ASSETS. The Fund must distribute to Shareholders each
year substantially all of its net investment income in order to
continue to qualify as a pass-through entity for federal income tax
purposes. Because the Fund must accrue income on its zero coupon
securities each year even though it receives no cash interest payments
thereon until maturity and the Fund expects to make all distributions
in cash, the Fund will be required to liquidate substantially all of
its non-zero coupon securities over time and will be required over
time to limit reinvestment of principal returned on investments for
the purpose of paying such distributions. The Fund's ability to
liquidate securities held for less than three months at a gain may be
limited by the requirements for qualification as a regulated
investment company for federal income tax purposes. If the Fund
realizes insufficient cash from the disposition of non-zero coupon
securities to satisfy its distribution requirements, the Fund will be
required to liquidate a portion of its zero coupon securities (or
borrow money) to satisfy these requirements. Such liquidations may
require the Fund to sell such securities at a loss or at a time when
it would otherwise be disadvantageous to do so, and there may also be
adverse tax consequences with respect to such liquidations (see
"Taxation"). In such circumstances, the liquidation of zero coupon
securities (or the repayment of such borrowings) might render the Fund
unable to distribute to its Shareholders an amount equal to $10.00 for
each Share outstanding on or shortly before May 31, 2001. The Fund may
liquidate zero coupon securities for certain other limited purposes.
To the extent the Fund purchases securities with effective maturities
extending beyond May 31, 2001 and liquidates those securities prior to
their stated maturity dates, the Fund may incur losses in connection
with such premature liquidations. See "Investment Objective and
Policies" and "Zero Coupon Securities."
ILLIQUID SECURITIES. The Fund may invest in securities that lack an
established secondary trading market or are otherwise considered
illiquid. Liquidity of a security relates to the ability to easily
dispose of securities and the price to be obtained, and does not
generally relate to the credit risk or likelihood of receipt of cash
at maturity. Illiquid securities commonly trade at a discount from
comparable, more liquid investments. Generally, it is anticipated that
25%-30% of the Fund's assets will be invested in illiquid securities
(exclusive of any illiquid zero coupon securities), but in no event
will such illiquid securities exceed 331/3% of the Fund's assets
(exclusive of any illiquid zero coupon securities). Interest rate
swaps and certain other hedging instruments are excluded from the
foregoing percentages. Certain non-zero coupon securities, such as
some types of stripped mortgage-backed securities, are currently
considered illiquid and, accordingly, will be included in the 331/3%
limitation on illiquid securities. The Fund, however, as no maximum
percentage limitation on the amount of its assets which may be
invested in illiquid zero coupon securities, and, at times, depending
upon the percentage of the Fund's assets invested in illiquid zero
coupon securities, a substantial portion of the Fund's total assets
may be illiquid. See "Zero Coupon Securities," "Mortgage-Backed
Securities," and "Other Investment Practices Restricted and Illiquid
Securities."
BORROWINGS. The Fund is authorized to borrow money (including through
reverse repurchase agreements) in amounts not exceeding 331/3% of its
total assets (including the amount borrowed) and under current market
conditions intends to borrow an amount equal to approximately 15%-25%
of its total assets. Borrowing by the Fund creates an opportunity for
increased net income, but, at the same time, creates special risks.
The Fund will only borrow when, in the Manager's opinion, such
borrowings will benefit the Fund. To the extent the income derived
from securities purchased or retained with borrowed money exceeds the
cost of such borrowing to the Fund, including the interest and
incremental management fees on the borrowed amount, the Fund's net
income will be greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with borrowed
money is not sufficient to cover the cost of borrowing, the net income
of the Fund will be less than if borrowing had not been used, and
therefore the amount available for distribution to Shareholders as
dividends will be reduced. The Fund may also borrow from banks up to
an additional 5% of its total assets for temporary or emergency
purposes without regard to the foregoing limitation. See "Other
Investment Practices-Leverage and Borrowing."
OTHER INVESTMENT TECHNIQUES. The Fund may use various investment
techniques that also involve special considerations, including
engaging in hedging transactions and short sales, selling covered call
options, making forward commitments, entering into repurchase
agreements and reverse repurchase agreements, investing in Eurodollar
instruments and lending its portfolio securities. For further
discussion of these practices and the associated special
considerations, see "Other Investment Practices."
MARKET PRICE OF SHARES. The shares of closed-end investment companies
such as the Fund frequently trade at a discount from their net asset
value but may trade at a premium. The Fund cannot predict whether its
Shares will trade at, above or below net asset value, and the initial
trading price of the shares may be less than their initial public
offering price. This market price risk may be greater for investors
who intend to sell their Shares in a relatively short period after
completion of the public offering. The Fund may periodically make
tender offers for a portion of the Shares in order to attempt to
reduce any market value discount that may exist. There are special
risks associated with such repurchases. See "Determination of Net
asset Value" and "Repurchase of Shares and Tender Offers." In
addition, the market prices of many of the securities in which the
Fund will invest have a high degree of market volatility which, in
turn, will affect the net asset value per Share and market price of
the Fund's Shares.
It is anticipated that the Fund's portfolio will consist primarily of
debt securities, the market value of which will generally vary
inversely with changes in prevailing interest rates. The various
hedging techniques that may be employed by the Fund and the different
characteristics of particular securities in which the Fund invests
make it very difficult to predict the extent of the impact of interest
rate changes on either the net asset value or the market price of the
Shares. However, to the extent the prices of the Fund's assets
fluctuate with changes in prevailing interest rates, the net asset
value of the Fund's Shares will also fluctuate in response to such
interest rate changes.
SHARES UNSECURED. Although certain portfolio securities purchased by
the Fund are collateralized by, or represent ownership interests in,
specific assets, the Fund's Shares themselves are not so secured.
THE FUND
Franklin Principal Maturity Trust (the "Fund") is a newly organized
diversified, closed-end management investment company designed primarily for
long-term investment and not as a trading vehicle. The Fund was organized as a
business trust under the laws of the Commonwealth of Massachusetts on November
22, 1988, and has registered under the Investment Company Act of 1940 (the "1940
Act"). The Fund's principal office is located at 777 Mariners Island Boulevard,
San Mateo, California 94404 and its telephone number is (415) 570-3000.
The Fund's investment objective is to manage a portfolio of securities that
may return $10.00 per Share (the initial public offering price per Share) to
investors on or shortly before May 31, 2001 while providing high monthly income.
The Fund intends to distribute substantially all of its net assets on or shortly
before May 31, 2001, at which time the Fund is designed to be terminated. This
distribution and the termination of the Fund may require Shareholder approval
pursuant to the current policy of the Securities and Exchange Commission (the
"SEC"). No assurance can be given that the Fund's investment objective will be
achieved, and the Fund may return less than $10.00 per Share. On a present value
basis, $10.00 will be worth substantially less in 2001. The Fund's Shares have
been approved for listing on the New York Stock Exchange under the symbol "FPT."
THE INVESTMENT MANAGER
Franklin Advisers, Inc. (the "Manager") is the Fund's investment manager
and, together with its affiliates, has been providing advisory and management
services to investment companies and private accounts for over 40 years.
Franklin Advisers currently manages over 77 investment funds with combined
assets (as of December 31, 1988) in excess of $36 billion, representing over 1.6
million shareholder accounts. Franklin Advisers manages the nation's largest
publicly offered mutual Fund specializing in U.S. Government and mortgage-backed
securities, and pioneered one of the first mutual funds investing in adjustable
rate mortgage-backed securities. Franklin Advisers also manages several
specialized funds which emphasize investment in debt securities. As of December
31, 1988, Franklin Advisers managed over $14 billion in U.S. corporate, U.S.
Government and mortgage-backed securities. See "Management of the Fund."
USE OF PROCEEDS
The net proceeds of this offering, after deduction of the underwriting
discounts and organization and offering expenses (estimated to be $163,790,000
assuming no exercise of the over-allotment option, see "Underwriting"), will be
invested in accordance with the policies set forth under "Investment Objective
and Policies." A portion of the organization and offering expenses of the Fund
has been advanced by the Manager and will be repaid by the Fund upon the closing
of this offering.
The Fund may enter into reverse repurchase agreements and/or engage in bank
borrowings at prevailing interest rates in order to borrow from unrelated third
parties an amount approximately equal to the underwriting discounts and the
estimated organization and offering expenses, so that initially it will have
available for investment approximately $10.00 per Share. The amount of any such
borrowings will be approximately $13,210,000 (approximately S.75 per Share), or
up to approximately $15,068,500 (approximately $.74 per Share) if the
over-allotment option discussed below is exercised in full. See "Other
Investment Practices-Borrowing."
The Fund estimates that the net proceeds of this offering will be fully
invested in accordance with the Fund's investment objective and policies within
two months of the initial public offering. Pending such investment, the proceeds
may be invested in U.S. Government securities or high quality, short-term money
market instruments. See "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to manage a portfolio of securities that
may return $10.00 per Share (the initial public offering price per Share) to
investors on or shortly before May 31, 2001 while providing high monthly income.
No assurance can be given that the Fund's investment objective will be achieved,
and the Fund may return less than $10.00 per Share. On a present value basis,
$10.00 will be worth substantially less in 2001. The Fund will seek to achieve
its objective by investing primarily in a combination of mortgage-backed
securities, zero coupon securities (including municipal zero coupon securities
or stripped securities of municipal issuers) and high income producing debt
securities of U.S. corporate and foreign governmental issuers. The Manager
estimates that initially zero coupon securities will represent approximately 30%
of the Fund's assets. The remainder of the Fund's assets initially will be
invested in approximately equal proportions in mortgage-backed securities and
high income producing debt securities. All of the Fund's zero coupon securities
will mature on or shortly before May 31, 2001 and their stated principal amount
is expected to be equal to $10.00 for each Share outstanding on such date.
Zero coupon securities are debt obligations which do not entitle the holder
to any periodic payments of interest prior to maturity and therefore are issued
and traded at a discount from their face amounts. The discount varies depending
on the time remaining until maturity, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. Zero coupon
securities may be created by separating the interest and principal components of
securities (i) issued or guaranteed by the United States Government or one of
its agencies or instrumentalities or (ii) issued or guaranteed by tax-exempt
issuers such as state or local governments or their agencies or
instrumentalities or (iii) issued by private corporate issuers. In addition,
they may be issued directly by private corporate or tax-exempt issuers. The Fund
may invest in, among other types of zero coupon securities, municipal zero
coupon securities. The Fund currently does not intend to invest in the zero
coupon securities of private corporate issuers unless such securities are rated
in the highest rating category by a nationally recognized rating organization.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
securities having similar maturities and credit quality.
Each year the Fund will be required to accrue an increasing amount of
income on its zero coupon securities. To maintain its tax status as a
pass-through entity, however, the Fund will be required to distribute dividends
equal to at least 90% of its net investment income each year, including
tax-exempt interest income and the accrued income on its zero coupon securities
for which it receives no payments in cash prior to their maturity. The Fund will
declare distributions only in cash. In order to generate sufficient cash to pay
these dividends, the Fund will be required to liquidate substantially all of its
non-zero coupon securities and will be required over time to limit reinvestment
of principal returned on investments. Thus, the Fund's portfolio may be
visualized as consisting of two portions: (i) mortgage-backed securities,
corporate debt securities, asset-backed securities, and all other investments
other than zero coupon securities, which will represent a declining portion of
the Fund's assets due to liquidations and repayments (including prepayments)
over time; and (ii) zero coupon securities, which are expected to accrete to an
amount equal to the aggregate initial public offering price of the Shares sold
in this Offering that remain outstanding on or shortly before May 31, 2001. The
Fund's income each year will consist of the total income from both portions of
its portfolio, although cash will only be received from the assets other than
Zero coupon securities (until the maturity of the zero coupon securities).
Although the Fund and the Manager expect, in the current interest rate
environment, that the zero coupon securities portion of the Fund's portfolio
will provide a lower yield than the other portion of the Fund's portfolio, the
Fund and the Manager expect that the Fund's expenses will decline over time and
this decline should mitigate this effect. The Fund and the Manager expect Fund
expenses to decline over the life of the Fund due to the scheduled reductions in
the Manager's fees and other operating expenses, including the reduction in the
trading of the portfolio securities of the Fund as zero upon securities comprise
an increasingly greater percentage of the Fund's total assets.
Lower than expected principal and interest income receipts to the Fund on
the non-zero coupon securities will result in the Fund having to liquidate
non-zero coupon securities or to borrow to meet its dividend distribution
requirements. The Manager will manage the Fund's portfolio with a view to
receiving enough income from the portion of the Fund's assets invested in
non-zero coupon securities or through borrowing to meet the Fund's dividend
distribution requirements. However, in order to meet these distribution
requirements, the Fund may be required to liquidate securities at times when it
would otherwise be disadvantageous, resulting in losses to the Fund.
The disposition of non-zero coupon securities at a loss may generate
sufficient capital losses to offset capital gains from the disposition of other
securities and reduce the Fund's distribution requirements. However, if the
disposition of non-zero coupon securities generates insufficient cash to satisfy
the Fund's distribution requirements and the Fund has liquidated substantially
all of its readily marketable non-zero coupon securities, the Fund may be
required to liquidate a portion of its zero coupon securities (or borrow money)
to satisfy these distribution requirements. In such circumstances, the
liquidation of zero coupon securities (or the repayment of such borrowings)
would render the Fund unable to distribute to the holders of its Shares
("Shareholders") at the end of the Fund's term an amount equal to $10.00 for
each Share then outstanding. However, the Manager believes that it will be able
to manage the Fund's assets so that the Fund will have sufficient cash to pay
required dividends without liquidating any zero coupon securities and without
realizing capital losses that are not offset, for federal income tax purposes,
by capital gains over the life of the Fund on liquidations of its other assets.
This result, although it cannot be guaranteed by either the Fund or the Manager,
should permit the Fund, on or shortly before May 31, 2001, to have available for
distribution to its Shareholders $10.00 for each Share then outstanding.
The Fund may also invest in U.S corporate debt securities, and foreign
government obligations, and, in particular, will seek out debt securities with
high income producing characteristics. See "High Income Producing Debt
Securities." In addition, the Fund may also invest in stripped mortgage-backed
securities. See, "Mortgage-Backed Securities - Stripped Mortgage-Backed
Securities." The Fund may utilize certain options, futures, forward contracts,
interest rate swaps and related transactions for hedging purposes. For purposes
of enhancing liquidity and/or preserving capital, on a temporary defensive
basis, the Fund may invest without limit in securities issued by the United
States Government or its agencies or instrumentalities, repurchase agreements
collateralized by such securities, or certificates of deposit, time deposits or
bankers' acceptances of similar quality. The Fund may also invest in other debt
obligations of corporate issuers, such as interest-paying corporate bonds,
commercial paper and certificates of deposit, bankers' acceptances and
interest-bearing savings accounts of banks having assets greater than $1 billion
and which are members of the Federal Deposit Insurance Corporation. These
securities typically have a lower yield than the mortgage-backed securities,
high income producing debt securities, and other types of securities in which
Fund typically will invest.
The Fund imposes no maturity restrictions on the non-zero coupon securities
in which it may invest. The Fund anticipates that all or substantially all of
its non-zero coupon securities, regardless of their maturity dates, will be
liquidated prior to May 31, 2001, and that, as that date approaches, its
portfolio will consist primarily of zero coupon securities maturing on or
shortly before that date. The Fund will purchase non-zero coupon securities, and
the Manager will manage the Fund's portfolio, with a view to this planned
termination date. To the extent the Fund purchases non-zero coupon securities
with effective maturities extending beyond May 31, 2001 and liquidates those
securities prior to their stated maturity dates, the Fund may incur losses in
connection with such premature liquidations and there may be adverse tax
consequences with respect to such liquidations.
The following describes in greater detail certain of the types of
securities in which the Fund intends to invest. It should be noted that new
types of zero coupon securities, mortgage-backed securities, high income
producing debt securities, derivative securities, asset-backed securities and
hedging instruments are developed and marketed from time to time and that,
consistent with its investment limitations, the Fund expects to invest in those
new types of securities and instruments that the Manager believes may assist the
Fund in achieving its investment objective. The Fund may use various investment
techniques and engage in hedging transactions. See "Other Investment Practices."
ZERO COUPON SECURITIES
There are currently two basic types of zero coupon securities, those
created by separating the interest and principal components of a previously
issued interest-paying security and those originally issued at a discount from
their face amount that pay no interest. Zero coupon securities of the United
States Government and certain of its agencies and instrumentalities, Government
Trusts (defined below), private corporate issuers and tax-exempt issuers,
including state and local governments and certain of their agencies and
instrumentalities, are currently available. Some types of zero coupon securities
may be considered to be illiquid.
Zero coupon securities of the United States Government that are currently
available are called STRIPS (Separate Trading of Registered Interest and
Principal of Securities) or CUBES (Coupon Under Book-Entry Safekeeping). STRIPS
and CUBES are issued under programs introduced by the United States Treasury and
are direct obligations of the United States Government. The United States
Government does not issue zero coupon securities directly. The STRIPS program,
which is ongoing, is designed to facilitate the secondary market stripping of
selected Treasury notes and bonds into individual interest and principal
components. Under the program, the United States Treasury continues to sell its
notes and bonds through its customary auction process. However, a financial
intermediary acting as purchaser of those specified notes and bonds who has
access to a book-entry account at a Federal Reserve bank may separate the
Treasury notes and bonds into individual interest and principal components and
may resell the components to third parties such as the Fund. The selected
Treasury securities may thereafter be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and legal ownership of the interest and principal payments. The Federal Reserve
does not charge a fee for this service; however, the book-entry transfer of
interest or principal components is subject to the same fee schedule generally
applicable to the transfer of Treasury securities.
STRIPS and CUBES are purchased at a discount from face value. Absent a
default by the United States Government, a purchaser will receive face value for
each of the STRIPS and CUBES purchased by him provided he holds the STRIPS and
CUBES to their maturity date. While STRIPS and CUBES can be purchased on any
business day, they all currently mature on a February 15, May 15, August 15 or
November 15. CUBES, like STRIPS, are direct obligations of the United States
Government. CUBES are coupons that have previously been stripped from Treasury
notes and bonds but which were deposited with the Federal Reserve and are now
carried and transferable in book-entry form only. Only stripped Treasury coupons
maturing on or after January 15, 1988, that were stripped prior to January 5,
1987, were eligible for conversion to book-entry form under the CUBES program.
Investment banks may also strip Treasury securities and sell them under
proprietary names. Such securities may not be as liquid as STRIPS and CUBES and
are not viewed by the staff of the SEC as U.S. Government securities.
Another type of zero coupon security is the FICO STRIP, each of which
represents an interest in securities issued by the Financing Corporation
("FICO"), which is a "mixed-ownership government corporation," chartered by the
Federal Home Loan Bank Board. FICO's sole purpose is to function as a financing
vehicle for recapitalizing the Federal Savings and Loan Insurance Corporation
("FSLIC"). FSLIC is an instrumentality of the U.S. Government which insures the
deposit accounts of eligible federal and state chartered savings and loan
associations and certain other types of thrift institutions. FICO STRIPS are not
backed by the full faith and credit of the U.S. Government but are treated as
U.S. Government securities by the Fund. FICO and FSLIC each operate under the
supervision and control of the Bank Board. The FICO STRIPS consist of Coupon
FICO STRIPS evidencing ownership of future interest payments ("Interest
Obligations") and of Principal FICO STRIPS evidencing ownership of future
principal payments ("Principal Obligations") due on a series of bonds of the
Financing Corporation (the "Bonds"). Each Coupon FICO STRIP is payable on the
due date of the corresponding Interest Obligation on the related series of
Bonds. Each Principal FICO STRIP is payable on the maturity date of the related
series of Bonds. No payments are made on any FICO STRIP prior to the maturity of
the corresponding Interest Obligation or Principal Obligation on the related
series of Bonds. Each FICO STRIP represents the right to receive a single
payment equal to the face amount of the applicable FICO STRIP on its due date.
The Bonds underlying each series of FICO STRIPS are held for the owners of FICO
STRIPS in book-entry form at the Federal Reserve Bank of New York.
Other types of zero coupon securities currently available are government
trust certificates issued by certain private trusts formed for the purpose of
refinancing certain foreign government loans ("Government Trusts"). The assets
of each Government Trust consist of a promissory note payable in United States
dollars representing a loan made by the Government Trust to a foreign government
which qualifies for a guarantee issued by the United States Government acting
through the Defense Security Assistance Agency of the Department of Defense.
Pursuant to the Foreign Operating Export Financing and Related Programs
Appropriations Act (the "Appropriations Act"), certain foreign government
borrowers are permitted to prepay certain high interest loans made by the
Federal Financing Bank under the Foreign Military Sales Credit Program (the
"FMS"). The Appropriations Act permits prepayment of the FMS loans and
authorizes the issuance of a United States Government guarantee covering no more
than and no less than 90% of the payment due on each such new loan, in
accordance with the Arms Export Control Act, as amended. The assets of the
Government Trust accordingly are backed by a full faith and credit guarantee of
the United States Government with respect to 90% of all principal and interest
payments. With respect to the 10% portion of the assets of the Government Trust
which are not guaranteed by the United States Government, each Government Trust
typically takes a security interest in noncallable securities issued or
guaranteed by the United States Government sufficient to pay the unguaranteed
10% portion. The zero coupon securities issued by the Government Trust generally
represent the right to receive a single payment equal to the face amount of the
applicable Government Trust certificate on its due date, which represents a
portion of the semiannual payments on the underlying loan held by the Government
Trust. These securities are not viewed by the staff of the SEC as U.S.
Government securities.
Initially, the Fund anticipates that a substantial portion of the zero
coupon securities in which its assets are invested will consist of Government
Trust zero coupon securities and will not consist to any great degree of STRIPS,
CUBES, FICO STRIPS and similar Treasury securities described above.
The Fund may also invest in zero coupon securities issued directly by
private corporate issuers which are rated in the highest rating category by a
nationally recognized rating organization. This type of security consists of a
single principal payment due at the maturity of the security, with no interest
being paid during the life of the security.
Zero coupon securities are also issued by a variety of tax-exempt issuers
such as state and local governments and their agencies and instrumentalities
("Municipal Issuers"). Zero coupon securities issued directly by Municipal
Issuers provide for a single principal payment at maturity. As with Treasury
securities, investment banks may strip the securities of municipal issuers and
sell the strips under proprietary names. The obligations of Municipal Issuers
include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation
systems, streets, and water and sewer works. They may also be issued for other
public purposes such as the refunding of outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities.
The two principal classifications of the debt obligations of Municipal
Issuers are (i) "general obligation bonds" and (ii) "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facility or project or, in a few cases, from the proceeds of a special excise or
other tax but are not supported by the issuer's power to levy taxes. There are
variations in the security and credit quality of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors. The yields and market values of municipal obligations are
dependent on a variety of factors, conditions of the municipal obligation
market, size of a particular offering, the maturity of the obligation and the
rating of the issue.
Because accreted income on municipal zero coupon securities is generally
not taxable to holders, municipal zero coupon securities have lower yields than
other zero coupon securities. The accreted income on such securities is not
taxable to the Fund, except that the Fund may be subject to the alternative
minimum tax with respect to interest income on certain private activity bonds.
In the case of stripped municipal securities, a portion of the income on the
security will be taxable if the yield at which the security was acquired is
greater than the yield at original issuance. When distributed to Shareholders,
the accreted income on all municipal securities will be taxed in the same manner
as other distributions. Any accreted income from municipal zero coupon
securities which is not distributed will increase the net asset value of the
Fund's Shares. Tax exempt income attributable to municipal zero coupon
securities and retained by the Fund is expected to constitute a portion of the
liquidating distribution returned to investors at the end of the Fund's term.
See "Dividends and Distributions."
The Fund may purchase advance refunded obligations of Municipal Issuers. An
advance refunded security is one as to which the issuer has deposited funds with
the trustee for such obligation; the trustee then applies the funds to purchase
other securities which are intended to satisfy the obligations of the Municipal
Issuer.
Zero coupon securities do not entitle the holder to any periodic payments
of interest prior to maturity and therefore are issued and trade at a discount
from their face or par value. The discount, in the absence of financial
difficulties of the issuer, decreases as the final maturity of the security
approaches. Zero coupon securities can be sold prior to their due date in the
secondary market at the then prevailing market value which depends primarily on
the time remaining to maturity, prevailing levels of interest rates and the
perceived credit quality of the issuer. The market prices of zero coupon
securities are more volatile than the market prices of securities of comparable
quality and similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such non-zero coupon
securities.
The Fund intends to purchase zero coupon securities that will mature on or
shortly before May 31, 2001 and will have a total stated principal amount equal
to the aggregate initial public offering price of the Shares sold in this
offering. The actual percentage of offering proceeds necessary to purchase such
zero coupon securities will vary depending upon prevailing interest rates at the
time of investment. Based on interest rates prevailing on the date of this
Prospectus, the Fund would be required to invest approximately 30% of its
initial assets to obtain such a return during this period.
The Fund will not liquidate any zero coupon securities prior to the
maturity thereof except if necessary to permit the Fund to make distributions in
order to avoid corporate income taxes (see "Taxation"), or to fund repurchases
of Shares or in connection with any purchase of substitute zero coupon
securities. The Fund may sell zero coupon securities and substitute different
zero coupon securities when, in the Manager's opinion, such substitution has net
economic benefits or it is otherwise appropriate to adjust the Fund's portfolio,
for example after a repurchase by the Fund of a portion of its Shares.
Current federal income tax law requires that a holder of a zero coupon
security report as income each year the portion of the original issue discount
on such security (other than tax-exempt original issue discount from a Municipal
zero coupon security) that accrues that year even though the holder receives no
cash payments of interest during the year. Current federal income tax law also
requires that companies such as the Fund which seek to qualify for pass-through
federal income tax treatment as regulated investment companies distribute at
least 90% of their net investment income each year, including tax-exempt and
non-cash income. See "Taxation." Accordingly, although the Fund will receive no
interest payments on its zero coupon securities, it will be required, in order
to maintain its desired tax treatment, to distribute the income attributable to
its zero coupon securities. Because the Fund will invest in zero coupon
securities having an aggregate principal amount at maturity that is expected to
be equal to the aggregate initial public offering price of the Shares sold in
this offering and remaining outstanding at the termination of the Fund, its
non-cash income and dividend requirements with respect to such zero coupon
securities will require the Fund over the course of its term to limit
reinvestment of principal returned on investments and require it to liquidate
substantially all of its non-zero coupon securities over time.
The disposition of non-zero coupon securities at a loss may generate
sufficient capital losses to offset capital gains from the disposition of other
securities and reduce the Fund's distribution requirements. However, if the
disposition of non-zero coupon securities generates insufficient cash to satisfy
the Fund's distribution requirements, the Fund will be required to liquidate a
portion of its zero coupon securities (or borrow money) to satisfy its
distribution requirements. In such circumstances, the liquidation of zero coupon
securities (or the repayment of such borrowings) might render the Fund unable to
distribute to its Shareholders an amount equal to $10.00 for each Share
outstanding on or shortly before May 31, 2001. The Manager believes that it will
be able to manage the assets of the Fund so as to avoid realized capital losses
which are not offset, for federal income tax purposes, by capital gains over the
life of the Fund on dispositions of other securities. However, neither the
Manager nor the Fund can guarantee this result. See "Investment Objective and
Policies."
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae" or "GNMA"), the Federal National
Mortgage Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities that do not carry a government guarantee but usually
having some form of private credit enhancement.
CMO RESIDUALS
The Fund will not invest in CMO or REMIC residual interests because they
may have a higher degree of market value volatility than other types of
derivative mortgage-backed securities. See "Investment Restrictions."
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
The Fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States Governmental or private lenders and guaranteed, to the extent
provided in such securities, by the United States Government or one of its
agencies or instrumentalities. Such securities, which are ownership interests in
the underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually semiannually)
and principal payments at maturity or on specified call dates. Mortgage
pass-through securities provide for monthly payments that are a "pass through"
of the monthly-interest and principal payments (including any prepayments) made
by the individual borrowers on the pooled mortgage loans, net of any fees paid
to the guarantor of such securities and the servicer of the underlying mortgage
loans.
The guaranteed mortgage pass-through securities in which the Fund will
invest include those issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie
Mac.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States thin the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool or mortgage
loans insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States Government is pledged to the
payment of all amounts that may be required to be paid under any guarantee. In
order to meet its obligations under such guarantee, Ginnie Mae is authorized to
borrow from the United States Treasury with no limitations as to amount.
The Ginnie Mae Certificates will represent a pro rata interest in one or
more pools of the following types of mortgage loans: (i) fixed rate level
payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii)
fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured
by manufactured (mobile) homes; mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized d existing under the Federal National Mortgage
Association Charter Act. Fannie Mae was originally established 1938 as a United
States Government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae provides funds to the
mortgage market primarily by purchasing home mortgage loans from local lenders,
hereby replenishing their funds from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each Fannie Mae Certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro rata interest in scheduled
principal payments and interest payments (at such Fannie Mae Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments, on the mortgage loans
in the pool represented by such Fannie Mae Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate will be guaranteed by
Fannie Mae, which guarantee is not backed by the full faith and credit of the
United States Government.
Each Fannie Mae Certificate will represent a pro rata interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (ie., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i)fixed rate level payment mortgage loans; (ii)fixed rate
growing equity mortgage loans; (iii)fixed rate graduated payment mortgage loans;
(iv)variable rate California mortgage loans; (v)other adjustable rate mortgage
loans; and (vi)fixed rate mortgage loans secured by multifamily projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of Freddie Mac currently consists of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily Freddie Mac
Certificates.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate, whether or not received. Freddie Mac also guarantees to
each registered holder of a Freddie Mac Certificate ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, but
does not, generally, guarantee the timely payment of scheduled principal.
Freddie Mac may remit the amount due on account of its guarantee of collection
of principal at any time after default on an underlying mortgage loan, but not
later than 30 days following (i) foreclosure sale, (ii) payment of a claim by
any mortgage insurer, or (iii) the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. The
obligations of Freddie Mac under its guarantee are obligations solely of Freddie
Mac and are not backed by the full faith and credit of the United States
Government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity between
ten and thirty years, substantially all of which are secured by first liens on
one- to four-family residential properties or multifamily projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to the Ginnie Mae, Fannie Mae and Freddie Mac mortgage
pass-through securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Private Pass-Throughs are usually backed by a pool of
conventional fixed rate or adjustable rate mortgage loans. Because Private
Pass-Throughs typically are not guaranteed by an entity having the credit status
of Ginnie Mae, Fannie Mae or Freddie Mac, such securities generally are
structured with one or more types of credit enhancement. See "Mortgage-Backed
Securities-Types of Credit Support."
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
Collateralized mortgage obligations ("CMOs") are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates,
but also may be collateralized by whole loans or Private Pass-Throughs (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the United States Government, or by private originators of,
or investors in, mortgage loans, including savings and loans associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be
treated as a REMIC. See "Taxation."
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a special
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
The Fund may also invest in, among others, parallel pay CMOs including
Planned Amortization Class CMOs ("PAC Bonds"), and Targeted Amortization class
CMOs ("TAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes. TAC Bonds are similar to parallel pay
CMOs and PAC Bonds except that TAC Bonds assume a specific level of principal
prepayment and their value fluctuates in response to the actual prepayment rate
on the mortgages underlying the CMOs, which may be more or less then the assumed
prepayment rate.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped mortgage-backed securities ("SMBS") are derivative multiclass
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
United States Government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The Fund may invest a substantial portion of its assets in SMBS which
have greater market volatility than zero coupon and high income producing
securities.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of Mortgage
Assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive not only to changes in prevailing interest rates but also to the rate
of principal payments (including prepayments) on the related underlying Mortgage
Assets, and a rapid rate of principal payments may have a material adverse
effect on the Fund's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the
securities are rated in the highest rating categories, AAA or Aaa, by Standard
and Poor's Corporation ("S&P") or Moody's Investors Service ("Moody's"),
respectively. See "Investment Objective and Policies."
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities are illiquid.
TYPES OF CREDIT SUPPORT
Mortgage-backed and asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (I) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from default ensures ultimate payment of the obligations on at least a portion
of the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Fund will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollateralization" (where the scheduled payments on, or the principal
amount of the underlying assets exceed that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated could adversely affect the return on an
investment in such a security.
1940 ACT CONSIDERATIONS
Many mortgage-backed securities are issued by entities that operate under
general exemptive orders from the SEC under the 1940 Act. Franklin Principal
Maturity Trust intends to file an application seeking an order from the SEC to
permit it to invest in such securities in unlimited amounts. Until the Fund
receives such an exemption, it will not invest more than 10% of its assets in
securities issued by all entities operating under such orders or more than 5% of
its assets in securities issued by any single such entity, and will not acquire
more than 3% of the voting securities of any single such entity. No assurance
can be given that any specific order to be requested by the Fund or any related
order will be granted by the SEC.
HIGH INCOME PRODUCING DEBT SECURITIES
High income producing debt securities include corporate debt securities
issued by U.S. corporations and foreign government obligations that generally
pay interest at a rate that is effectively higher than U.S. Government
securities. Such debt securities entitle the holder thereof to regular scheduled
payments of principal and interest. The Fund intends to invest principally in
U.S. corporate debt securities and foreign government obligations that have high
income producing characteristics. In selecting high income debt securities, the
Fund's Manager will consider three primary factors: credit risk, which involves
the ability of the issuer to make timely payment of principal and interest;
interest rate risk, which involves the change in the market value of debt
securities as a result of changes in the prevailing interest rates; and
maturity, which affects the volatility of the market price (IE., longer
maturities may increase the degree of a decline or rise in market price in
response to interest rate changes, assuming no change in the issuer's
creditworthiness).
The types of high income corporate debt securities in which the Fund will
invest principally include bonds, debentures and notes and will typically be
rated below investment grade. However, the Fund has no requirements regarding
whether the corporate debt securities it purchases must be rated or, if such
securities are rated, what the minimum or maximum rating on such securities must
be. Rather, the Manager will base its investment decisions for the Fund on its
own determination of reasonable investment risk. The Manager's judgment as to
the "reasonableness" of the risk involved in any particular investment will be a
function of its experience in managing fixed-income investments and its
evaluation (i) of the general economic and financial conditions; (ii) of a
specific issuer's (a) business and management, (b) cash flow, (c) earnings
coverage of interest and dividends, (d) ability to operate under adverse
economic conditions, (e) fair market value of assets, and (f) in the case of
foreign currency denominated securities, the economic conditions and interest
rates applicable to such currency; and (iii) of such other considerations as the
Manager may deem appropriate. Although some risk is inherent in all types of
investments, holders of fixed-income securities have a claim on the assets of
the issuer prior to the holders of common stock. Therefore, an investment in
corporate debt securities generally entails less risk than an investment in
common stock of the same issuer.
High income corporate debt securities of the type in which the Fund intends
principally to invest, if rated, are typically rated between "BB" and "C" by S&P
or between "Ba" and "C" by Moody's and are frequently issued by corporations in
the growth stage of their development. The Fund may also acquire high income
producing securities issued in connection with a corporate reorganization or
issued as part of a corporate takeover. See "Special Considerations." Debt
obligations which are rated "BB" or "Ba," "B," "CCC" or "Caa," "CC" or "Ca," and
"C" are rated below investment grade and are regarded by S&P and Moody's, on
balance, as predominantly speculative with respect to their capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Such securities are also generally considered to be subject to greater risk than
securities with higher ratings with regard to a deterioration of general
economic conditions. The Fund may also invest in investment grade debt
securities that have high income producing characteristics when the Manager
deems such investment to be consistent with the Fund's investment objective.
Further information concerning the ratings of debt obligations, including the
rating categories of S&P and Moody's, is provided in Appendix A.
In addition, the Fund may invest in bonds convertible into equity
securities, conditional sales contracts and loan participations of domestic
issuers. These types of fixed-income securities may involve equity features,
such as conversion or exchange rights or warrants for the acquisition of stock
of the same or a different issuer; participation based on revenues, sales or
profits; or the purchase of common stock in a unit transaction (where an
issuer's debt securities and common stock are offered as a unit). Loan
participations, which are sold without guarantee or recourse to the lending
institution, are subject to the credit risks of both the borrower and the
lending institution. The Fund may also invest in preferred stocks. These types
of securities generally are not rated. The Fund currently does not anticipate
investing in these types of securities, and none of these types of securities
will constitute 5% or more of the Fund's total assets at the time of investment.
The types of foreign government obligations in which the Fund intends to
invest include debt obligations of foreign governments, their political
subdivisions, governmental authorities, agencies and instrumentalities, and
supranational organizations. A supranational organization is an entity
designated or supported by the national government of one or more counties to
promote economic reconstruction or development. Examples of supranational
organizations include, among others, the World Bank, the European Investment
Bank and the Asian Development Bank. The Fund may also invest in
"semi-government securities," which are debt obligations issued by entities
owned by either a national, state or equivalent government or are obligations of
such a government jurisdiction which are not backed by its full faith and credit
and general taxing powers. These securities may be denominated in U.S. dollars,
foreign currencies, or European Currency Units ("ECU"), and may be traded on
both U.S. and foreign securities markets.
The Fund will limit its investments to foreign governmental issuers of
countries the economies of which are considered stable by the Fund's Manager.
The Manager's determination that a particular country should be considered
stable depends upon the Manager's evaluation of political and economic
developments affecting the country as well as recent experience in the markets
for the government securities of the country. The Manager does not believe that
there is a substantial credit risk involved in an investment in the obligations
of such stable foreign governments, although such investments may involve
exposure to inflationary economies and may have market price volatility. In
considering possible investments in foreign government obligations, the Fund's
Manager will evaluate various other factors in addition to economic and
political conditions, such as inflation rate, growth prospects, global trade
patterns and government policies. It is currently anticipated that the portion
of the Fund's assets invested in such securities will be invested principally in
issuers within Australia, Canada, Japan, New Zealand, Scandinavia, the United
Kingdom and Western Europe, and in securities denominate currencies of these
countries, in U.S. dollars, or in multinational currency units such as the ECU.
The special risks associated with non-U.S. dollar denominated investments are
discussed below. See "Special Considerations."
ASSET-BACKED SECURITIES
The securitization techniques used to develop mortgage-backed securities
are now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures described above or in a
pay-through structure similar to the CMO structure. The Fund invest in these and
other types of asset-backed securities that may be developed in the future.
Although under current market conditions the Fund will not purchase asset-backed
securities, if cost and yield considerations become favorable in the future, the
Fund will consider purchasing asset-backed securities. See "Mortgage Backed
Securities."
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans a less likely to experience substantial
prepayments. As with mortgage-backed securities, asset-backed securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques. See
"Mortgage-Backed Securities-Types of Credit Support."
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
OTHER INVESTMENT PRACTICES
HEDGING
The Fund may engage in various interest rate transactions, put and call
option transactions, transactions in futures contracts and options on futures
contracts, and forward contracts (collectively, "Hedging Transactions"). Hedging
Transactions may be used to attempt to protect against possible declines in the
market value of the Fund's portfolio resulting from downward trends in the debt
securities markets (generally due to a rise in interest rates), to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes or to establish a position
in the securities markets as a temporary substitute for purchasing particular
securities, to protect the value of the Fund's non-U.S. dollar denominated
assets from fluctuation in currency exchange rates, or to enhance income. Any or
all or these techniques may be used at any time. There is no particular strategy
that requires use of one technique rather than another. Use of any Hedging
Transaction is a function of market conditions. The Hedging Transactions that
the Fund may use are described below and in Appendix B.
INTEREST RATE TRANSACTIONS. In order to attempt to protect the value of the
Fund's portfolio from interest rate fluctuations, the Fund may ester into
various Hedging Transactions, such as interest rate swaps and the purchase or
sale of interest rate caps and floors. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as a hedge and not as a speculative investment. The Fund
will not sell interest rate caps or floors that it does not own. Interest rate
swaps involve the exchange by the Fund with another party of their respective
commitments to pay or receive ,interest, E.G., an exchange of floating rate
payments for fixed rate payments. The purchase of an interest rate cap entities
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entities the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
A specific type of interest rate swap in which the Fund may invest is a
mortgage swap. In a mortgage swap cash flows based on a group of GNMA mortgage
pools are exchanged for cash flows based on a floating interest rate. A mortgage
swap is affected by changes in interest rates which in turn affect the
prepayment rate of the underlying mortgages upon which the mortgage swap index
is based.
The Fund, may enter into interest rate swaps, caps, and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, I.E., THE TWo payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as these Hedging Transactions are entered into for good faith hedging purposes,
the Manager and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. An amount of cash or liquid securities having an
aggregate net asset value at least equal to the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be maintained in a segregated account by the Fund's
custodian. The Fund will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is considered creditworthy by the Manager. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they are
less liquid than swaps.
OPTIONS ON SECURITIES AND FUTURES. In order to enhance income, reduce
fluctuations in net asset value, or provide limited protection against decreases
in market value of the Fund's portfolio, the Fund may sell or purchase put or
call options. The Fund may sell or purchase call options ("calls") on United
States Treasury securities, mortgage-backed and asset-backed securities,
corporate debt securities, foreign government obligations, and Eurodollar
instruments that are traded on United States and foreign securities exchanges
and in the over-the-counter markets and on futures contracts (see "Futures
Contracts" below) on these types of securities. A call option gives the
purchaser of the option the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option period.
All such calls sold by the Fund must be "covered" as long as the call is
outstanding (ie., the Fund must own the securities subject to the call or other
securities acceptable for applicable escrow requirements). A call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or to possible continued holding of a security which might otherwise
have been sold to protect against depreciation in the market price of the
security. The purchase of a call gives the Fund the right to buy a security at a
fixed price Calls on futures contracts must also be covered by deliverable
securities or by liquid assets segregated to satisfy the Fund's obligations
under the futures contracts.
The Fund may sell or purchase put options ("puts") that relate to United
States Treasury securities, mortgage-backed and asset-backed securities,
corporate debt securities, foreign government obligations, an Eurodollar
instruments (whether or not it holds such securities in its portfolio) and to
futures contracts on these types of securities. The Fund may sell puts on
securities in its portfolio or on futures contracts on such securities only if
such puts are secured by segregated liquid assets. The Fund will not sell puts
if, as a result, more than 50% of the Fund's assets would be required to be
segregated liquid assets. In selling puts, there is a risk that the Fun may be
required to buy the underlying security at a disadvantageous price.
FUTURES CONTRACTS. The Fund may also enter into contracts on organized
boards of trade for the purchase or sale for future delivery of foreign
currencies ("currency futures contracts") and may purchase or write options to
buy or sell currency futures contracts traded on U.S. and foreign exchanges. The
Fund may also purchase and sell futures contracts on securities and other
financial market indices.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities on foreign currencies called for by the
futures contract at a specified price on a specified date. A "purchase" of
futures contract means the incurring of a contractual obligation to acquire the
securities or foreign currencies called for by the contract at a specified price
on a specified date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the difference between a
specified dollar multiple of the value of the index on the expiration date of
the contract and the value of the index at the time the futures contract was
entered into. No physical delivery of the securities underlying the index is
made. The principal risks relating to the use of futures are: (a) possible
imperfect correlation between the prices of the futures and the market value of
the securities in the Fund's portfolio; (b) possible lack of a liquid secondary
market for closing out futures position; and (c) losses on futures resulting
from interest rate movements not anticipated by the Manager
LIMITATIONS ON USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES. These
investment techniques are designed only to hedge against anticipated future
changes in the value of the Fund's portfolio, e.g., through changes in interest
or currency exchange rates which otherwise might either adversely affect the
value of the Fund' portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date The Trustees have
adopted the requirement that all futures contracts and options on futures
contracts may only be used for hedging purposes and not for speculation. In
addition to complying with this requirement, the Fund will not purchase or sell
futures contracts or options on futures contracts if immediately thereafter the
amount of initial margin deposits on all the futures positions of the Fund and
premiums paid on options on futures contracts would exceed 5% of the market
value of the total assets of the Fund. Notwithstanding these limitations, should
financial markets move in an unexpected manner, the Fund may not achieve the
anticipated benefits of a futures contract or option on futures contract or may
realize a loss. See Appendix B for further information.
OPTIONS ON FOREIGN CURRENCIES. The Fund may also write covered call options
and purchase put and call options on foreign currencies (traded on U.S. and
foreign exchanges or over-the-counter) for hedging purpose to protect against
declines in the U.S. dollar value of foreign government obligations owned by the
Fund and against increases in the U.S. dollar cost of foreign government
obligations to be acquired. As in the case of other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transactions costs.
Options on foreign currencies to be written or purchased by the Fund will be
traded on U.S. and foreign exchanges and over-the-counter. There is no specific
limitation on investments in options on foreign currencies.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may also enter into forward
currency exchange contracts to attempt to minimize the risk to the Fund from
adverse changes in the relationship between currencies in which any foreign
government obligations in its portfolio are denominated, or to enhance income. A
forward contract is an obligation to purchase or sale a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. Forward contracts may potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies or between foreign currencies. Unanticipated changes in
currency exchange rates also may result in poorer overall performance for the
Fund than if it had not entered into such forward contracts.
RISK FACTORS AND ADDITIONAL INFORMATION. Appendix B contains further
information about the characteristics, risks and possible benefits of options,
futures contracts, options on futures contracts and forward contracts and the
Fund's other policies and limitations (which are not fundamental policies)
relating to these Hedging Transactions.
EURODOLLAR INSTRUMENTS
The Fund may make investments in Eurodollar instruments. Eurodollar
instruments are essentially U.S. dollar denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR").
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
intends to use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps are linked. Investments in
these types of securities of non-United States issuers involve certain risks not
ordinarily associated with investments in securities of U.S. issuers. See
"Special Considerations."
SHORT SALES
The Fund may make short sales of Securities. A short sale is a transaction
in which the Fund sells a security in anticipation that the market price of that
security will decline. The Fund expects to make short sales both (i) as a form
of hedging to offset potential declines in long positions in securities it owns,
or anticipates acquiring, or in similar securities, and (ii) in order to
maintain portfolio flexibility.
When the Fund makes a short sale of a security it does not own, it must
borrow the security sold short and deliver it to the broker-dealer through which
it made the short sale as collateral for its obligation to deliver the security
upon conclusion of the sale. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any payments received on such
borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, United States
Government securities or other highly liquid securities similar to those
borrowed. The Fund will also be required to deposit similar collateral with its
Custodian to the extent, if any necessary so that the value of both collateral
deposits in the aggregate is at all times equal to at least 100% of the current
market value of the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding payment over of any
payments received by the Fund on such security, the Fund may not receive any
payments (including interest) on its collateral deposited with such
broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its total
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Fund may also make
short sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the Fund owns the security it has sold
short or has the immediate and unconditional right to acquire at no additional
cost the identical security.
LEVERAGE AND BORROWING
The Fund is authorized to borrow money from banks or otherwise in an amount
up to 331/3% of the Fund's total assets (including the amount borrowed), less
all liabilities and indebtedness other than the bank or other borrowing. Under
current market conditions, the Fund intends to borrow an amount equal to
approximately 15%25% of the Fund's total assets, including an amount sufficient
to pay the organization, offering and underwriting costs and expenses incurred
in connection with the public offering of the Fund's Shares. The Fund is also
authorized to borrow from banks an additional 5% of its total assets without
regard to the foregoing limitation for temporary or emergency purposes such as
clearances of portfolio transactions, share repurchases and dividend payments.
The Fund will only borrow when, in the Manager's opinion, such borrowing will
benefit the Fund after taking into account considerations such as interest
income and possible gains or losses upon liquidation of securities retained or
purchased with borrowed money, and the cost of borrowing (discussed below).
Borrowing by the Fund creates an opportunity for increased net income but,
at the same time, creates special risk considerations. For example, leveraging
may exaggerate changes in the net asset value of Fund shares and in the yield on
the Fund's portfolio. Although the principal amount of such borrowings will be
fixed, the Fund's assets may change in value during the time the borrowing is
outstanding. Borrowing will create interest expenses for the Fund which can
exceed the income from the assets retained or purchased with such borrowing.
Borrowing (other than temporary borrowing) also increases the assets of the Fund
upon which the management fee is based and may result in increases in other
administrative costs borne by the Fund. To the extent the income derived from
securities retained or purchased with borrowed funds exceeds the interest
expenses and incremental costs the Fund will have to pay, the Fund's net income
will be greater than if borrowing were not used. Conversely, if the income from
the assets retained with borrowed funds is not sufficient to cover the cost of
such borrowing, the net income of the Fund will be less than if borrowing were
not used, and therefore the amount available for distribution to Shareholders as
dividends will be reduced.
Because few or none of the Fund's assets will consist of margin securities,
the Fund does not expect to borrow on margin, although such borrowing is not
prohibited. The Fund may also borrow by entering into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements (as discussed below). Under a reverse repurchase agreement, the Fund
sells securities and agrees to repurchase them at a mutually agreed upon date
and price. At the time the Fund enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with an approved custodian
containing liquid high grade securities having a value not less than the
repurchase price (including accrued interest). Reverse repurchase agreements
involve risk that the market value of the securities retained in lieu of sale by
the Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities and the Fund's use of
the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Reverse repurchase agreements can create leverage, a
speculative factor, and will be considered as borrowings for purposes of the
Fund's limitation on borrowing.
The Fund expects that some of its borrowings may be made on a secured
basis. In such situations, either the Custodian will segregate the pledged
assets for the benefit of the lender or arrangements will be made with (i) the
lender to act as a subcustodian if the lender is a bank or otherwise qualifies
as a custodian of investment company assets or (ii) a suitable custodian.
RESTRICTED AND ILLIQUID SECURITIES
The Fund expects to invest in securities the disposition of which is
subject to legal or contractual restrictions the markets for which are illiquid.
The sale of restricted and illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
often sell at a price lower than similar securities that are not subject to
restrictions on resale.
The Fund expects that approximately 25%-30% of its assets will be invested
in restricted and illiquid securities (exclusive of any illiquid zero coupon
securities), but in no event will such securities exceed 331/3% of the Fund's
assets (exclusive of any illiquid zero coupon securities). Interest rate swaps
and certain other hedging instruments are excluded from the foregoing
percentages. Certain non-zero coupon securities, such as some types of stripped
mortgage-backed securities, are currently considered illiquid but may become
liquid as secondary markets for these securities continue to develop. Until such
time as an active trading market has developed and these securities are no
longer considered illiquid, they will be included in the 331/3% limitation on
illiquid securities. The Fund, however, has no maximum percentage limitation on
the amount of its assets which may be invested in illiquid zero coupon
securities, and, at times, depending upon the percentage of the Fund's assets
invested in illiquid zero coupon securities, a substantial portion of the Fund's
total assets may be illiquid.
REPURCHASE AGREEMENTS
The Fund may invest temporarily, without limitation, in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Fund from a third party with the understanding that they will be repurchased
by the seller at a fixed price on an agreed date. These agreements may be made
with respect to any of the portfolio securities in which the Fund is authorized
to invest. Repurchase agreements may be characterized as loans secured by the
underlying securities. The Fund may enter into repurchase agreements with (i)
member banks of the Federal Reserve System and (ii) securities dealers, provided
that such banks or dealers meet the creditworthiness standards established by
the Fund's Board of Trustees ("Qualified Institutions"). The Manager will
monitor the continued creditworthiness of Qualified Institutions, subject to the
supervision of the Fund's Board of Trustees. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The collateral is
marked to market daily. Such agreements permit the Fund to keep all its assets
earning interest while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. The Fund typically will enter into
repurchase agreements that settle in seven days or less.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization Under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize these risks, the securities
underlying the repurchase agreement will be limited to U.S. Government
securities and will be held by the Custodian at all times in an amount at least
equal to 102% of the repurchase price, including accrued interest. If the seller
fails to repurchase the securities, the Fund may suffer a loss to the extent
proceeds from the sale of the underlying securities are less than the repurchase
price.
LENDING OF SECURITIES
The Fund may lend its portfolio securities to Qualified Institutions. By
lending its portfolio securities, the Fund attempts to increase its income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that may occur during the term of the loan will
be for the account of the Fund. The Fund may lend its portfolio securities so
long as the terms and the structure of such loans are not inconsistent with the
requirements of the 1940 Act and the Manager's guidelines, which currently
require that (a) the borrower pledges and maintains with the Fund collateral
consisting of cash, cash equivalents or U.S. Government securities having a
value at all times not less than 102% of the value of the securities loaned, (b)
the borrower adds to such collateral whenever the price of the securities loan
rises (i.e., the value of the loan is "marked to the market" on a daily basis),
(c) the loan is made subject to termination by the Fund at any time, and (d) the
Fund receives reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and the increase in their market value.
The Fund will not lend portfolio securities if, as a result, the aggregate of
such loans exceeds 331/3% of the value of the Fund's total assets (including
such loans). Loan arrangements made by the Fund will comply with all other
applicable regulatory requirements, including rules of the New York Stock
Exchange which rules presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of five business days. All
relevant facts and circumstances, including the creditworthiness of the
Qualified Institution, will be monitored by the Manager, and will be considered
in making decisions with respect to lending of securities, subject to review by
the Fund's Board of Trustees.
The Fund may pay reasonable negotiated fees in connection with loaned
securities, as long as such fees are set forth in a written contract and
approved by the Fund's Board of Trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting the
loan, the loan must be called and the securities voted.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis in order to hedge against
anticipated changes in interest rates and prices. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. When-issued securities and forward commitments may
be sold prior to the settlement date, but the Fund will enter into when-issued
and forward commitments only with the intention of actually receiving or
delivering the securities, as the case may be. No income accrues on securities
which have been purchased pursuant to a forward commitment or on a when-issued
basis prior to delivery to the Fund. If the Fund disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss.
At the time the Fund enters into a transaction on a when-issued or forward
commitment basis, a segregated account consisting of cash or liquid debt
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with the Custodian and will be
marked to market daily. There is always a risk that the securities may not be
delivered and that the Fund may incur a loss. Settlements in the ordinary
course, which may take substantially more than five business days for
mortgage-related securities, are not treated by the Fund as when-issued or
forward commitment transactions and accordingly are not subject to the foregoing
restrictions.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and, like
the Fund's investment objective, may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the 1940 Act means the lesser of (i) 67% of the Shares
represented at a meeting at which more than 50% of the outstanding Shares are
represented or (ii) more than 50% of the outstanding Shares). The Fund MAY NOT:
1) invest more than 25% of its total assets (valued at the time of
investment) in securities of companies engaged principally in any one
industry. This restriction does not apply to securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities;
2) with respect to 75% of its total assets: (i) invest more than 5% of
its total assets (taken at market value at the time of investment) in the
securities of any one issuer, or (ii) acquire more than 10% of the
outstanding voting securities of any one issuer. This restriction does not
apply to securities issued or guaranteed by the United States Government or
its agencies or instrumentalities;
3) issue senior securities (or borrow money, including through the use
of margin, if margin securities are owned, and reverse repurchase
agreements) in excess of 331/3% of its total assets (including the amount
of senior securities issued but excluding any liabilities and indebtedness
not constituting senior securities). For purposes of this restriction,
temporary borrowing from banks not in excess of 5% of the Fund's total
assets (not including the amount borrowed) shall not be deemed a senior
security as defined in the 1940 Act;
4) pledge, mortgage or hypothecate its assets except to secure
permitted borrowings and in connection with collateral arrangements on
loans of portfolio securities. For purposes of this restriction, the Fund's
obligations under interest rate swaps and any collateral arrangements with
respect to short sales, when-issued and forward commitment contracts, and
Hedging Transactions shall not be deemed to be pledges or other
encumbrances of the Fund's assets;
5) make loans to other persons except (i) through the lending of its
portfolio securities, (ii) through the purchase of debt securities in
accordance with its investment objectives and policies, and (iii) to the
extent the entry into a repurchase agreement is deemed to be a loan;
6) underwrite the distribution of securities of other issuers except
to the extent, in connection with the resale of its portfolio securities,
or the issuance of its own Shares, the Fund may be deemed an underwriter as
defined in the Securities Act of 1933, as amended;
7) purchase or sell interests in oil, gas or mineral exploration or
development programs, or real estate or any interest therein, except that
the Fund may invest in securities issued by companies (including
partnerships and real estate investment funds) that invest in such
interests or are engaged in such activities and in mortgage related
securities;
8) acquire securities of other investment companies in an amount
exceeding the limitations set forth in the 1940 Act and the rules
thereunder, except as part of a merger, consolidation or other plan of
reorganization and as set forth under "Mortgage-Backed Securities - 1940
Act Considerations;"
9) invest in CMO or REMIC residual interests or residual interests of
asset-backed securities;
10) invest for the purpose of exercising control over the management
of any company;
11) make any short sale of securities except as provided herein and in
conformity with applicable laws, rules and regulations and further provided
that, after giving effect to such sale, the market value of all securities
sold short does not exceed 25% of the value of the Fund's total assets and
the Fund's aggregate short sales of a particular class of securities does
not exceed 25% of then outstanding securities of that class; or
12) purchase or sell commodities or commodity contracts, except that
the Fund may enter into forward commitment contracts, futures contracts and
options on futures contracts with respect to securities or foreign
currencies.
If a percentage restriction set forth above is adhered to at the time a
transaction is effected, later changes in percentages resulting from changes in
value or in the number of outstanding securities of an issuer will not be
considered a violation, except as noted.
SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks, including the
following:
The Fund is a newly organized entity and has no operating history. The
shares of closed-end investment companies frequently trade at discounts from
their net asset value but may trade at a premium. The Fund Cannot predict
whether its Shares will trade at, above or below net asset value, and the
initial trading price of the Shares may be less than their initial public
offering price. This market price risk may be greater for investors who intend
to sell their Shares in a relatively short period after completion of the public
offering. Accordingly, the Fund is designed primarily for long term investment
and should not be considered a trading vehicle. The Fund may periodically make
tender offers for a portion of the Shares in order to attempt to reduce any
market value discount that may exist. There are special risks associated with
such repurchases. See "Determination of Net Asset Value" and "Repurchase of
Shares and Tender Offers."
It is anticipated that the Fund's portfolio will primarily consist of debt
securities, the market value of which will generally vary inversely with changes
in prevailing interest rates. The various hedging techniques that may be
employed by the Fund and the different characteristics of particular securities
in which the Fund invests make it very difficult to predict the extent of the
impact of interest rate changes on either the net asset value or the market
price of the Shares. However, to the extent the prices of the Fund's assets
fluctuate with changes in prevailing interest rates, the net asset value of the
Fund's Shares will also fluctuate in response to such interest rate changes.
The yield characteristics of mortgage-backed and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time. As a result, if the Fund purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund expects to invest a substantial portion of
its assets in derivative mortgage-backed securities, such as stripped
mortgage-backed securities, which are highly sensitive to changes in prepayment
and interest rates and have greater market volatility than zero coupon and high
income producing securities.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Accordingly,
amounts available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Although,
generally, asset-backed securities are less likely to experience substantial
prepayments than are mortgage-backed securities, certain of the factors that
affect the rate of prepayments on mortgage-backed securities also affect the
rate of prepayments on asset-backed securities. However, during any particular
period, the predominant factors affecting prepayment rates on mortgage-backed
and asset-backed securities may be different. Mortgage-backed and asset-backed
securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed income securities from declining interest
rates because of the risk of prepayment. The Manager will attempt to manage
prepayment risk through diversification and hedging.
The process of determining ratings for mortgage-backed and asset-backed
securities by S&P and Moodys includes consideration of the likelihood of the
receipt by securityholders of all distributions, the nature underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects with such securities. Neither of such ratings represents
an assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from that
originally anticipated, nor does it address the possibility that investors may
suffer a lower than anticipated yield or that investors in such securities may
fail to fully recoup their initial investment due to prepayments.
Zero coupon securities typically have a higher yield than comparable
quality non-zero coupon securities in order to "compensate" investors for the
fact that zero coupon securities do not pay current interest but do generate
accrued income upon which there is a current tax liability or, in the case of
the Fund, a current tax distribution requirement. The Fund's portfolio will
require careful management in order to meet the tax distribution requirements
related to the accrued income on the zero coupon securities it owns. In some
circumstances, the Fund may be required to liquidate non-zero coupon and/or zero
coupon securities at a loss to cover these tax distribution requirements. There
may also be adverse tax consequences with respect to such liquidations. See
"Taxation."
The Fund's yield will also be affected by the yields on the securities in
which the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium impose
a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full. The Manager will seek to
manage these risks (and potential benefits) by investing in a variety of such
securities and through hedging techniques.
The Fund also expects to invest a significant portion of its assets in U.S.
corporate debt securities that have high income producing characteristics.
Corporate debt securities offering high current income will ordinarily be in the
lower rating categories of recognized rating agencies or will be non-rated. The
values of such securities tend to reflect individual corporate developments to a
greater extent than higher rated securities, which react primarily to
fluctuations in the general level of interest rates. The lower credit ratings
assigned to such securities frequently reflect a greater possibility that the
financial condition of the issuers, or adverse changes in general economic
conditions, or both, may impair the ability of the issuers to make timely
payments of interest and principal. These high income producing securities are
considered by S&P and Moody's, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. In addition, the market values of
such securities will typically fluctuate more than the market value of higher
quality fixed-income securities in response to interest rate changes, changes in
general economic conditions and changes in business conditions affecting
specific industries in which such issuers are engaged. See "High Income
Producing Debt Securities."
As a result of the Fund's investment in high income producing corporate
debt securities, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or
interest. The corporate debt securities held by the Fund may be frequently
subordinated to the prior payment of senior indebtedness and may be traded in
markets that are relatively less liquid than the market for higher rated
securities. Moreover, because not all dealers maintain markets in all such high
income securities, there is not an established retail secondary market for many
of these securities, and the Fund does not anticipate that those securities
could be sold other than to institutional investors. The Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of an issuer. In this evaluation, the Manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
Because the Fund will invest in foreign government securities which
typically will be denominated in non-U.S. currencies, a change in the value of
any such currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of the Fund's assets denominated in that currency. Such
changes will also affect the net investment income available to the Fund to
distribute to Shareholders and may require adjustment to amounts accrued to
cover Fund expenses and distributions to Shareholders. Under the Internal
Revenue Code of 1986, as amended, changes in an exchange rate which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities will result in
foreign exchange gains or losses that increase or decrease distributable net
income. Similarly, dispositions of certain securities (by sale, at maturity or
otherwise) at a U.S. dollar amount that is higher or lower than the Fund's
original U.S. dollar cost may result in foreign exchange gains or losses, which
will increase or decrease distributable net investment income. The Fund will
invest only in securities denominated in foreign currencies that are freely
convertible into U.S. dollars without legal restriction at the time of
investment.
The Fund's interest income from Eurodollar and foreign securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. Because the Fund, under current market
conditions, is unlikely to have more than 50% of its total assets in any year
invested in securities of foreign corporations, the Fund probably will not be
entitled to "pass-through" to Shareholders for foreign tax credit purposes the
amount of foreign taxes paid by the Fund. See "Taxation."
There are other risks and costs associated with an investment in Eurodollar
and foreign securities. Certain foreign countries are not as politically stable
as the United States. In addition, there may be less government supervision and
regulation of foreign securities exchanges, brokers and listed companies than
exists in the United States. Restrictions and controls on investment in the
securities markets of some countries may have an adverse effect on the
availability and costs to the Fund of investments in those countries. The Fund's
investments in foreign government securities offering a high rate of return may
also involve exposure to inflationary economies because countries with high
prevailing interest rates frequently are experiencing high inflation. In
addition, the possibility of expropriations, confiscatory taxation, currency
blockage, political, economic or social instability or diplomatic developments
could affect assets of the Fund that are invested in foreign securities. There
may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than securities
markets in the United States and some foreign securities may be less liquid and
more volatile than U.S. securities. Transaction costs on foreign securities
exchanges may be higher than in the United States, and foreign securities
settlements may, in some instances, be subject to delays and related
administrative uncertainties. In addition, custodial, valuation, communication
and other administrative costs relating to Eurodollar and foreign securities are
generally higher than corresponding costs relating to domestic securities.
Given the above-described investment risks inherent in the Fund, investment
in Shares of the Fund should not be considered a complete investment program and
may not be appropriate for all investors. Investors should carefully consider
their ability to assume these risks before making an investment in the Fund.
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund is responsible for establishing and
overseeing the policies of the Fund. The officers, who are elected by the Board,
are responsible for the management of the Fund's day-to-day operations. The
Trustees and executive officers of the Fund and their principal occupations
during the last five years are set forth below. An asterisk appears next to the
name of each Trustee who is an "interested person" of the Fund (as defined in
the 1940 Act).
Frank H. Abbott, III, Trustee
1045 Sansome Street, San Francisco, CA 94111. President & Director,
Abbott Corporation (an investment company); Director, Vacu-Dry Co. (a
food processing company), Mother Lode Gold Mines Consolidated,
Franklin Gold Fund, Franklin Option Fund, Franklin Equity Fund, AGE
High Income Fund, Inc., Franklin Federal Tax-Free Income Fund,
Franklin Money Fund, Franklin Federal Money Fund, Franklin Tax-Exempt
Money Fund, Franklin Corporate Cash Management Fund, and Franklin
Pennsylvania Investors Fund; Trustee, Franklin Tax-Free Trust,
Franklin California Tax-Free Trust, Franklin New York Tax-Exempt Money
Fund, Franklin Investors Securities Trust, Franklin Investment Trust,
Institutional Fiduciary Trust Franklin Government Securities Trust,
Franklin Valuemark Funds and Franklin Universal Trust; and Managing
General Partner of Franklin Tax-Advantaged U.S. Government Securities
Fund and Franklin Tax Advantaged High Yield Securities Fund.
Harris J. Ashton, Trustee
22 Gate House Road, Stamford, CT 06902. Chairman of the Board,
President and Chief Executive Officer of General Host Corporation;
Director of The Royal Bank and Trust Company, and of RBC Holdings
(U.S.A.) Inc.; Director, Franklin Gold Fund, Franklin Equity Fund,
Franklin Custodian Funds, Inc., Franklin California Tax-Free Income
Fund, Inc., Franklin New York Tax-Free Income Fund, Inc., Franklin
Federal Tax-Free Income Fund, Franklin Money Fund, Franklin Federal
Money Fund, Franklin Tax-Exempt Money Fund, Franklin Pennsylvania
Investors Fund, Franklin Real Estate Income Fund, and Franklin
Corporate Cash Management Fund; Trustee, Franklin Tax-Free Trust,
Franklin California Tax-Free Trust Franklin New York Tax-Exempt Money
Fund, Franklin Investors Securities Trust, Franklin Investment Trust,
Institutional Fiduciary Trust, Franklin Government Securities Trust,
Franklin Valuemark Funds an Franklin Universal Trust; and Managing
General Partner of Franklin Tax-Advantaged U.S. Government Securities
Fund and Franklin Tax-Advantaged High Yield Securities Fund.
Zadoc W. Brown, Trustee
Financial Plaza of the Pacific, Bancorp Tower, Suite 905, Honolulu, H
96813. Private Investor; Director Franklin Gold Fund, Franklin Option
Fund, Franklin Equity Fund, Franklin Federal Tax-Free Income Fund
Franklin Money Fund, Franklin Federal Money Fund, Franklin Tax-Exempt
Money Fund, Franklin Pennsylvania Investors Fund and Franklin
Corporate Cash Management Fund; Trustee, Franklin Tax-Free Trust,
Franklin California Tax-Free Trust, Franklin New York Tax-Exempt Money
Fund, Franklin Investors Securities Trust, Franklin Investment Trust,
Institutional Fiduciary Trust, Franklin Government Securities Trust,
Franklin Valuemark Funds and Franklin Universal Trust; and Managing
General Partner of Franklin Tax-Advantaged U.S. Government Securities
Fund and Franklin Tax-Advantaged High Yield Securities Fund.
David W. Garbellano, Trustee
612 Marine Street, Point Richmond, CA 94801. Private Investor;
Director and Assistant Secretary/Treasurer. Berkeley Science
Corporation (a venture capital company); Director, Franklin Gold Fund,
Franklin Option Fund, Franklin Federal Tax-Free Income Fund, Franklin
Corporate Cash Management Fund, Franklin Pennsylvania Investors Fund,
Franklin Federal Money Fund, Franklin Tax-Exempt Money Fund and
Franklin Equity Fund; Trustee, Franklin Tax-Free Trust, Franklin
California Tax-Free Trust, Franklin New York Tax-Exempt Money Fund,
Institutional Fiduciary Trust, Franklin Investment Trust, Franklin
Investor Securities Trust, Franklin Government Securities Trust,
Franklin Valuemark Fund and Franklin Universal Trust; and Managing
General Partner of Franklin Tax-Advantaged U.S. Government Securities
Fund and Franklin Tax-Advantaged High Yield Securities Fund.
*Henry L. Jamieson, Chairman of the Board and Trustee
777 Mariners Island Boulevard, San Mateo, CA 94404. Sales
Representative, Protected Investor America; Chairman of the Board and
Director, Franklin Gold Fund, Franklin Option Fund, Franklin Equity
Fund, AGE High Income Fund, Inc., Franklin Federal Tax-Free Income
Fund, Franklin Money Fund, Franklin Federal Money Fund, Franklin
Tax-Exempt Money Fund, Franklin Pennsylvania Investors Fund and
Franklin Corporate Cash Management Fund; Director, Northwest Life
Assurance Company; Chairman of the Board and Trustee, Franklin
Tax-Free Trust, Franklin California Tax-Free Trust, Franklin New
Tax-Exempt Money Fund, Franklin Investors Securities Trust, Franklin
Investment Trust, Institutional Fiduciary Trust, Franklin Government
Securities Trust, Franklin Valuemark Funds and Franklin Universal
Trust; and Managing General Partner of Franklin Tax-Advantaged U.S.
Government Securities Fund and Franklin Tax-Advantaged High Yield
Securities Fund.
*Charles B. Johnson, President and Trustee
777 Mariners Island Boulevard, San Mateo, CA 94404. President and
Director of Franklin Resources, Inc., Franklin Distributors, Inc.;
Director and Chairman of the Board, Franklin Advisers, Inc.; Director,
Franklin Trust Company, Franklin Administrative Services, Inc.,
General Host Corporation, Franklin Bank and Franklin Management, Inc.;
President and Director, Franklin Gold Fund, Franklin Option Fund,
Franklin Equity Fund, Franklin Custodian Funds, Inc., Franklin
California Tax-Free Income Fund, Inc., Franklin New York Tax-Free
Income Fund, Inc., Franklin Federal Tax-Free Income Fund, Inc.,
Franklin Money Fund, Franklin Federal Money Fund, Franklin Tax-Exempt
Money Fund, Franklin Corporate Cash Management Fund and Franklin
Pennsylvania Investors Fund; President and Trustee, Franklin Tax-Free
Trust, Franklin California Tax-Free Trust, Institutional Fiduciary
Trust, Franklin New York Tax-Exempt Money Fund, Franklin Investment
Trust, Franklin Investors Securities Trust, Franklin Government
Securities Trust, Franklin Valuemark Funds and Franklin Universal
Trust; and Managing General Partner of Franklin Tax-Advantaged U.S.
Government Securities Fund and Franklin Tax-Advantaged High Yield
Securities Fund. Mr. Johnson is the brother of Rupert H. Johnson, Jr.
*Rupert H. Johnson, Jr., Vice President and Trustee
777 Mariners Island Boulevard, San Mateo, CA 94404. President and
Director, Franklin Advisers, Inc.; Senior Vice President and Director,
Franklin Distributors, Inc. and Franklin Resources, Inc.; Director,
Franklin Administrative Services, Inc. and Franklin Bank; Director and
Chairman of the Board, Franklin Management, Inc.; Executive Vice
President, Director and Senior Investment Officer, Franklin Trust
Company; Vice President and Director, Franklin Gold Fund, Franklin
Equity Fund, Franklin Custodian Funds, Inc., AGE High Income Fund,
Inc., Franklin California Tax-Free Income Fund, Inc., Franklin New
York Tax-Free Income Fund, Inc., Franklin Federal Tax-Free Income
Fund, Inc., Franklin Money Fund, Franklin Federal Money Fund, Franklin
Tax-Exempt Money Fund, Franklin Corporate Cash Management Fund and
Franklin Pennsylvania Investors Fund; Senior Vice President and
Trustee, Franklin Universal Trust; Vice President and Trustee,
Franklin Tax-Free Trust, Franklin California Tax-Free Trust, Franklin
New York Tax-Exempt Money Fund, Franklin Investors Securities Trust,
Franklin Investment Trust, Institutional Fiduciary Trust, Franklin
Government Securities Trust and Franklin Valuemark Funds; and Managing
General Partner of Franklin Tax-Advantaged U.S. Government Securities
Fund and Franklin Tax-Advantaged High Yield Securities Fund. Mr.
Johnson is the brother of Charles B. Johnson.
Frank W. T. LaHaye, Trustee
20833 Stevens Creek, Boulevard, Cupertino, CA 95014. General Partner
of Peregrine Associates and of Miller & LaHaye which are General
Partners of Peregrine Ventures I and Peregrine Ventures II (venture
capital firms); Director, Franklin Gold Fund, Franklin Equity Fund,
Franklin Federal Tax-Free Income Fund, Franklin Money Fund, Franklin
Federal Money Fund, Franklin Tax-Exempt Money Fund, Franklin
Pennsylvania Investors Fund and Franklin Corporate Cash Management
Fund; Trustee, Franklin Tax-Free Trust, Franklin California Tax-Free
Trust, Franklin New York Tax-Exempt Money Fund, Franklin Investors
Securities Trust, Franklin Investment Trust, Institutional Fiduciary
Trust, Franklin Government Securities Trust, Franklin Valuemark Funds
and Franklin Universal Trust.
Harmon E. Burns, Vice President
777 Mariners Island Boulevard, San Mateo, California 94404. Senior
Vice President-Legal and Administrative and Secretary, Franklin
Resources, Inc.; Senior Vice President and Secretary, Franklin
Distributors, Inc.; Vice President and Secretary, Franklin Advisers,
Inc.; Secretary and Director, Franklin Administrative Services, Inc.
and Franklin Trust Company; Director, Franklin Bank; officer of all of
the investment companies in the Franklin Group of Funds.
Kenneth V. Domingues, Vice President, Treasurer and Chief Financial and
Accounting Officer
777 Mariners Island Boulevard, San Mateo, California 94404. Senior
Vice President and Chief Accounting and Financial Officer of Franklin
Resources, Inc., Franklin Advisers, Inc. and Franklin Distributors, I
officer of all of the investment companies in the Franklin Group of
Funds. For more than five years prior to August 1986, partner of
Coopers & Lybrand.
Kenneth L. Koskella, Vice President
777 Mariners Island Boulevard, San Mateo, California 94404. Senior
Vice President, Franklin Resources Inc. and Franklin Distributors,
Inc. and Executive Vice President, Franklin Trust Co.; officer of many
of the investment companies in the Franklin Group of Funds.
Edward V. McVey, Vice President
777 Mariners Island Boulevard, San Mateo, California 94404. Senior
Vice President/National Sales Manager, Franklin Distributors, Inc.;
officer of many of the investment companies in the Franklin Group
Funds. For more than five years prior to May 1985, President of the
National Sales Division of Colon Management Associates, Inc.,
President of Colonial Investment Services, Inc., and Senior Vice
President of Colonial Management Associates, Inc.
R. Martin Wiskemann, Vice President
777 Mariners Island Boulevard, San Mateo, California 94404. Vice
President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Vice President, Franklin Distributors Inc,: Vice President and
Director, Franklin Gold Fund, Franklin Option Fund, Franklin Equity
Fund and Franklin Pennsylvania Investors Fund. Officer of many of the
investment companies in the Franklin Group of Funds.
Charles E. Johnson, Vice President
777 Mariners Island Boulevard, San Mateo, California 94404. Portfolio
Manager, Franklin Advisers, Inc,; Vice President-Marketing of Franklin
Resources, Inc., and Franklin Energy Corporation; Director, Property
Resources, Inc. and ILA Financial Services, Inc. For the period from
September 1983 to June 1985, Mr. Johnson attended Harvard University
Graduate School of Business where he earned a Masters in Business
Administration. Prior to September 1983, Mr. Johnson was Manager of
Dealer Services at Franklin Resources, Inc. Mr. Johnson is the son of
Charles B. Johnson.
Deborah R. Gatzek, Secretary
777 Mariners Island Boulevard, San Mateo, California 94404. Vice
President-Legal, Franklin Resources, Inc.; officer of all of the
investment companies in the Franklin Group of Funds.
The Fund intends to pay each Trustee not affiliated with the Manager a fee
of $ 1,200 per year plus $100 per Trustee or committee meeting attended,
together with each Trustee's actual out-of-pocket expenses relating to
attendance at such meetings. The Board of Trustees has an Audit Committee
comprised of Messrs. Abbott, Jamieson and LaHaye, of which Mr. Domingues is an
ex-officio member.
MANAGEMENT OF THE FUND
The Fund will employ Franklin Advisers, Inc. to manage the investment and
reinvestment of the Fund's assets and administer the affairs of the Fund,
subject to the supervision of the Fund's Board of Trustees. The Manager is a
registered investment adviser and a wholly owned subsidiary of Franklin
Resources, Inc. ("Resources").
Resources is a publicly held company whose shares are listed on the New
York Stock Exchange. Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin
Wiskemann, Trustees and/or officers of the Fund, are the principal shareholders
of Resources and own, respectively, approximately 20%, 16%. and 10% of its
outstanding shares. Resources owns several other subsidiaries which are involved
in investment management and shareholder services. Please refer to the table
under Trustees and Officers which indicates the names of all affiliated persons
of the Fund who are also affiliated persons of Resources.
Franklin Advisers provides investment advisory and management services to
over 77 investment funds (the Franklin Group of Funds), with total assets (as of
December 31, 1988) in excess of $36 billion, representing over 1.6 million
shareholder accounts. The Manager, through its predecessors and affiliates, has
been providing investment advisory and management services to investment
companies and private accounts since 1947. The Manager's abilities in widely
varied market conditions have enabled it to become one of the largest
independent investment advisory organizations in the United States. The Manager
currently advises several specialized funds which emphasize investment in debt
securities, and it manages the nation's largest publicly offered mutual fund
specializing in U.S. Government and mortgage-backed securities. The Manager
pioneered one of the first mutual funds investing in adjustable rate
mortgage-backed securities. As of December 31, 1988, the Manager managed over
$14 billion in U.S. corporate, U.S. Government and mortgage-backed securities.
It maintains a large staff of professional portfolio managers, securities
analysts and administrative specialists to continuously select investments,
monitor its portfolios and furnish timely reports to Shareholders. The Manager's
address is 777 Mariners Island Boulevard, San Mateo, California 94404.
Under an investment management agreement dated as of January 19, 1989 (the
"Management Agreement"), the Fund will pay the Manager a fee for services
performed, computed weekly and payable monthly, based on the Fund's average
weekly net assets (which, for purposes of determining such fee, shall mean the
average weekly value of the total assets of the Fund, minus the sum of the
accrued liabilities of the Fund other than the amount of any non-temporary
borrowings). Through May 31, 1993, the management fee will be computed at an
initial annual rate of 0.75% of the Fund's average weekly net assets, with
scheduled reductions as follows: 0.60% of the Fund's average weekly net assets
from June 1, 1993 through May 31, 1997; and 0.45% of the Fund's average weekly
net assets from June 1, 1997 until the anticipated termination of the Fund (May
31, 2001). The management fee, which covers various administrative, bookkeeping
and related services required by the Fund, initially will be higher than the
fees paid by most management investment companies, although it is comparable to
fees paid by recently-organized, publicly-offered, closed-end management
investment companies that have specialized objectives and policies. The average
annual fee payable to the Manager over the life of the Fund will be
approximately 0.60% of the Fund's average net asset value. Because the
management fee will be based on the Fund's assets including non-temporary
borrowings used for investment, the amount and terms of all Such borrowing will
be reviewed regularly by the Board of Trustees.
The Management Agreement obligates the Manager to provide advisory,
management and various administrative services to the Fund, including all
bookkeeping and recordkeeping required by the 1940 Act, and to pay all expenses
arising from the performance of its obligations under the Management Agreement,
but permits the Manager to retain others at its expense to perform certain
administrative and shareholder services for the Fund that would otherwise be
performed by the Manager. The Manager will compensate such persons, who may be
affiliated with the Manager or the Underwriters, out of its own resources for
any such services. (Such compensation is not a separate expense of the Fund, and
the delegation of such services does not relieve the Manager of its
responsibilities under its Management Agreement with the Fund.)
The Fund intends to enter into a separate agreement with PaineWebber
Incorporated pursuant to which PaineWebber Incorporated will perform certain
corporate finance services for the Fund in connection with share repurchases and
tender offers by the Fund. The Fund will pay PaineWebber Incorporated an annual
fee for such services, payable quarterly, at a fixed rate not to exceed 0.10% of
the net assets of the Fund as of the completion of the public offering of the
Shares. This agreement will be in effect for a period of one year and may be
renewed for successive one-year periods by the Fund.
The Fund pays all other expenses incurred in the operation of the Fund
including, but not limited to, direct charges relating to the purchase and sale
of its portfolio securities, interest charges, fees and expenses of legal
counsel and independent auditors, taxes and governmental fees, costs of Share
certificates and any other expenses (including clerical expenses) of issuance,
sale or repurchase of the Shares, expenses in connection with the Dividend
Reinvestment Plan, membership fees in trade associations, expenses of
registering and qualifying the Shares for sale under federal and state
securities laws, expenses of obtaining and maintaining stock exchange listings
of the Shares, expenses of printing and distributing reports, notices and proxy
materials to Shareholders, expenses of filing reports and other documents filed
with governmental agencies, expenses of annual and special Shareholders'
meetings, fees and disbursements of the transfer agents, custodians and
sub-custodians, expenses of disbursing dividends and distributions, fees,
expenses and out-of-pocket costs of Trustees of the Fund who are not affiliated
with the Manager, insurance premiums, indemnification and other expenses not
expressly provided for in the Management Agreement, and any extraordinary
expenses of a nonrecurring nature.
The Fund's expenses are charged against the Fund's current income. It is
presently anticipated that the Fund will not be subject to any expense
limitation imposed under state law.
The Management Agreement was approved by a majority of the Fund's Board of
Trustees, including a majority of the Trustees who are not "interested persons"
(as defined in the 1940 Act), at a meeting held on December 13, 1988, and was
approved by Resources, as the Fund's initial Shareholder, on January 11, 1989.
The Management Agreement is in effect through January 19, 1991 and shall
continue in effect thereafter for periods not exceeding one year, provided such
continuation is approved at least annually (i) by the Board of Trustees of the
Fund or by the holders of a majority of the Fund's outstanding voting securities
and (ii) by a majority of the Trustees who are not parties to the Management
Agreement or interested persons of any such party.
The Management Agreement terminates upon assignment, and may be terminated
without penalty on not less than 60 days' prior written notice at the option of
either of the parties thereto or by the affirmative vote of the holders of a
majority of the Fund's outstanding voting securities.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The securities in which the
Fund invests are traded principally in the over-the-counter market. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the price,
a fixed amount of compensation for the manager(s), underwriter(s), and
dealer(s). The Fund may also purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid. Purchases
and sales of bonds on a stock exchange are effected through brokers who charge a
commission on their services.
In effecting transactions in the over-the-counter market, the Fund intends
to deal directly with the dealers who make markets in the securities involved,
except in those circumstances where better prices and execution are available
elsewhere. Under the 1940 Act, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Because transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons in connection with such transactions or other
transactions, such as those discussed above, where an affiliated person is
acting as principal for its own account.
The primary considerations in selecting the manner of executing securities
transactions for the Fund, and the brokerage firms that will be used, will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Manager, more than
one firm can offer comparable execution services. Accordingly the Management
Agreement recognizes that in the purchase and sale of portfolio securities for
the Fund, the Manager will seek the best combination of price (inclusive of
brokerage commissions) and execution and, consistent with that policy, may give
consideration to the research, statistical and other services furnished by
brokers or dealers to the Manager or its affiliates which the Manager or its
affiliates may lawfully and appropriately use in their investment management
capacities. In addition, the Manager is authorized to place orders with brokers
who provide supplemental investment, market research and security and economic
analyses, and other services, although the use of such brokers may result in
higher brokerage charges to the Fund than the use of brokers selected solely on
the basis of seeking the best combination of price (inclusive of brokerage
commissions) and execution for the same order. The Manager considers such
services and information, which are in addition to and not in lieu of services
required to be performed by the Manager under its Management Agreement with the
Fund, to be useful in varying degrees but of indeterminable value. Brokerage may
be allocated entirely on the basis of net results to the Fund, including the
size and difficulty of the order and the reputation of the broker-dealer.
Research and analysis received by the Manager may benefit the Manager in
connection with its services to other clients, as well as the Fund. Consistent
with the Manager's policy to seek the best combination of price and execution,
brokerage may also be allocated to brokers or dealers who assisted in the
offering of the Fund's Shares.
Subject to the foregoing policies, the Fund may use brokers or dealers that
are affiliated persons of the Fund, including any of the Underwriters for this
offering, or affiliated persons of such persons to execute portfolio
transactions for the Fund on an agency basis subject to certain procedures which
the Fund has adopted in accordance with the provisions of Rule 17e-1 under the
1940 Act. These procedures are designed to provide that commissions payable to
such affiliated brokers or dealers are reasonable and fair as compared to the
commissions received by other brokers or dealers in connection with comparable
transactions involving similar securities being purchased or sold on securities
exchanges during a comparable period of time. The Board of Trustees will review
such procedures, at least annually, for their continuing appropriateness, and
determine, on at least a quarterly basis, that all such transactions during the
preceding quarter were effected in compliance with such procedures. The Fund has
also adopted certain procedures, pursuant to Rule lOf-3 under the 1940 Act,
which must be followed any time that the Fund purchases or otherwise acquires,
during the existence of the underwriting or selling syndicate with respect to
the Shares, a security of which one of the Underwriters of this offering or any
affiliate of the Fund is a principal underwriter.
The investment decisions for the Fund will be made independently of those
for other clients of the Manager or its affiliates. However, in certain
circumstances, the same position may be taken by one or more accounts managed by
the Manager or its affiliates. When the Fund and one or more such accounts
managed by the Manager or one of its affiliates propose to purchase or sell the
same security at the same time, the available opportunities will be allocated in
a manner that the Manager believes to be equitable. In some cases, this
procedure may affect the price paid or received by the Fund or the size of the
position purchased or sold by the Fund.
National securities exchanges have established limitations governing the
maximum number of options in each class which may be written by a single
investor or group of investors acting in concert. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions. These position limits may restrict the number of
options the Fund will be able to write on a particular security.
The above-mentioned factors may, have a detrimental effect on the
quantities or prices of securities an options or futures contracts available to
the Fund. On the other hand, the ability of the Fund to participate in volume
transactions may produce better executions for the Fund in some cases. The Board
of Trustees of the Fund believes that the benefits of the Manager's organization
outweigh any limitations that may arise from simultaneous transactions.
Although the Management Agreement contains no restrictions on portfolio
turnover, it is not the Fund policy to engage in transactions with the objective
of seeking profits from short-term trading. It is expected that the annual
portfolio turnover rate of the Fund will not exceed 400% excluding securities
having a maturity of one year or less and is expected to decline over time.
Because it is difficult to predict accurately portfolio turnover rates, actual
turnover may be higher or lower. The Manager will monitor the Fund's tax status
under the Internal Revenue Code during periods in which the Fund's annual
turnover rate exceeds 100%. Higher portfolio turnover results in increased Fund
expenses, including brokerage commissions, dealer mark-ups and other transaction
costs on the sale of securities and on the reinvestment in other securities. To
the extent that increased portfolio turnover results in sales at a profit of
securities held less than three months, the Fund's ability to qualify as a
"regulated investment company" under the Internal Revenue Code may be affected.
The Fund is authorized to invest in the securities of unaffiliated
broker-dealers, including broker-dealers that execute portfolio transactions for
the Fund.
DETERMINATION OF NET ASSET VALUE
The aggregate net asset value of the Fund is computed based upon the market
value of the investment securities in the Fund's portfolio. The Fund values zero
coupon securities, mortgage-backed and asset-backed securities, corporate debt
securities and other securities on the basis of valuations provided by dealers
or b pricing service, approved by the Fund's Board of Trustees, which uses
information with respect to transactions in such securities, quotations from
dealers, market transactions in comparable securities, various relationships
between securities and yield to maturity in determining value. Debt securities
having a remaining maturity of sixty days or less when purchased and debt
securities originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at cost
adjusted for amortization of premiums and accretion of discounts. Any securities
or other assets for which current market quotations are not readily available
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees.
Securities denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be valued in a similar manner and their
value translated into U.S. dollars at the bid price of their respective currency
denomination against U.S. dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
policies established in good faith by the Board of Trustees. Because the value
of securities denominated in foreign currencies must be translated into U.S.
dollars, fluctuations in the value of such currencies in relation to the U.S.
dollar will affect the net asset value of Fund shares even though there has not
been any change in the values of such securities.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. Occasionally, events affecting the values of such securities in U.S.
dollars on a day on which the Fund calculates its net asset value may occur
between the times at which such securities are valued and the close of the New
York Stock Exchange which will not be reflected in the computation of the Fund's
net asset value unless the Trustees or their delegates deem that such events
would materially affect the net asset value, in which case an adjustment would
be made.
If any securities held by the Fund are restricted as to resale, the Manager
determines their fair value following procedures approved and periodically
reviewed by the Board of Trustees. The fair value of such securities is
generally determined as the amount which the Fund could reasonably expect to
realize from an orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific instance are likely to
vary from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data relating
to the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the Fund
in connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
The net asset value per Share is determined no less frequently than once
each week and is equal to the value of the Fund's assets (including interest
accrued but not received), minus the Fund's liabilities (including accrued
expenses and dividends payable), divided by the number of Shares outstanding.
The net asset value per Share will be made available for publication. Currently,
The WALL STREET JOURNAL AND BARRON'S publish net asset values for closed-end
investment companies generally on Monday of each week.
DIVIDENDS AND DISTRIBUTIONS
All distributions of the Fund will be made in cash, subject to the
Shareholders' ability to have distributions reinvested in Fund Shares purchased
on the open market under the Dividend Reinvestment Plan (see "Dividend
Reinvestment Plan"). The Fund will distribute to Shareholders monthly dividends
consisting of all or a portion of its net investment income. The Fund currently
intends to retain income, until the final liquidating distribution, in an amount
approximately equal to the tax-exempt income attributable to its municipal zero
coupon securities, but in no event greater than one-tenth of the Fund's net
investment income per annum. All or a portion of net capital gain (I.E., the
excess of net long-term capital gain over net short-term capital loss), if any,
will be distributed at least annually. "Net investment income," as used herein,
includes all dividends, interest (including tax-exempt interest), other ordinary
income earned by the Fund on its portfolio holdings and net short-term capital
gains, net of the Fund's expenses. Because the Fund must bear certain expenses
incurred in connection with the offering of the Fund's Shares, net asset value
will be less than $10.00 per Share immediately after the offering. The Fund will
attempt to retain over time sufficient income to cause the Fund's net asset
value on or shortly before May 31, 2001 to be $10.00 per Share. Net asset value
will fluctuate over time, but if the Fund does not incur any capital losses that
are not offset, for federal income tax purposes, by capital gains, and if the
Fund does not liquidate any zero coupon securities, the Manager anticipates
that, through the retention of income from municipal zero coupon securities, the
Fund's net asset value should be $10.00 per Share on or shortly before May 31,
2001.
The Fund's first dividend will consist of the Fund's net investment income
for the period beginning on the date of the initial issuance of the Shares and
ending on March 31, 1989.
The Fund's income and distributions expressed as a percentage of the
initial public offering price are expected to decline over the term of the Fund.
Initially, the yield on the Fund's corporate debt securities and mortgage-backed
securities is expected to be higher than the yield on the Fund's zero coupon
securities. Over time, zero coupon securities will constitute an increasing
percentage of the Fund's assets, as principal payments on mortgage-backed and
asset-backed securities, if any (including principal received on sale) are
distributed to Shareholders to satisfy tax distribution requirements and the
Fund's non-zero coupon securities are liquidated. Immediately prior to the final
liquidating distribution, it is anticipated that zero coupon securities will
constitute all or substantially all of the Fund's assets. Various factors will
affect the level of the Fund's income, including the asset mix, the scheduled
reductions in the management fee, the amount of leverage utilized by the Fund
and the Fund's use of hedging. Monthly notices will be provided in accordance
with Section 19(a) of the 1940 Act. The Fund expects that a final liquidating
distribution to Shareholders of the net assets of the Fund will be made on or
shortly before the termination of the Fund.
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan") for Shareholders
pursuant to which Shareholders who are participants in the Plan may have all
income dividends and/or all capital gains distributions automatically reinvested
by National Westminster Bank NJ, One Exchange Place, Jersey City, New Jersey
07302, as Plan Agent, in additional full and fractional Shares of the Fund. All
Shareholders will be deemed to be participants in the Plan unless they
specifically elect not to participate. Shareholders may elect not to participate
in the Plan or to participate only with respect to income dividends or capital
gains distributions.
The Plan Agent serves as agent for the Shareholders in administering the
Plan. Shareholders may receive more detailed instructions on the Plan from the
Fund. Shareholders whose Shares are held in the name of a broker or nominee
other than the selling, agent should contact such broker or nominee to determine
their rights with respect to the Plan. Because the first monthly dividend may be
paid before the Plan becomes fully operational with respect to all participating
Shareholders, some Shareholders who are participants in the Plan may receive
their first monthly dividend in cash.
In the case of Shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
Shareholder as representing the total amount registered in the Shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
The Plan provides that after the Fund declares a dividend or determines to
make a capital gain distribution, the Plan Agent will, as agent for the
participants, receive the cash payment and use it to buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, for the participant's
accounts. The Fund will not issue any new shares in connection with the Plan.
Such open market purchases may have the effect of increasing the market price of
the Shares. There is no charge to participants for reinvesting dividends and
distributions. All fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. However, each participant will incur a
pro rata share of any brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the Plan.
The Plan Agent maintains all Shareholder accounts in the Plan.
Additionally, the Fund or the Plan Agent furnishes written confirmations of all
transactions in the accounts of all Shareholders, including information needed
by Shareholders for personal and tax records. Shares in the account of each Plan
participant will be held in non-certificated form in the name of the
participant, and each Shareholder's proxy will include those Shares purchased
pursuant to the Plan. The Plan Agent will issue Share certificates (for full
Shares only) upon written request.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable or required to be withheld
on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to the date of written
notice of the change sent to the participants in the Plan at least 90 days
before the record date for such dividend or distribution. The Plan may also be
amended or terminated by the Plan Agent, with the Fund's prior written consent
on at least 90 days' prior written notice to participants in the Plan.
A Shareholder may elect not to participate in the Plan or may withdraw from
the Plan at any time. There is no penalty for non-participation in or withdrawal
from the Plan, and Shareholders who have previously withdrawn from the Plan may
rejoin it at any time. Participating Shareholders may also change their election
with respect to either income dividends or capital gains distributions, electing
either to reinvest such dividends or distributions in additional Shares pursuant
to the Plan or to receive such dividends or distributions in cash. Changes in
elections should be directed to the Plan Agent and should include the name of
the Fund and the Shareholder's name and address as they appear on the share
certificate. An election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a Shareholder to take all subsequent
dividends and distributions in cash. Elections will only be effective for
dividends and distributions declared after, and with a record date of at least
ten days after, such elections are received by the Plan Agent. When a
participant withdraws from the Plan or upon termination of the Plan as provided
above, certificates for whole Fund Shares credited to, his or her account under
the Plan will be issued and a cash payment will be made for any fraction of a
Fund Share credited to such account.
Shareholders who elect not to participate in the Plan will receive all
distributions of dividends and capital gains in cash paid by check mailed
directly to the Shareholder by the Fund's dividend disbursing agent.
Shareholders who elect to receive either income dividends or capital gains
distributions in cash will receive all such dividends or distributions in the
same manner.
TAXATION
The following discussion is based on the advice of Gaston & Snow and,
except as otherwise indicated, reflects provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), as of the date of this Prospectus, including
the provisions of the Technical and Miscellaneous Revenue Act of 1988.
TAXATION OF THE FUND
The Fund intends to qualify and elect to be treated as a regulated
investment company for federal income tax purposes. In order to so qualify for
any fiscal year, the Fund must, among other things, (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities and gains from the sale or other disposition of securities, or other
income (such as currency gains and income from options, futures contracts or
forward contracts) derived with respect to its business of investing in
securities or currencies ("Qualified Income"); (b) derive less than 30% of its
gross income from the sale or other disposition of securities (including
options, futures contracts, forward contracts and certain foreign currency
derivative instruments) held for less than three months; and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's total assets is represented by cash and cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to 5% of the Fund's
total assets and not more than 10% of the voting securities of the issuer, and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies). The U.S. Treasury
Department has the authority to issue regulations that would exclude from
Qualified Income, for purposes of the 90% gross income requirement described
above, foreign currency gains which are not directly related to the regulated
investment company's principal business of investing in securities. No such
regulations have been formally proposed or adopted. The Fund's activities
involving short sales, options, futures contracts and forward contracts may be
limited by these requirements for qualification as a regulated investment
company.
If the Fund qualifies as a regulated investment company and distributes to
its Shareholders in any fiscal year an amount equal to at least 90% of its
investment company taxable income ( I.E., its taxable net investment income and
its net short-term capital gains) plus 90% of its net tax-exempt interest
income, it will not be required to pay federal income taxes on any income that
is distributed and will be subject to corporate income tax (including corporate
alternative minimum tax, if applicable) only with respect to taxable income that
is retained. The Fund intends to distribute at least the minimum amount of net
investment income and net short-term capital gains necessary to satisfy this
90%, distribution requirement. If the Fund retains an amount of tax-exempt
income no greater than 10% of the sum of its investment company taxable income
and its net tax-exempt income, the Fund will not be subject to corporate income
tax but could be subject to the corporate alternative minimum tax to the extent
it derives interest income from certain tax-exempt private activity bonds. The
Fund will not be subject to federal income tax on any net capital gains (i.e.,
the excess of net long-term capital gains over net short-term capital losses)
that are distributed to Shareholders.
Assuming that the Fund qualifies as a regulated investment company, a
non-deductible 4% federal excise tax will be imposed upon the excess, if any, of
amounts the Fund is required to distribute in a given calendar year to avoid
such tax over the amounts actually distributed by the Fund. In order to avoid
this 4% excise tax, the Fund must distribute by December 31 of each calendar
year at least 97% of its ordinary income (i.e., its taxable net investment
income) for such year, at least 98% of the excess of its capital gains over its
capital losses (computed on the basis of the one-year period ending on October
31 of such year), and all amounts required to be distributed in the previous
year that were not distributed and on which no federal income tax was paid.
The Fund intends to qualify and elect to be treated as a regulated
investment company in each fiscal year. The Fund also intends to distribute
sufficient income so as to avoid both corporate income tax (other than possibly
the alternative minimum tax with respect to interest on private activity bonds)
and excise tax. However, the Fund may in the future decide to retain all or a
portion of its net capital gains. In such case, the Fund will have to pay
corporate income tax on such undistributed gains at the corporate rate on
long-term capital gains and may elect to treat such capital gains as having been
distributed to Shareholders. As a result of any such election, such amounts will
be taxable as long-term capital gains to Shareholders, who will be entitled to
claim a credit for their pro rata share of federal income tax paid by the Fund
on these undistributed capital gains, and the basis of their Shares will be
increased by the difference between their pro rata share of these gains and the
tax paid by the Fund.
The Fund's distribution requirements will be affected by special rules
governing the accrual of original issue discount and market discount on
securities purchased by the Fund and the taxation of transactions involving
options, futures contracts, forward contracts and short sales.
The Fund will invest in zero coupon securities (and possibly other
securities) having original issue discount represented by the excess of the
stated redemption price at maturity over the issue price. Each year, the Fund
will be required to accrued as income a portion of such original issue discount
even though the Fund may, receive no cash payments of interest with respect to
such securities. The portion of original issue discount generally be calculated
using the "constant interest" method and will result in inclusion of increasing
amounts of discount in income during the period the security is held by the
Fund. The Fund will be required to distribute this accrued income to
Shareholders each year in order to avoid federal income and excise taxes with
respect to such income.
Because the Fund will be required to distribute substantially all of its
net investment income (including accrued original issue discount) in order to
qualify for "pass-through" federal income tax treatment, the Fund will be
required in some years to distribute an amount greater than the total cash
income actually received by the Fund. Accordingly, in order to make the required
distribution, the Fund will be required to borrow or to liquidate securities.
The extent to which the Fund may liquidate securities at a gain may be limited
by the requirement discussed above that generally less than 30% of the Fund's
gross income consist of gain from the sale of securities held for less than
three months. Any capital losses resulting from the liquidation of securities
(which could occur if the Fund is required to liquidate portfolio securities at
disadvantageous times) can only be used to offset capital gains and cannot be
used to reduce the Fund's ordinary income.
Stripped securities and coupons purchased by the Fund will be treated as
instruments having original issue discount. A portion of original issue discount
relating to certain stripped tax-exempt securities and coupons may be treated as
taxable income to the Fund.
The Fund may purchase securities at a market discount ( I.E., the purchase
price paid by the Fund will be lower than the issue price of the security and
the aggregate amount of original issue discount includable in the gross income
of all holders for the period before the Fund's purchase of the security). Gain
on the disposition of a market discount bond is treated as ordinary income to
the extent of accrued market discount at the time of the disposition. Market
discount is generally accrued on a straight-line basis, although an election is
available to accrue such discount on a "constant interest" basis. Deduction of
interest expense associated with market discount bonds is subject to certain
limitations.
The Fund's transactions in options, futures contracts and forward contracts
will generally give rise to capital gains and losses. The Fund's transactions in
certain futures contracts, forward contracts and listed options on debt
securities will be subject to special tax rules that may affect the amount,
timing and character of distributions to Shareholders. Under these rules, all
such outstanding positions will be "marked to market" (i.e., treated as if they
were closed out) on the last trading day of the Fund's fiscal year, and any gain
or loss recognized with respect to such transactions will be treated as 60%
long-term and 40% short-term capital gain or loss. The purchase of a put option
may be treated as entry into a short sale for tax purposes. If a position held
by the Fund (such as an option) substantially diminishes the Fund's risk of loss
with respect to one or more securities in its portfolio, this combination of
positions may be regarded as a "straddle" for tax purposes, resulting in
possible deferral of losses, adjustments in the holding periods of portfolio
securities and conversion of short-term capital losses into long-term capital
losses to the Fund. Certain straddles are subject to tax elections which may
alter the operation of these rules. See Appendix B.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency denominated securities, forward
contracts, foreign currencies, options and futures contracts on foreign
currencies and payables and receivables denominated in a foreign currency are
subject to the special tax rules of Section 988 of the Code, which may cause
such gains and losses to be treated as ordinary income and losses rather than
capital gains and losses.
The Fund's taxable income will in most cases be determined on the basis of
reports made to the Fund by the issuers of the securities in which the Fund
invests. The tax treatment of certain securities in which the Fund may invest is
not free from doubt, and it is possible that an audit by a tax authority of the
tax returns of issuers of such securities or of the Fund could result in
adjustments to the income of the Fund and therefore to the amounts required to
be distributed to Shareholders.
Upon liquidation of the Fund, a corporate income tax may be imposed on
unrealized appreciation, if any, in the assets of the Fund on the date of
liquidation.
The Fund may be subject to foreign withholding taxes on certain income from
its foreign securities and is unlikely to qualify for a federal income tax
election to pass foreign tax credits through to Shareholders.
In any year in which the Fund qualifies as a regulated investment company
under the Code and is exempt from federal income tax, it will also be exempt
from Massachusetts income tax and from the California corporate income tax.
However, in any year in which the Fund is subject to an alternative minimum tax
for federal income tax purposes, it could also be subject to a California
alternative minimum tax.
TAXATION OF SHAREHOLDERS
Dividends and distributions will generally be taxable to Shareholders when
received, whether received in cash or reinvested in Shares of the Fund, and
whether representing a distribution of net investment income or of capital
gains. However, dividends and distributions that are declared in October,
November or December, payable to Shareholders of record on a specified date in
such a month and paid in January of the following year will be treated for
federal income tax purposes as if received on December 31. In addition, solely
for the purpose of applying the distribution requirements to avoid federal
income taxes on the Fund, certain distributions made after the close of a fiscal
year of the Fund may be "spilled back" and treated as paid during such fiscal
year pursuant to Section 855 of the Code. In such case, however, Shareholders
will be treated under the Code as having received such dividends in the taxable
year in which the distribution was actually made.
Dividends paid by the Fund from its investment company taxable income are
taxable to Shareholders at ordinary income tax rates. Although the Fund may
invest in tax-exempt securities, the Fund will not be eligible to pass through
to Shareholders the tax-exempt character of income derived with respect to such
securities. Consequently, distributions of the Fund that are derived from
tax-exempt interest will be taxable to Shareholders as dividends at ordinary
income tax rates. Distributions that are classified as net capital gains
distributions will be taxed to Shareholders as long-term capital gains
regardless of how long Shareholders have owned Shares of the Fund. Distributions
of the Fund may subject a Shareholder to, or increase the Shareholder's
liability under, the alternative minimum tax, depending on the Shareholder's
particular tax situation.
Distributions will be taxable as described above, whether received in cash
or reinvested in Shares under the Dividend Reinvestment Plan. With respect to a
distribution reinvested in Shares purchased in the open market under the Plan,
the amount of the distribution for tax purposes is the amount of cash
distributed or allocated to the Shareholder, and the Shareholder's tax basis in
each Share received is its cost.
If a Shareholder purchases Shares at a cost that reflects an anticipated
dividend, such dividend will be a taxable event even though from an economic
standpoint it represents in whole or in part a return of the purchase price.
Investors should consider the tax implications of buying Shares shortly before a
distribution.
It is not expected that any portion of the Fund's distributions will
qualify for the 70% corporate dividends received deduction.
Any gain or loss recognized upon a taxable disposition of Shares of the
Fund by a Shareholder who holds the Shares as a capital asset will generally be
treated as a long-term capital gain or loss if the Shares have been held for
more than one year, and otherwise as a short-term capital gain or loss. However,
any loss recognized by a Shareholder within six months of purchasing the Shares
will be treated as a long-term capital loss to the extent of any long-term
capital gain distributions received by the Shareholder and the Shareholder's
share of undistributed long-term capital gains. All or a portion of a loss
realized upon a sale or repurchase of Shares within 30 days before or after a
purchase of Shares (whether under the Dividend Reinvestment Plan or otherwise)
may be disallowed for federal income tax purposes.
An amount received by a Shareholder from the Fund in exchange for Shares of
the Fund (pursuant to a repurchase of Shares or a tender offer or otherwise)
generally will be treated as a payment in exchange for the Shares tendered,
which may result in taxable gain or loss as described above. However, if the
amount received by a Shareholder exceeds the fair market value of the Shares
tendered, or a Shareholder does not tender all of the Shares of the Fund owned
or deemed to be owned by the Shareholder, all or a portion of the amount
received may be treated instead as a dividend taxable as ordinary income or as a
return of capital. In addition, if a tender offer is made, any Shareholders who
do not tender their Shares could be deemed, under certain circumstances, to have
received a taxable distribution of Shares of the Fund as a result of their
increased proportionate interest in the Fund.
Upon liquidation of the Fund, liquidating distributions which in the
aggregate exceed a Shareholder's tax basis in the Shareholder's Shares will be
treated as gain from the sale of the Shares. If such liquidating distributions
are less than such tax basis, the Shareholder will recognize a loss for tax
purposes. Such gain or loss will constitute a capital gain or loss to
Shareholders who hold their Shares as a capital asset.
Under current law, individuals, estates and trusts are permitted to deduct
certain employee business, investment and other miscellaneous expenses only to
the extent such expenses exceed 2% of such person's adjusted gross income. After
1989, a Shareholder of the Fund, if an individual, estate or trust, may be
required to include in income a pro rata share of certain investment advisory
and other expenses of the Fund and would be permitted to deduct such expenses
only to the extent the Shareholder's total miscellaneous itemized deductions
exceed 2% of adjusted gross income. Thus, a Shareholder may recognize taxable
income without receiving a distribution attributable to such income. The U.S.
Treasury Department is authorized to promulgate regulations setting forth the
precise application of this limitation to investors in pass-through entities
such as the Fund.
The Fund will be required to withhold 20% of dividends and distributions
made to a Shareholder other than a corporation or other exempt Shareholder if
the Shareholder has not provided a correct taxpayer identification number and
certain required certifications to the Fund or the Secretary of the Treasury
notifies the Fund that the number provided by the Shareholder is incorrect or
that the Shareholder has not reported all interest and dividend income required
to be shown on the Shareholder's federal income tax return and is therefore
subject to such withholding.
The Fund will send written notices to Shareholders regarding the tax status
of all distributions made during the year, the amount of any undistributed net
long-term capital gains and any applicable tax credit, and the amount, if any,
of federal income tax withheld.
Foreign shareholders, including shareholders who are nonresident aliens,
may be subject to U.S. withholding tax on certain distributions (whether
received in cash or reinvested in Fund Shares) at a rate of 30% or such lower
rate as may be prescribed by an applicable treaty.
Distributions of the Fund may be subject to state and local taxation,
although in certain states, distributions derived from interest on U.S.
Government obligations are exempt from state income tax.
The tax discussion set forth above is for general information only.
Prospective shareholders should consult their tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of an
investment in the Fund, including the effects of any change, including proposed
changes, in the tax laws.
DESCRIPTION OF SHARES
The Fund's Agreement and Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest in one or more series or classes. Up to 20,355,000 shares of beneficial
interest, $.01 par value, offered hereby will be issued in a public offering.
Prior to this offering, 107,600 Shares were issued for the Fund's initial
capital in accordance with the requirements of the 1940 Act. The Shares are
common shares and, when issued, will be fully paid and non-assessable and will
have no pre-emptive rights or exchange or conversion rights. The Fund has no
present intention of offering additional Shares other than through the exercise
of the over-allotment option. Any other offering of its Shares, if made, will
require approval of the Fund's Board of Trustees. Any additional offering will
be subject to the requirements of the 1940 Act that Shares may not be sold at a
price below the then current net asset value, exclusive of underwriting
discounts and commissions, except, among other things, in connection with an
offering to existing Shareholders or with the consent of the holders of a
majority of the Fund's outstanding voting securities.
The rights of the Shares with respect to dividends and distributions are
described under "Dividends and Distributions." Each Share is entitled to
participate equally in the net distributable assets of the Fund upon liquidation
or termination. The Fund is designed to terminate on May 31, 2001, and in
connection with such termination will liquidate all of its assets and distribute
to Shareholders the net proceeds therefrom after making appropriate provision
for any liabilities of the Fund. This distribution and the termination of the
Fund may require Shareholder approval pursuant to the current policy of the SEC.
Shareholders are entitled to one vote per Share. Unless otherwise required
by law, the presence at any meeting in person or by proxy of Shareholders
entitled to cast votes with respect to 40% of the Shares entitled to vote shall
constitute a quorum, and, except as otherwise set forth below, the affirmative
vote of a majority of the Shares present and entitled to vote at a meeting at
which such a quorum is present shall be sufficient to approve a matter.
The affirmative vote or consent of the holders of a majority of the Fund's
outstanding Shares, or 67% of the outstanding Shares voting at the meeting if
more than 50% of such Shares are present or represented by proxy, whichever is
less, is required to approve the amendment of any of the Fund's fundamental
investment policies, to adopt any proposal for the merger or consolidation of
the Fund, to adopt amendments to the Agreement and Declaration of Trust or any
other action adversely affecting the rights or preferences of the Shares or
increasing or decreasing the amount of the par value of the Shares, and (if
Shareholder approval of the Fund's planned termination and liquidation is deemed
required by the 1940 Act or SEC policy) to approve the termination and
liquidation of the Trust on May 31, 2001. The affirmative vote of at least
two-thirds (662/3%) of the Fund's outstanding Shares is required to terminate
the Fund by Shareholder action or to authorize the conversion of the Fund from a
"closed-end company" to an "open-end company" (as those terms are defined in the
1940 Act) prior to May 31, 2001.
In certain circumstances, Shareholders have the right to communicate with
other Shareholders and to remove Trustees. The rights applicable to the Shares
with respect to dividends and distributions are described under "The Fund" and
"Dividends and Distributions."
TRADING, REDEMPTION AND LIQUIDATION RIGHTS
The Shares have been approved for listing on the New York Stock Exchange.
It is expected that a liquid trading market for the Shares will exist on the New
York Stock Exchange and on other markets where the Shares are traded. Shares of
closed-end investment companies frequently trade at a discount to net asset
value, but in some cases trade at net asset value or a premium. Because the
market price of the Fund's Shares will be determined by factors including
trading volume of such Shares, general market and economic conditions, and other
factors beyond control of the Fund, the Fund cannot predict whether its Shares
will trade at, below or above their net asset value. The Fund is authorized to
repurchase or tender for its Shares and may do so when such Shares are trading
at a discount from net asset value (see "Repurchase of Shares and Tender Offers"
below). The Shares do not have any right of redemption.
REPURCHASE OF SHARES AND TENDER OFFERS
In recognition of the possibility that the Fund's Shares might trade at a
discount, the Fund's Board of Trustees has determined that it would be in the
interest of Shareholders for the Fund to take action to attempt to reduce or
eliminate a market value discount from net asset value. To that end, the
Trustees presently contemplate that the Fund could from time to time take action
to repurchase its Shares in the open market or to tender for its Shares at their
net asset value. The Board of Trustees, in consultation with the Manager, will
review on a regular basis the possibility of open market repurchases and/or
tender offers of Fund Shares. There are no assurances that the Board of Trustees
will, in fact, decide to undertake either of these actions or, if undertaken,
that such actions will result in the Fund's Shares trading at a price which is
equal to or approximates their net asset value. In addition, the Board of
Trustees will not necessarily announce when it has given consideration to these
matters.
Subject to the Fund's investment restrictions with respect to borrowings,
the Fund may incur debt to finance repurchases and/or tender offers. See
"Investment Restrictions." Interest on any such borrowings will reduce the
Fund's net investment income, and any such borrowing is subject to special
considerations. See "Other Investment Practices-Leverage and Borrowing."
There can be no assurance that repurchases and/or tenders will result in
the Fund's Shares trading at a price that approximates or is equal to their net
asset value. The Fund anticipates that the market price of its Shares will from
time to time vary from net asset value. The market price of the Fund's Shares
will, among other things, be determined by the relative demand for and supply of
Shares in the market, the Fund's investment performance, the Fund's dividends
and yield and investor perception of the Fund's overall attractiveness as an
investment as the Fund's dividends and yield and investor perception of the
Fund's overall attractiveness as an investment as compared with other investment
alternatives. Nevertheless, the fact that the Fund's Shares may be the subject
of tender offers at net asset value from time to time may reduce the spread
between market price and net asset value that might otherwise exist. In the
opinion of the Manager, sellers may be less inclined to accept a significant
discount if they have a reasonable expectation of being able to recover net
asset value in conjunction with a possible tender offer.
Although the Board of Trustees believes that share repurchases and tender
offers generally would have a favorable effect on the market price of the Fund's
Shares, the repurchase of Shares by the Fund will decrease the total assets of
the Fund and, therefore, have the effect of increasing the Fund's expense ratio.
Because of the nature of the Fund's investment objectives and policies and the
Fund's portfolio, the Manager does not anticipate that repurchases and tenders
should have a materially adverse effect on the Fund's investment performance and
does not anticipate any material difficulty in disposing of portfolio securities
in order to consummate Share repurchases and tenders.
Even if a tender offer has been made, it is the Trustees' announced policy,
which may be changed by the Trustees, that the Fund cannot accept tenders or
effect repurchases if (1) such transactions, if consummated, would (a) result in
the delisting of the Fund's shares from the New York Stock Exchange (the
Exchange having advised the Fund that it would consider delisting if the
aggregate market value of the Fund's outstanding Shares is less than $5,000,000,
the number of publicly held Shares falls below 600,000 or the number of
round-lot holders falls below 1,200), or (b) impair the Fund's status as a
regulated investment company under the Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the Fund level in addition to
the taxation of Shareholders who receive dividends from the Fund); (2) the
amount of securities tendered would require liquidation of such a substantial
portion of the Fund's securities that the Fund would not be able to liquidate
portfolio securities in an orderly manner in light of the existing market
conditions and such liquidation would have an adverse effect on the net asset
value of the Fund to the detriment of nontendering Shareholders; or (3) there
is, in the Board of Trustees' judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on the New York Stock Exchange or any
foreign exchange on which portfolio securities of the Fund are traded, (c)
declaration of a banking moratorium by federal, state and foreign authorities or
any suspension of payment by banks in the United States, New York State or
foreign countries in which the Fund invests, (d) limitation affecting the Fund
or the issuers of its portfolio securities imposed by federal, state or foreign
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
Shareholders if Shares were repurchased. The Trustees may modify these
conditions in light of experience.
Any tender offer made by the Fund for its Shares will be at a price equal
to the net asset value of the Shares on a date subsequent to the Fund's receipt
of all tenders. During the pendency of any tender offer by the Fund, the Fund
will calculate daily the net asset value of the Shares and will establish
procedures which will be specified in the tender offer documents, to enable
Shareholders to ascertain readily such net asset value. Each offer will be made
and Shareholders notified in accordance with the requirements of the Securities
Exchange Act of 1934 and the 1940 Act, either by publication or mailing or both.
Each offering document will contain such information as is prescribed by such
laws and the rules and regulations promulgated thereunder. When a tender offer
is authorized to be made by the Fund's Trustees, a Shareholder wishing to accept
the offer will be required to tender all (but not less than all) of the Shares
owned by such Shareholder (or attributed to him for federal income tax purposes
under Section 318 of the Code). The Fund will not specify a record date for the
tender offer which will not permit a Shareholder of record on the effective date
of the tender offer to tender his Shares. The Fund will purchase all Shares
tendered in accordance with the terms of the offer unless it determines to
accept none of them (based upon one of the conditions set forth above). Each
person tendering shares will pay to the Fund a reasonable service charge
currently anticipated to be $25.00, subject to change, to help defray certain
costs, including the processing of tender forms, effecting payment, postage and
handling. It is the position of the staff of the SEC that such service charge
may not be deducted from the proceeds of the purchase. The Fund's transfer agent
will receive the fee as an offset to these costs. The Fund expects the cost to
the Fund of effecting a tender offer will exceed the aggregate of all service
charges received from those who tender their Shares. Costs associated with the
tender will be charged against capital.
Tendered Shares that have been accepted and purchased by the Fund will be
recorded and reported as an offset to Shareholders' equity and accordingly will
reduce the Fund's total assets.
If the Fund must liquidate portfolio securities in order to purchase Shares
tendered, the Fund may realize gains and losses. Such gains may be realized on
securities held for less than three months. Because of the limitation of 30% on
the portion of the Fund's gross income that may be derived from the sale or
disposition of stocks and securities held less than three months (in order to
retain the Fund's tax status as a regulated investment company under the Code),
such gains would reduce the ability of the Fund to sell other securities held
for less than three months that the Fund may wish to sell in the ordinary course
of its portfolio management which may adversely affect the Fund's yield. If the
portfolio securities sold generate foreign exchange gain or loss governed by
Section 988 of the Code, the Fund's distributable net investment income could be
positively or adversely affected. See "Taxation." The portfolio turnover rate of
the Fund may or may not be affected by the Fund's repurchases of Shares pursuant
to a tender offer.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for its
obligations. However, the Agreement and Declaration of Trust of the Fund
contains an express disclaimer of Shareholder liability for acts or obligations
of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
Trustees. The Agreement and Declaration of Trust provides for indemnification
and reimbursement of expenses out of the Fund property for any Shareholder held
personally liable for the obligations of the Fund. The Agreement and Declaration
of Trust also provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the protection
of the Fund, its Shareholders, Trustees, officers, employees and agents covering
possible tort and other liabilities. Thus, the risk of a Shareholder incurring
financial loss on account of shareholder liability is extremely remote because
it is limited to circumstances in which both inadequate insurance exists and the
Fund itself is unable to meet its obligations.
The Agreement and Declaration of Trust further provides that obligations of
the Fund are not binding upon the Trustees individually but only upon the
property of the Fund and that the Trustees will not be liable for errors of
judgment or mistakes of fact or law, but nothing in the Agreement and
Declaration of Trust protects a Trustee against any liability to which he 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
office.
Reference is made to the Agreement and Declaration of Trust of the Fund, on
file with the SEC, for the full text of these provisions. See "Further
Information."
PRINCIPAL SHAREHOLDER
As of the date of this Prospectus, 107,600 Shares have been issued to
Resources at $9.30 per Share. As a result, Resources will be a controlling
person of the Fund until the Shares offered hereby are issued and sold.
Resources has undertaken that these Shares were purchased for investment
purposes only and that they will be sold only pursuant to a registration
statement under the Securities Act of 1933, as amended, or an applicable
exemption therefrom.
UNDERWRITING
A group of underwriters (the "Underwriters") for whom PaineWebber
Incorporated, A. G. Edwards & Sons, Inc., Thomson McKinnon Securities Inc., Dain
Bosworth Incorporated, Gruntal & Co., Incorporated and Stifel, Nicolaus &
Company, Incorporated are acting as representatives have entered into an
Underwriting Agreement with the Fund (the "Underwriting Agreement") pursuant to
which the Underwriters have agreed to purchase 17,700,000 Shares of the Fund.
The Underwriting Agreement provides that the obligation of the Underwriters is
subject to the approval of certain legal matters by counsel and to various other
conditions. Each of the Underwriters named below has severally agreed to
purchase from the Fund the number of Shares set forth opposite its name:
Number of
UNDERWRITER SHARES
PaineWebber Incorporated..............................755,000
A. G. Edwards & Sons, Inc.............................755,000
Thomson McKinnon Securities Inc.......................755,000
Dain Bosworth Incorporated............................755,000
Gruntal & Co., Incorporated...........................755,000
Stifel, Nicolaus & Company, Incorporated..............755,000
Bear, Stearns & Co. Inc...............................440,000
Alex. Brown & Sons Incorporated.......................440,000
Donaldson, Lufkin & Jenrette Securities Corporation...440,000
Drexel Burnham Lambert Incorporated...................440,000
Hambrecht & Quist Incorporated........................440,000
Kidder, Peabody & Co. Incorporated....................440,000
Prudential-Bache Securities Inc.......................440,000
Shearson Lehman Hutton Inc............................440,000
Smith Barney, Harris Upham & Co. Incorporated.........440,000
Dean Witter Reynolds Inc..............................440,000
UNDERWRITER Number of
Shares
Advest, Inc...........................................221,000
Robert W. Baird & Co. Incorporated....................221,000
Bateman Eichler, Hill Richards Incorporated...........221,000
Blunt Ellis & Loewi Incorporated......................221,000
Boettcher & Company, Inc..............................221,000
Butcher & Singer Inc..................................221,000
Cowen & Co............................................221,000
Eppler, Guerin & Turner, Inc..........................221,000
First Albany Corporation..............................221,000
First of Michigan Corporation.........................221,000
Janney Montgomery Scott Inc...........................221,000
Ladenburg, Thalmann & Co. Inc.........................221,000
Legg Mason Wood Walker Incorporated...................221,000
McDonald & Company Securities, Inc....................221,000
Morgan Keegan & Company, Inc..........................221,000
Piper, Jaffray & Hopwood Incorporated.................221,000
Prescott, Ball & Turben, Inc..........................221,00O
The Robinson-Humphrey Company, Inc....................221,000
Rotan Mosle Inc.......................................221,000
Sutro & Co. Incorporated..............................221,000
Tucker, Anthony & R. L. Day, Inc......................221,000
Wheat, First Securities, Inc..........................221,000
Branch, Cabell and Company............................110,000
Cable, Howse & Ragen Incorporated.....................110,000
The Chicago Corporation ..............................110,000
B. C. Christopher Securities Co.......................110,000
D. A. Davidson & Co. Incorporated.....................110,000
Howard, Weil, Labouisse, Friedrichs Incorporated......110,000
Interstate/Johnson Lane Corporation...................110,000
Johnston, Lemon & Co. Incorporated....................110,000
Josephthal & Co. Incorporated.........................110,000
C. J. Lawrence, Morgan Grenfell Inc...................110,000
Mabon, Nugent & Co....................................110,000
Newhard, Cook & Co. Incorporated......................110,000
The Ohio Company......................................110,000
Rauscher Pierce Refsnes, Inc..........................110,000
Raymond James & Associates, Inc.......................110,000
Rodman & Renshaw, Inc.................................110,000
Scott & Stringfellow, Inc.............................110,000
Seidler Amdec Securities Inc..........................110,000
Stephens Inc..........................................110,000
Underwood, Neuhaus & Co. Incorporated.................110,000
Wedbush Morgan Securities.............................110,000
UNDERWRITER Number of
Shares
American Securities Corporation........................50,000
Brean Murray, Foster Securities Inc....................50,000
JW Charles SecuritieS, Inc.............................50,000
City Securities Corporation............................50,000
R. G. Dickinson & Co...................................50,000
Dominick & Dominick, Inc...............................50,000
Fahnestock & Co. Inc...................................50,000
Ferris, Baker Watts, Incorporated......................50,000
First Affiliated Securities, Inc.......................50,000
Frederick & Company, Inc...............................50,000
Gulfstream Financial Associates, Inc...................50,000
J. B. Hanauer & Co.....................................50,000
Hanifen, Imhoff Inc....................................50,000
J. J. B. Hilliard, W. L. Lyons, Inc....................50,000
Howe Barnes Investments................................50,000
Illinois Company Investments Inc.......................50,000
Investment Corporation Of Virginia.....................50,000
John G. Kinnard and Company, Inc.......................50,000
WR Lazard & Laidlaw Incorporated.......................50,000
W. H. Newbold's Son & Co., Inc.........................50,000
David A. Noyes & CO....................................50,000
Parker/Hunter Incorporated.............................50,000
Raffensperger, Hughes & Co. Incorporated...............50,000
Roney & Co.............................................50,000
Smith, Hague & Co., Incorporated.......................50,000
Southwest Securities, Inc..............................50,000
Henry F. Swift & Co....................................50,000
Van Kasper & Company...................................50,000
Allen & Company of Florida, Inc........................18,000
Allied Group Securities Corporation....................18,000
Atkinson and Company...................................18,000
Butler, Wick & Co., Inc................................18,000
Cleary Gull Reiland McDevitt & Collopy, Inc............18,000
Cohig & Associates, Inc................................18,000
First Equity Corporation of Florida....................18,000
Hopper Soliday & Co., Inc..............................18,000
Integrated Resources Equity Corporation................18,000
J. T. Moran & Co., Inc.................................18,000
Private Ledger Financial Services, Inc.................18,000
------
Total....................................... 17,700,000
Under the terms of and subject to the conditions of the Underwriting
Agreement, the Underwriters are committed to purchase and pay for all Shares
offered hereby if any are purchased. The Underwriting Agreement provides that it
may be terminated at or prior to the closing date for the purchase of the Shares
if, in the judgment of the Representatives or in the judgment of such
Underwriters which have agreed to purchase at least 50% of the Shares, payment
for the delivery of the Shares is rendered impracticable or inadvisable because
(1) trading in the equity securities of the Fund is suspended by the SEC, by an
exchange that lists the Shares, or by the National Association of Securities
Dealers Automated Quotation National Market System, (2) additional material
governmental restrictions, not in force on the date of the Underwriting
Agreement, have been imposed upon trading in securities generally, or minimum or
maximum prices have been generally established on the New York Stock Exchange or
on the American Stock Exchange, or trading in securities generally has been
suspended on any such Exchange, or a general banking moratorium has been
established by Federal or New York authorities, or (3) any outbreak of or
material escalation of hostilities or other calamity or crisis occurs, the
effect of which is such as to make it impracticable to market any of the Shares.
The Underwriting Agreement also may be terminated if any of the conditions
specified in the Underwriting Agreement have not been fulfilled when and as
required by the Underwriting Agreement.
The Underwriters propose to offer the Shares of the Fund, initially,
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain securities dealers at such price less a
concession not in excess of $.45 per Share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $.10 per Share to certain
other dealers. In addition, the Underwriters will pay $.025 per Share to
Franklin Distributors, Inc., an affiliate of the Fund's Manager and a member of
the National Association of Securities Dealers, Inc., for distribution
assistance.
After the Shares are released for sale to the public, the public offering
price and other selling terms may be changed. The minimum initial investment
requirement is 100 Shares ($1,000). Investors should consult their brokers
concerning the manner and method of payment for the Shares.
The Fund has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 2,655,000 additional Shares
at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option only to cover
over-allotments of Shares in connection with the offering. To the extent such
option to purchase is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional Shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of Shares shown on the table.
The Underwriters have taken certain actions to discourage short-term
trading of the Fund's Shares during a period of time following the initial
offering date. Included in these actions is the withholding of the concession to
dealers in connection with Shares which were sold by such dealers and which are
repurchased for the account of the Underwriters during such period. In addition,
physical delivery of certificates representing Shares is required to transfer
ownership of Shares of the Fund.
The Fund has agreed not to offer or sell any additional Shares for a period
of 180 days after the date of this Prospectus without the prior written consent
of the Underwriters, except for sales to the Underwriters pursuant to the
Underwriting Agreement.
The Fund and the Manager have each agreed to indemnify the Underwriters
against certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended.
The Fund anticipates that certain of the Underwriters may from time to time
act as a broker or a dealer in connection with the execution of portfolio
transactions for the Fund. Certain of the Underwriters or their affiliates,
including PaineWebber Incorporated, may also perform certain administrative
services for the Fund or for the Manager, and will receive fees from the Fund or
the Manager for acting in such capacity. See "Management of the Fund."
Prior to this offering, there has been no market for the Shares, and there
can be no assurance that a trading market in the Shares will develop. The Shares
have been approved for listing on the New York Stock Exchange under the symbol
"FPT."
CUSTODIAN, DIVIDEND DISBURSING AGENT,
TRANSFER AGENT AND REGISTRAR
The Custodian of the Fund's portfolio securities is Bank of America NT&SA (the
"Custodian"), 555 South Flower Street, Los Angeles, California 90071. National
Westminster Bank NJ, One Exchange Place, Jersey City, New Jersey 07302, serves
as dividend disbursing agent, transfer agent and registrar.
LEGAL OPINIONS
The legality of the Shares offered hereby will be passed on for the Fund by
Gaston & Snow, San Francisco, California. Certain legal matters will be passed
on for the Underwriters by Skadden, Arps, Slate, Meagher & Flom.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited quarterly and audited annual reports to its
Shareholders, including a list of the portfolio investments held by the Fund.
More frequent reports may also be made by the Fund.
ACCOUNTANTS
The Statement of Assets and Liabilities of the Fund as of January 11, 1989
has been examined by Coopers & Lybrand, independent certified public
accountants, as indicated in their report with respect thereto, and has been
included herein in reliance upon such report and upon the authority of such firm
as experts in accounting and auditing.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, with respect to the
Fund's Shares offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. The Registration Statement,
including exhibits filed therewith, may be examined at the office of the SEC in
Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, of which this Prospectus forms a
part, each such statement being qualified in all respects by such reference.
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APPENDIX A
STANDARD & POOR'S CORPORATION
LONG-TERM DEBT
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI 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.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is 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. The top two categories are as
follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive long-term
debt rating. The following criteria will be used in making that assessment:
-Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will treated as a note).
-Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest. SP-3 Speculative
capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE
LONG-TERM DEBT
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree o investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bond because margins of
protection may not be as large as in Aaa securities or fluctuations or
protective elements may be of greater amplitude or there may be other elements
present which make long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but element may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements. their
future cannot be considers as well assured. Often the protection of interest and
principal payments may be very moderate and thereby no well safeguarded during
other good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds which are 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NONRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonably up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A1, Ba 1 and B 1.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial paper,
bank deposits, bankers' acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance ondebt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF OPTIONS,
FUTURES AND FORWARD CONTRACTS
GENERAL. The Fund may engage in Hedging Transactions involving options,
futures contracts, options on futures contracts, and forward contracts in
accordance with its investment objectives and policies. The Fund currently
intends to engage in such Hedging Transactions if it appears advantageous to the
Manager to do so in order to pursue its investment objectives, to hedge against
the effects of market conditions and to stabilize the value of its assets. The
use of these types of Hedging Transactions, the possible benefits and attendant
risks are discussed below, along with information concerning certain other
investment policies and techniques.
OPTIONS ON SECURITIES. As previously indicated in this Prospectus, the Fund
may write (sell) covered call options so long as it owns the underlying
securities or comparable securities which are acceptable for escrow purposes,
and may purchase put and call options. The premium paid by the purchaser of an
option will generally reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand, and current interest rates.
The Fund may write or purchase spread options, which are options for which the
exercise price may be a fixed dollar spread or yield between the security
underlying the option and another security that is used as a benchmark.
The exercise price of an option may be below, equal to or above the current
market value of the underlying security at the time the option is written. When
the Fund buys a put option and also owns the related security, the Fund is
protected by ownership of the put option against any decline in that security's
price below the exercise price, less the amount paid for the option. The ability
to purchase put options allows the Fund to protect capital gains in an
appreciated security it owns, without being required to actually sell that
security. By purchasing a call option the Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because the Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
When the Fund wishes to terminate its obligation with respect to an option
it has written, it may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the Fund's position will be
cancelled by a clearing corporation or otherwise economically nullified.
However, the Fund may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, when the Fund holds an option,
it may liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. Effecting a closing transaction will permit the cash or proceeds from
the concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security. There is no
guarantee in any particular situation that either a closing purchase or a
closing sale transaction can be effected. An option position may be closed out
only where there exists a secondary market for an option of the same series. If
a secondary market does not exist, it might not be possible to effect closing
transactions in particular options held by the Fund, with the result that the
Fund would have to exercise the options in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction with respect to options
it has written in a secondary market, it will not be able to sell the underlying
security or other asset covering the option until the option expires or it
delivers the underlying security or asset upon exercise.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option
written by the Fund will generally be inversely related to the market price of
the underlying security, any losses resulting from the closing out of a call
option is likely to be offset in whole or in part by appreciation in the value
of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option against
that security. The exercise price of the call will depend upon the expected
price movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the underlying security at the time
the option is written. Buy-and-write transactions using in-the-money call
options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using, at-the-money call options may be used when it
is expected that the price of the underlying security will remain or advance
moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price for the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The risks of transactions in options on foreign exchanges are similar to
the risks of investing in foreign securities. In addition, a foreign exchange
may impose exercise and settlement terms and procedures and margin requirements
different from those of a U.S. exchange.
OVER-THE-COUNTER OPTIONS. As previously indicated in this Prospectus, the
Fund may deal in OTC options. The Fund understands the position of the staff of
the SEC to be that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities. The Fund and the Manager disagree
with this position and have found the dealers with which they engage in OTC
option transactions generally agreeable to and capable of entering into closing
transactions. As also indicated in this Prospectus, the Fund has adopted
procedures for engaging in OTC options for the purpose of reducing any potential
adverse impact of such transactions upon the liquidity of the Fund's portfolio.
A brief description of such procedures is set forth below.
The dealers with whom the Fund will engage in OTC options transactions
shall be specifically approved by the Board of Trustees of the Fund. The Fund
and its Manager believe that such dealers generally present minimal credit risks
to the Fund and should, therefore, be capable of entering into closing
transactions in the event that it would be necessary. The Fund currently will
not deal in OTC options if the amount invested by the Fund in such options, plus
a "liquidity charge" related to OTC options written by the Fund, plus the amount
invested by the Fund in illiquid securities, would exceed 331/3% of the Fund's
total assets. The "liquidity charge" referred to above is computed as described
below.
In accordance with certain positions taken by the SEC staff, the Fund
anticipates entering into agreements with dealers to which the Fund sells OTC
options under which agreements the Fund would have the absolute right to
repurchase the OTC options from the dealer at any time at a price no greater
than a price established pursuant to a formula (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction shall
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes
shall be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
shall be the amount by which the exercise price exceeds the current market value
of the underlying security. In the event that there shall be no such agreement
with a dealer to allow the Fund to repurchase a specific OTC option written by
the Fund, the "liquidity charge" shall be the current market value of the assets
serving as "cover" for such OTC option.
OPTIONS ON FOREIGN CURRENCIES. The Fund may write call options and purchase
put and call options on foreign currencies for hedging purposes in a manner
similar to that in which forward contracts (see below) will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted. Alternatively, instead of
purchasing a put option, the Fund could write a call option on the relevant
currency; if the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received.
Conversely, when a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options on such currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in currency exchange rates. As with other types of
options, however, the benefit the Fund derives from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefit of advantageous changes in such rates.
As with other types of options, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium received,
and only if rates move in the expected direction. If this does not occur, the
option may be exercised and the Fund would be required to sell the underlying
currency at a loss which may not be fully offset by the amount of the premium
received. As a result of writing call options on foreign currencies, the Fund
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call
option on foreign currencies written by the Fund is "covered" if the Fund owns
(or has an absolute and immediate right to acquire) the underlying foreign
currency covered by the call or readily marketable securities denominated in the
foreign currency which the Fund has the absolute and immediate right to sell or
otherwise convert into the foreign currency in an amount at least equal to the
"strike" price of the option. A call option is also covered if the Fund has a
call on the same foreign currency in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash and U.S.
Government securities in a segregated account with its custodian.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may sell futures contracts
or purchase put options on such futures as a hedge against anticipated interest
rate or foreign currency exchange rate changes. A futures contract sale creates
an obligation by the Fund, as seller, to deliver the specific type of financial
instrument or foreign currency called for in the contract at a specified future
time for a specified price. Options on futures contracts are similar to options
on securities except that an option on a futures contract gives the purchaser
the right in return for the premium paid to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put).
LIMITATIONS ON USE OF OPTIONS AND FUTURES. The Fund's use of futures and
options on futures will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission with which the Fund must comply in order not to be
deemed a commodity pool operator within the meaning and intent of the Commodity
Exchange Act.
RISKS ASSOCIATED WITH OPTIONS AND FUTURES. Typically, investment in futures
contracts requires the Fund to deposit with the applicable exchange or other
specified financial intermediary as security for its obligations an amount of
cash or other specified debt securities which initially is 1% to 5% of the face
amount of the contract and which thereafter fluctuates on a periodic basis as
the value of the contract fluctuates. Investment in options involves payment of
a premium for the option without any further obligation on the part of the Fund.
The Fund will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio. In
addition, the Fund will not enter into a futures contract or related options
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial deposits and premiums on open contracts and options would
exceed 5% of the Fund's total assets (taken at current value). Also, when
required, a segregated account of cash or cash equivalents will be maintained
and marked to market in an amount equal to the market value of the contract.
Hedging Transactions present certain risks. In particular, the variable
degree of correlation between price movements in futures contracts and price
movements in the position being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's position. In
addition, futures and futures option markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses substantially greater than the
initial deposit. Although the contemplated use of these contracts should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time the use of these contracts tends to limit any potential gains
which might result from an increase in the value of such position. The ability
of the Fund to hedge successfully will depend on the Manager's ability to
predict pertinent market movements, which cannot be assured. Finally, the daily
deposit requirements in futures contracts create an ongoing greater potential
financial risk than do options transactions, where the exposure is limited to
the cost of the initial premium. Losses due to hedging transactions will reduce
net asset value. Income earned by the Fund from its hedging activities generally
will be treated as capital gains except in the case of certain foreign currency
gains (see below).
FOREIGN CURRENCY EXCHANGE CONTRACTS. As previously indicated in this
Prospectus, the Fund may deal in forward currency exchange contracts (or,
simply, forward contracts). A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded directly
between currency traders (usually large commercial banks) and their customers.
Longer term forward contracts are sometimes referred to as currency swaps.
To limit potential risks in connection with the purchase of currency under
forward contracts, cash, cash equivalents or readily marketable debt securities
equal to the amount of the purchase will be held aside or segregated in the
Fund's Custodian to be used to pay for the commitment, or the Fund will cover
any commitments under these contracts to sell currency by owning the underlying
currency (or an absolute right to acquire such currency). The segregated account
will be marked to market on a daily basis.
TAX AND ACCOUNTING CONSIDERATIONS. For accounting purposes, when the Fund
writes an option, an amount equal to the premium received by it is included in
the Fund's Statement of Net Assets as a liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When the Fund purchases an option the premium paid by the Fund
is recorded as an asset and is subsequently adjusted to the current market value
of the option.
Certain listed options, forward contracts and future contracts are
considered "Section 1256 contracts" for federal income-tax purposes. In general,
gain-or loss realized by the Fund on Section 1256 contracts will be considered
60% long term and 40% short term capital gain or loss. Also Section 1256
contracts held by the Fund at the end of each taxable year (and at October 31
for purposes of calculating the excise tax) will be "marked to market," that is,
treated for federal income tax purposes as though sold for fair market value on
the last business day of such taxable year. The Fund can elect to exempt its
Section 1256 contracts which are part of a "mixed straddle" (as described below)
from the application of Section 1256.
With respect to certain over-the-counter put and call options, gain or loss
realized by the Fund upon the expiration or sale of such options held by the
Fund will be either long term or short term capital gain or loss depending upon
the Fund's holding period with respect to such option. However, gain or loss
realized upon the expiration or closing out of such options that are written by
the Fund will be treated as short term capital gain or loss. In general, if the
Fund exercises an option, or an option that the Fund has written is exercised,
gain or loss on the option will not be separately recognized but the premium
received or paid will be included in the calculation of gain or loss upon
disposition of the property underlying the option.
Any security, option, futures contract, forward foreign currency contract,
forward commitment, or other position entered into or held by the Fund in
conjunction with any other position held by the Fund may constitute a "straddle"
for federal income tax purposes. A straddle of which at least one, but not all,
the positions are Section 1256 contracts will constitute a "mixed straddle." In
general, straddles are subject to certain rules that may affect the character
and timing of the Fund's gains and losses with respect to straddle positions by
requiring, among other things, that loss realized on disposition of one position
of a straddle be deferred to the extent of any unrealized gain in an offsetting
position until such position is disposed of; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in gain or loss being treated as short term capital gain rather than
long term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short term capital losses,
be treated as long term capital losses. Different elections are available to the
Fund which may mitigate the effects of the straddle rules, particularly with
respect to mixed straddles.
Under Code Section 988, foreign currency gain or loss realized with respect
to foreign currency denominated debt instruments and other foreign currency
denominated positions held or entered into by the Fund, except for certain
futures contracts and listed options which are not marked to market under Code
Section 1256, will be characterized as U.S. source ordinary income or loss.
FUTURE DEVELOPMENTS. The Fund proposes to take advantage of investment
opportunities in the area of options, Index Options, options of foreign
currencies, futures contracts and options on futures contracts which are not
presently contemplated or used by the Fund or which are not currently available
but which may be developed in the future, to the extent such opportunities are
both consistent with the Fund's investment objectives and policies and are
legally permissible transactions for the Fund. Such opportunities, if they
arise, may involve risks which are different from those involved in the options
and forward contracts activities described above.
No person has been authorized to give any Information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Underwriters. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date hereof or that the
information contained herein Is correct as of any time subsequent to its date.
However, if any material change occurs while this Prospectus is required to be
delivered, this Prospectus will be amended or supplemented accordingly. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the registered securities to which it relates.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
TABLE OF CONTENTS PAGE
Prospectus Summary...........................................3
The Fund....................................................12
Use of Proceeds.............................................12
Investment Objective and Policies...........................13
Zero Coupon Securities......................................15
Mortgage-Backed Securities..................................15
High Income Producing Debt Securities.......................22
Asset-Backed Securities.....................................24
Other Investment Practices..................................24
Investment Restrictions.....................................30
Special Considerations......................................32
Trustees And Officers.......................................34
Management of the Fund......................................38
Portfolio Transactions And Brokerage........................39
Determination of Net Asset Value............................41
Dividends and Distributions.................................42
Dividend Reinvestment Plan..................................43
Taxation....................................................44
Description of Shares.......................................48
Underwriting................................................52
Custodian, Dividend Disbursing Agent, Transfer Agent
and Registrant............................................56
Legal Opinions..............................................56
Reports To Shareholders.....................................56
Accountants.................................................56
Further Information.........................................56
Report of Independent Certified Public Accountants..........57
Statement of Assets and Liabilities.........................58
Appendix A.................................................A-1
Appendix B.................................................B-1
Until February 13, 1989, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
17,700,000 Shares
of Beneficial Interest
Franklin
Principal Maturity
Trust
PROSPECTUS
PaineWebber Incorporated
A. G. Edwards & Sons, Inc.
Thomson McKinnon Securities Inc.
Dain Bosworth
Incorporated
Gruntal & Co., Incorporated
Stifel, Nicolaus & Company
Incorporated
January 19, 1989
This is a reprint of the prospectus of Franklin Principal Maturity Trust, which
was initially offered by Franklin on January 19, 1989. This initial offering is
now closed and shares of the Fund are traded on the New York Stock Exchange
under the symbol "FPT".
FRANKLIN PRINCIPAL MATURITY TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made between FRANKLIN PRINCIPAL
MATURITY TRUST, a Massachusetts Business Trust, hereinafter called the "Trust",
and FRANKLIN ADVISERS, INC., a California corporation, hereinafter called the
"Manager."
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940, as
amended (the "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 Act and the Securities Act of 1933, all
as heretofore amended and supplemented; and the Trust desires to avail itself of
the services, information, advice, assistance and facilities of an investment
manager and to have an investment manager perform various management,
statistical, research, investment advisory and other services for it; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Trust.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Trust's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust in any way or otherwise be deemed an agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the Trust
adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, and
(ii) office furnishings, facilities and equipment as may be reasonably
required for managing the affairs and conducting the business of the Trust,
including conducting correspondence and other communications with the
shareholders of the Trust, maintaining all internal bookkeeping, accounting
and auditing services and records in connection with the Trust's investment
and business activities. The Manager shall employ or provide and compensate
the executive, secretarial and clerical personnel necessary to provide such
services. The Manager shall also compensate all officers and employees of
the Trust who are officers or employees of the Manager or its affiliates.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Trust's assets subject to and in
accordance with the respective investment objectives and policies of
the Trust and any directions which the Trust's Board of Trustees may
issue from time to time. In pursuance of the foregoing, the Manager
shall make all determinations with respect to the investment of the
Trust's assets and the purchase and sale of its investment securities,
and shall take such steps as may be necessary to implement the same.
Such determinations and services shall include determining the manner
in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Trust's investment securities shall
be exercised. The Manager shall render 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 which it has made with respect to the investment of
the Trust's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent
to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any directions
which the Trust's Board of Trustees may issue from time to time, shall
place, in the name of the Trust, orders for the execution of the
Trust's securities transactions. When placing such orders the Manager
shall seek to obtain the best net price and execution for the Trust,
but this requirement shall not be deemed to obligate the Manager to
place any order solely on the basis of obtaining the lowest commission
rate if the other standards set forth in this section have been
satisfied. The parties recognize that there are likely to be many
cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with
respect to particular trades, it is desirable to choose those brokers
who furnish research, statistical, quotations and other information to
the Trust and the Manager in accord with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so
and so long as the Board of Trustees determines that the Trust will
benefit, directly or indirectly, by doing so, the Manager may place
orders with a broker who charges a commission for that transaction
which is in excess of the amount of commission that another broker
would have charged for effecting that transaction, provided that the
excess commission is reasonable in relation to the value of "brokerage
and research services" (as defined in Section 28(e) (3) of the
Securities Exchange Act of 1934) provided by that broker. Accordingly,
the Trust and the Manager agree that the Manager shall select brokers
for the execution of the Trust's transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Trust, specifically including the
quotations necessary to determine the Trust's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Trust, or which place the Manager in a better position
to make decisions in connection with the management of the
Trust's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required.
(c) When the Manager has determined that the Trust should tender
securities pursuant to a "tender offer solicitation," the Manager
shall designate Franklin Distributors, Inc. ("Distributors") as the
"tendering dealer" so long as it is legally permissible for the
Manager to do so, and 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.
Distributors shall not be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other
than normal periodic fees or payments necessary to maintain its
corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This
Agreement shall not obligate the Manager or Distributors (i) to act
pursuant to the foregoing requirement under any circumstances in which
they might reasonably believe that liability might be considered to be
due from others to it as a result of such a tender, unless the Trust
shall enter into an agreement with the Manager and/or Distributors to
reimburse them for all such expenses connected with attempting to
collect such fees, including legal fees and expenses and that portion
of the compensation due to their employees which is attributable to
the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust, on a
quarterly basis unless more frequent reports are mutually agreed upon
by the Trust and the Manager, of how much total brokerage business has
been placed by the Manager with brokers falling into each of the
categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Manager agrees that no investment decision will be made
or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such
allocation of brokerage shall not interfere with the Manager's
paramount duty to obtain the best net price and execution for the
Trust.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Trust in the preparation of
registration statements, reports and other documents required by federal
and state securities laws and with such information as the Trust may
reasonably request.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its officers
and employees available to the Board of Trustees and officers of the Trust
for consultation and discussions regarding the administration and
management of the Trust and its investment activities.
3. EXPENSES OF THE TRUST. It is understood that the Trust will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Trust shall include without limitation:
A. Fees to the Manager as provided herein;
B. Expenses of all audits and other services by independent public
accountants;
C. Expenses of its transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of or tender for its shares,
and the cost of certificates;
D. Expenses of obtaining quotations for calculating the Trust's net
asset value;
E. Salaries and other compensation of executive officers of the Trust
who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Trust;
G. Brokerage fees and commissions in connection with the purchase and
sale of securities for the Trust;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of Board of Trustees and shareholders of
the Trust, reports to the Trust's shareholders, the filing of reports with
regulatory bodies and the maintenance of the Trust's legal existence;
J. Legal fees, including the legal fees related to the registration
and any continued qualification of the Trust's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the registration
of the Trust and its shares under federal and any applicable state laws;
including the printing and distributing of prospectuses, proxy statements
and reports to its shareholders;
M. Trade association dues;
N. Its pro rata portion of fidelity bond and liability insurance
premiums;
O. Expenses of obtaining and maintaining stock exchange listings of
the Trust's shares; and
P. Expenses incurred in connection with the Trust's Dividend
Reinvestment Plan.
4. COMPENSATION OF THE MANAGER. The Trust shall pay a management fee in
cash to the Manager based upon a percentage of the value of the Trust's weekly
net assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager, payable monthly at the request
of the Manager.
A. For purposes of calculating such fee, the value of the weekly net
assets of the Trust shall mean the average weekly value of the total assets
of the Trust, minus the sum of accrued liabilities (other than the
principal amount of any non-temporary borrowings). The value of the Trust's
portfolio securities shall be determined in the same manner as the Trust
otherwise uses to compute the value of its net assets in connection with
the determination of the net asset value of its shares, all as set forth
more fully in the Trust's current Registration Statement on Form N-2.
B. The management fee payable by the Trust shall be calculated weekly
and payable monthly from the date of the initial public offering of the
Shares of the Trust through May 31, 1993 at an annual rate of 0.75 of 1% of
the Trust's average weekly net assets. The annual rate shall be reduced to
0.60% of the Trust's average weekly net assets from June 1, 1993 through
May 31, 1997 and to 0.45% of the Trust's average weekly net assets from
June 1, 1997 through the termination of the Trust.
C. The management fee will be accrued weekly by the Trust and paid to
the Manager on the first business day of the succeeding month. The initial
monthly management fee shall be payable on the first business day of the
first month following the effective date of this Agreement. The management
fee shall be prorated for the portion of any month in which this Agreement
is in effect which is not a complete month according to the proportion
which the number of calendar days in the month during which the Agreement
is in effect bears to the number of calendar days in the month. If this
Agreement is terminated prior to the end of any month, the fee to the
Manager shall be payable within ten (10) days after the date of
termination.
D. The Management fee 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 as set forth in paragraph 2.B. (c) of this Agreement. The Manager
may reduce the compensation or reimbursement of expenses due to it pursuant
to this Agreement. Any such reduction shall be applicable only with respect
to the items or time periods specified by the Manager and shall not
constitute an agreement to reduce any future compensation or reimbursement
due to the Manager hereunder.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Trust
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the Act, it is understood that trustees, officers, agents
and shareholders of the Trust are or may be interested in the Manager or its
affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Trust as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Manager, the Manager shall not be subject to liability to the Trust or to
any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by any of the
Trust.
B. Notwithstanding the foregoing, the Manager agrees to reimburse the
Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of
factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to
any transactions or proposed transaction in the stock or control of the
Manager or its affiliates (or litigation related to any pending or proposed
or future transaction in such shares or control) which shall have been
undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its
affiliates or any of their officers, directors, employees or stockholders.
The Manager shall not be obligated pursuant to the provisions of this
Subparagraph 6(B), to reimburse the Trust for any expenditures related to
the institution of an administrative proceeding or civil litigation by the
Trust or a shareholder of the Trust seeking to recover all or a portion of
the proceeds derived by any stockholder of the Manager or any of its
affiliates from the sale of his shares of the Manager, or similar matters.
So long as this Agreement is in effect, the Manager shall pay to the Trust
the amount due for expenses subject to this Subparagraph 6(B) within 30
days after a bill or statement has been received by the Manager therefor.
This provision shall not be deemed to be waiver of any claim the Trust may
have or may assert against the Manager of others for costs, expenses or
damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager,
from liability in violation of Sections 17(h) and (i) of the Act.
7. EFFECTIVE DATE, RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date as set forth
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 year so long as such continuation
is approved at least annually by (i) the Board of Trustees of the Trust or
by the vote of a majority of the outstanding voting securities of the
Trust, and (ii) the vote of a majority of the Trustees of the Trust who are
not parties to this Agreement or interested persons thereof, cast in person
at a meeting called for the purpose of voting on such approval.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Trust,
on 60 days' written notice to the Manager;
(ii) shall immediately terminate in the event of its assignment;
and
(iii) may be terminated by the Manager on 60 days' written notice
to the Trust.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 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.
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.
10. LIMITATION OF LIABILITY. The Manager acknowledges that it has received
notice of and accepts the limitations of the Trust's liability as set forth in
Article VIII of its Agreement and Declaration of Trust. The Manager agrees that
the Trust's obligations hereunder shall be limited to the assets of the Trust,
and that the Manager shall not seek satisfaction of any such obligation from any
shareholders of the Trust nor from any trustee, officer, employee or agent of
the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
on the 19th day of January, 1989.
FRANKLIN PRINCIPAL MATURITY TRUST
By: /s/ Harmon E. Burns
Harmon E. Burns
Vice President
FRANKLIN ADVISERS, INC.
By: /s/ R. Martin Wiskemann
R. Martin Wiskemann
Vice President
CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of January
18, 1989, by and between Franklin Principal Maturity Trust, a Massachusetts
business trust (the "Trust"), and Bank of America National Trust and Savings
Association, a banking association organized under the laws of the United States
(the "Custodian").
RECITALS
A. The Trust is a closed-end investment company registered under the
Investment Company Act that invests and reinvests in Domestic Securities
and Foreign Securities.
B. The Trust and the Custodian desire to provide for the retention of
the Custodian as the custodian of the assets of the Trust on the terms and
subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties
hereto agree as follows:
Section 1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board of Trustees" shall mean the board of trustees of the Trust.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking
institutions are authorized or required by law to be closed in The City of
New York and, with respect to Foreign Securities, a London Business Day.
"London Business Day" shall mean any day on which dealings and deposits in
U.S. dollars are transacted in the London interbank market.
"Custodian" shall mean Bank of America National Trust and Savings
Association.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of the Board
of Trustees.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Guidelines" shall have the meaning provided in Subsection 3.5(a)
hereof.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Shares" shall mean shares of beneficial interest of the Trust.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for the Trust.
"Trust" shall mean Franklin Principal Maturity Trust, a Massachusetts
business trust.
"Writing" shall mean a communication in writing, a communication by
telex, the Custodian's Global Custody Instruction System TM, facsimile
transmission, bankwire or other teleprocess or electronic instruction
system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 APPOINTMENT OF CUSTODIAN. The Trust hereby appoints and designates
the Custodian as the custodian of the assets of the Trust including cash,
securities the Trust desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are
sometimes referred to herein, collectively, as "Securities." The Custodian
hereby accepts such appointment and designation and agrees that it shall
maintain custody of the assets of the Trust delivered to it hereunder in
the manner provided for herein.
2.2 DELIVERY OF ASSETS. The Trust agrees to deliver to the Custodian
Securities and cash owned by the Trust, payments of income, principal or
capital distributions received by the Trust with respect to Securities
owned by the Trust from time to time, and the consideration received by it
for such Shares or other securities of the Trust as may be issued and sold
from time to time. The Custodian shall have no responsibility whatsoever
for any property or assets of the Trust held or received by the Trust and
not delivered to the Custodian pursuant to and in accordance with the terms
hereof. All Securities accepted by the Custodian on behalf of the Trust
under the terms of this Agreement shall be in "street name" or other good
delivery form as determined by the Custodian.
2.3 SUBCUSTODIANS. Upon receipt of Proper Instructions and a certified
copy of a resolution of the Board of Trustees or of the Executive Committee
certified by the Secretary or an Assistant Secretary of the Trust, the
Custodian may from time to time appoint one or more Subcustodians or
Foreign Custodians to hold assets of the Trust in accordance with the
provisions of this Agreement.
2.4 NO DUTY TO MANAGE. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of the Trust held by them hereunder or to
initiate any purchase, sale or other investment transaction in the absence
of Proper Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF
THE FUND HELD BY THE CUSTODIAN
3.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of the
Trust, all non-cash property delivered by the Trust to the Custodian
hereunder other than Securities which, pursuant to Subsection 3.8 hereof,
are held through a registered clearing agency, a registered securities
depository, the Federal Reserve's book-entry securities system (referred to
herein, individually, as a "Securities System"), or held by a Subcustodian,
Foreign Custodian or in a Foreign Securities Depository.
3.2 DELIVERY OF SECURITIES. Except as otherwise provided in Subsection
3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by the Trust and held by the Custodian
in the following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Trust and receipt by the Custodian,
a Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a Subcustodian
or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Trust;
(c) in the case of a sale effected through a Securities System,
in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the
Trust, or (ii) a tender offer or repurchase by the Trust of its own
Shares;
(e) to the issuer thereof or its agent when such Securities are
called, redeemed, retired or otherwise become payable; provided, that
in any such case, the cash or other consideration is to be delivered
to the Custodian, a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Trust, the name or nominee name of the
Custodian, the name or nominee name of any Subcustodian or Foreign
Custodian; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new
Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in accordance
with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of
such Securities, or pursuant to a conversion of such Securities;
provided that, in any such case, the new Securities and cash, if any,
are to be delivered to the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar Securities, the
surrender thereof in connection with the exercise of such warrants,
rights or similar Securities or the surrender of interim receipts or
temporary Securities for definitive Securities; provided that, in any
such case, the new Securities and cash, if any, are to be delivered to
the Custodian, a Subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of Securities made
by the Trust, but only against receipt by the Custodian, a
Subcustodian or a Foreign Custodian of adequate collateral as
determined by the Trust (and identified in Proper Instructions
communicated to the Custodian), which may be in the form of cash or
obligations issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for which
collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's
book-entry securities system, the Custodian will not be held liable or
responsible for the delivery of Securities owned by the Trust prior to
the receipt of such collateral;
(k) for delivery as security in connection with any borrowings by
the Trust requiring a pledge of assets by the Trust, but only against
receipt by the Custodian, a Subcustodian or a Foreign Custodian of
amounts borrowed;
(1) for delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, a Subcustodian or a Foreign
Custodian and a broker-dealer relating to compliance with the rules of
registered clearing corporations and of any registered national
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
by the Trust;
(m) for delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, a Subcustodian or a Foreign
Custodian and a futures commission merchant, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any
contract market, or any similar organization or organizations,
regarding account deposits in connection with transactions by the
Trust; and
(n) following conversion of the Trust to an open-end investment
company, upon the receipt of instructions from the Transfer Agent for
delivery to the Transfer Agent or to the holders of Shares in
connection with distributions in kind in satisfaction of requests by
holders of Shares for repurchase or redemption.
3.3 REGISTRATION OF SECURITIES. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the Trust, in the name or nominee
name of the Custodian or in the name or nominee name of any Subcustodian or
Foreign Custodian. The Trust agrees to hold the Custodian, any such
nominee, Subcustodian or Foreign Custodian harmless from any liability as a
holder of record of such Securities.
3.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate
bank account or accounts for the Trust, subject only to draft or order by
the Custodian acting pursuant to the terms of this Agreement, and shall
hold in such account or accounts, subject to the provisions hereof, all
cash received by it hereunder from or for the account of the Trust, other
than cash maintained by the Trust in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act. Funds held by
the Custodian for the Trust may be deposited by it to its credit as
Custodian in the banking department of the Custodian, a Subcustodian or a
Foreign Custodian. It is understood and agreed by the Custodian and the
Trust that the rate of interest, if any, payable on such funds (including
foreign currency deposits) that are deposited with the Custodian may not be
a market rate of interest and that the rate of interest payable by the
Custodian to the Trust shall be agreed upon by the Custodian and the Trust
from time to time. Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.
3.5 COLLECTION OF INCOME; TRADE SETTLEMENT; CREDITING OF Accounts. The
Custodian shall collect income payable with respect to Securities owned by
the Trust, settle Securities trades for the account of the Trust and credit
and debit the Trust's account with the Custodian in connection therewith as
follows:
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Trust
on the contractual settlement date; provided, however, that in the
case of Foreign Securities, Proper Instructions are provided to the
Custodian by the Trust prior to the contractual settlement date in
accordance with, and within the time period specified in, the "Global
Custody Guidelines for Franklin Principal Maturity Trust (the
"Guidelines"), as amended by the Custodian from time to time in its
sole discretion. A copy of the Guidelines has been delivered by the
Custodian to the Trust. The Custodian shall have no liability of any
kind to any person, including the Trust, if the Custodian effects
payment on behalf of the Trust as provided for herein or in Proper
Instructions, and the seller or selling broker fails to deliver the
Securities purchased.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by delivering a certificate or other
indicia of ownership, and shall credit the account of the Trust with
the proceeds of such sale on the contractual settlement date;
provided, however, that in the case of Foreign Securities, Proper
Instructions are provided to the Custodian by the Trust prior to the
contractual settlement date in accordance with, and within the time
period specified in, the Guidelines. The Custodian shall have no
liability of any kind to any person, including the Trust, if the
Custodian delivers such a certificate(s) or other indicia of ownership
as provided for herein or in Proper Instructions, and the purchaser or
purchasing broker fails to effect payment to the Trust within a
reasonable time period, as determined by the Custodian in its sole
discretion. In such event, the Custodian shall be entitled to
reimbursement of the amount so credited to the account of the Trust in
connection with such sale.
(c) The Trust is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the
Custodian to effect settlement of any purchase or sale. If the
Custodian does not receive such instructions within the required time
period, the Custodian shall have no liability of any kind to any
person, including the Trust, for failing to effect settlement on the
contractual settlement date. However, the Custodian shall use its best
reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Trust with
interest income payable on interest bearing Securities on payable
date. Interest income on cash balances will be credited monthly to the
account of the Trust on the first Business Day (on which the Custodian
is open for business) following the end of each month. Dividends and
other amounts payable with respect to Domestic Securities and Foreign
Securities shall be credited to the account of the Trust when received
by the Custodian. The Custodian shall not be required to commence suit
or collection proceedings or resort to any extraordinary means to
collect such income and other amounts payable with respect to
Securities owned by the Trust. The collection of income due the Trust
on Domestic Securities loaned pursuant to the provisions of Subsection
3.2(j) shall be the responsibility of the Trust. The Custodian will
have no duty or responsibility in connection therewith, other than to
provide the Trust with such information or data as may be necessary to
assist the Trust in arranging for the timely delivery to the Custodian
of the income to which the Trust is entitled. The Custodian shall have
no liability to any person, including the Trust, if the Custodian
credits the account of the Trust with such income or other amounts
payable with respect to Securities owned by the Trust (other than
Securities loaned by the Trust pursuant to Subsection 3.2(j) hereof)
and the Custodian subsequently is unable to collect such income or
other amounts from the payors thereof within a reasonable time period,
as determined by the Custodian in its sole discretion. In such event,
the Custodian shall be entitled to reimbursement of the amount so
credited to the account of the Trust.
3.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions the
Custodian shall pay out monies of the Trust in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or options
on futures contracts for the account of the Trust but only, except as
otherwise provided herein, (i) against the delivery of such
securities, or evidence of title to futures contracts or options on
futures contracts, to the Custodian or a Subcustodian registered
pursuant to Subsection 3.3 hereof or in proper form for transfer; (ii)
in the case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Subsection 3.8 hereof; or
(iii) in the case of repurchase agreements entered into between the
Trust and the Custodian, another bank or a broker-dealer (A) against
delivery of the Securities either in certificated form to the
Custodian or a Subcustodian or through an entry crediting the
Custodian's account at the appropriate Federal Reserve Bank with such
Securities or (B) against delivery of the confirmation evidencing
purchase by the Trust of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the
agreement by the Custodian or such broker-dealer or other bank to
repurchase such Securities from the Trust;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Trust as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Trust;
(d) for the payment of any expense or liability incurred by the
Trust, including but not limited to the following payments for the
account of the Trust: custodian fees, interest, taxes, management,
accounting, transfer agent and legal fees and operating expenses of
the Trust whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses; and
(e) for the payment of any dividends or distributions declared by
the Board of Trustees with respect to the Shares.
3.7 APPOINTMENT OF SUBCUSTODIANS. The Custodian may, upon receipt of
Proper Instructions, appoint another bank or trust company, which is itself
qualified under the Investment Company Act to act as a custodian (a
"Subcustodian"), as the agent of the Custodian to carry out such of the
duties of the Custodian hereunder as the Custodian may from time to time
direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The Custodian may
deposit and/or maintain Domestic Securities owned by the Trust in a
Securities System in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
(a) the Custodian may hold Domestic Securities of the Trust in
the Depository Trust Company or the Federal Reservels book entry
system or, upon receipt of Proper Instructions, in another Securities
System provided that such securities are held in an account of the
Custodian in the Securities System ("Securities System Account") which
shall not include any assets of the Custodian other than assets held
as a fiduciary, custodian or otherwise for customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Trust which are maintained in a Securities System
shall identify by book-entry those Domestic Securities belonging to
the Trust;
(c) the Custodian shall pay for Domestic Securities purchased for
the account of the Trust upon (i) receipt of advice from the
Securities System that such securities have been transferred to the
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Trust. The Custodian shall transfer Domestic Securities
sold for the account of the Trust upon (A) receipt of advice from the
Securities System that payment for such securities has been
transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and
payment for the account of the Trust. Copies of all advices from the
Securities System of transfers of Domestic Securities for the account
of the Trust shall be maintained for the Trust by the Custodian and be
provided to the Trust at its request. Upon request, the Custodian
shall furnish the Trust confirmation of each transfer to or from the
account of the Trust in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Trust with any
report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System.
3.9 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Trust, into which account or accounts may be
transferred cash and/or Securities, including Securities maintained in an
account by the Custodian pursuant to Section 3.8 hereof, (i) in accordance
with the provisions of any agreement among the Trust, the Custodian and a
broker-dealer or futures commission merchant, relating to compliance with
the rules of registered clearing corporations and of any national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Trust, (ii) for purposes of segregating cash or
securities in connection with options purchased, sold or written by the
Trust or commodity futures contracts or options thereon purchased or sold
by the Trust and (iii) for other proper corporate purposes, but only, in
the case of this clause (iii) upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of Trustees or
of the Executive Committee certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account
and declaring such purposes to be proper corporate purposes.
3.10 PROXIES. The Custodian shall, with respect to the Securities held
hereunder, promptly deliver to the Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities
are registered otherwise than in the name of the Fund or a nominee of the
Fund, the Custodian shall use its best reasonable efforts, consistent with
applicable law, to cause all proxies to be promptly executed by the
registered holder of such Securities in accordance with Proper
Instructions.
3.11 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. The
Custodian shall transmit promptly to the Trust all written information
(including, without limitation, pendency of calls and maturities of
Securities and expirations of rights in connection therewith and notices of
exercise of put and call options written by the Trust and the maturity of
futures contracts purchased or sold by the Trust) received by the Custodian
from issuers of Securities being held for the Trust. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Trust all
written information received by the Custodian from issuers of the
Securities whose tender or exchange is sought and from the party (or its
agents) making the tender or exchange offer. If the Trust desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Trust shall notify the Custodian at least three
Business Days prior to the date of which the Custodian is to take such
action.
3.12 REPORTS BY CUSTODIAN. The Custodian shall supply to the Trust the
daily, weekly and monthly reports described in the Guidelines as well as
any other reports which the Custodian and the Trust may agree upon from
time to time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUND HELD OUTSIDE THE UNITED STATES
4.1 CUSTODY OUTSIDE THE UNITED STATES. The Trust authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which
have been established by the Custodian with (i) its foreign branches, (ii)
foreign banking institutions, foreign branches of United States banks and
subsidiaries of United States banks or bank holding companies (each a
"Foreign Custodian") and (iii) Foreign Securities depositories or clearing
agencies (each a "Foreign Securities Depository"); provided, however, that
the Board of Trustees or the Executive Committee has approved in advance
the use of each such Foreign Custodian and Foreign Securities Depository
and the contract between the Custodian and each Foreign Custodian and that
such approval is set forth in Proper Instructions and a certified copy of a
resolution of the Board of Trustees or of the Executive Committee certified
by the Secretary or an Assistant Secretary of the Trust. Unless expressly
provided to the contrary in this Section 4, custody of Foreign Securities
and assets held outside the United States by the Custodian, a Foreign
Custodian or through a Foreign Securities Depository shall be governed by
Section 3 hereof.
4.2 ASSETS TO BE HELD. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act, and (ii) cash and cash equivalents in such amounts
as the Custodian or the Trust may determine to be reasonably necessary to
effect the Trust's Foreign Securities transactions.
4.3 FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise be agreed
upon in writing by the Custodian and the Trust, assets of the Trust shall
be maintained in Foreign Securities Depositories only through arrangements
implemented by the Custodian or Foreign Custodians pursuant to the terms
hereof.
4.4 SEGREGATION OF SECURITIES. The Custodian shall identify on its
books and records as belonging to the Trust, the Foreign Securities of the
Trust held by each Foreign Custodian.
4.5 AGREEMENTS WITH FOREIGN CUSTODIANS. Each agreement with a Foreign
Custodian shall provide generally that: (a) the Trust's assets will not be
subject to any right, charge, security interest, lien or claim of any kind
in favor of the Foreign Custodian or its creditors, except a claim of
payment for their safe custody or administration; (b) beneficial ownership
for the Trust's assets will be freely transferable without the payment of
money or value other than for custody or administration; (c) adequate
records will be maintained identifying the assets as belonging to the
Custodian; (d) the independent public accountants for the Trust, will be
given access to the records of the Foreign Custodian relating to the assets
of the Trust or confirmation of the contents of those records; (e) the
disposition of assets of the Trust held by the Foreign Custodian will be
subject only to the instructions of the Custodian or its agents; (f) the
Foreign Custodian shall indemnify and hold harmless the Custodian and the
Trust from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the Foreign Custodian's performance of
its obligations under such agreement; (g) to the extent practicable, the
Trust's assets will be adequately insured in the event of loss; and (h) the
Custodian will receive periodic reports with respect to the safekeeping of
the Trust's assets, including notification of any transfer to or from the
Trust's account.
4.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE TRUST. Upon request of
the Trust, the Custodian will use its best reasonable efforts to arrange
for the independent accountants of the Trust to be afforded access to the
books and records of any Foreign Custodian insofar as such books and
records relate to the custody by any such Foreign Custodian of assets of
the Trust.
4.7 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNTS. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by the
Trust, but, except to the extent explicitly provided herein, only in any of
the cases specified in Subsection 3.2. Upon receipt of Proper Instructions,
the Custodian shall pay out or instruct the appropriate Foreign Custodian
to pay out monies of the Trust in any of the cases specified in Subsection
3.6. Notwithstanding anything herein to the contrary, settlement and
payment for Foreign Securities received for the account of the Trust and
delivery of Foreign Securities maintained for the account of the Trust may
be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivering securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt with
the expectation of receiving later payment for such securities from such
purchaser or dealer. Foreign Securities maintained in the custody of a
Foreign Custodian may be maintained in the name of such entity or its
nominee name to the same extent as set forth in Section 3.3 of this
Agreement and the Trust agrees to hold any Foreign Custodian and its
nominee harmless from any liability as a holder of record of such
Securities.
4.8 LIABILITY OF FOREIGN CUSTODIAN. Each agreement between the
Custodian and a Foreign Custodian shall require the Foreign Custodian to
exercise reasonable care in the performance of its duties and to indemnify
and hold harmless the Custodian and the Trust from and against any loss,
damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations. At the
election of the Trust, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claims against a Foreign Custodian as
a consequence of any such loss, damage, cost, expense, liability or claim
if and to the extent that the Trust has not been made whole for any such
loss, damage, cost, expense, liability or claim.
4.9 MONITORING RESPONSIBILITIES. The Custodian will promptly inform
the Trust in the event that the Custodian learns of a material adverse
change in the financial condition of a Foreign Custodian or is notified by
(i) a foreign banking institution employed as a Foreign Custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below U.S. $200 million or that its shareholders' equity has
declined below U.S. $200 million (in each case computed in accordance with
generally accepted United States accounting principles), or (ii) a
subsidiary of a United States bank or bank holding company acting as a
Foreign Custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below U.S. $100 million or that its
shareholders' equity has declined below U.S. $100 million (in each case
computed in accordance with generally accepted United States accounting
principles).
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of the Trust received by the Custodian via telephone or in
Writing which the Custodian believes in good faith to have been given by
Authorized Persons (as defined below) or which are transmitted with proper
testing or authentication pursuant to terms and conditions which the
Custodian may specify. Any Proper Instructions delivered to the Custodian
by telephone shall promptly thereafter be confirmed in Writing by an
Authorized Person, but the Trust will hold the Custodian harmless for its
failure to send such confirmation in writing, the failure of such
confirmation to conform to the telephone instructions received or the
Custodian's failure to produce such confirmation at any subsequent time.
Unless otherwise expressly provided, all Proper Instructions shall continue
in full force and effect until cancelled or superseded. If the Custodian
requires test arrangements, authentication methods or other security
devices to be used with respect to Proper Instructions, any Proper
Instructions given by the Trust thereafter shall be given and processed in
accordance with such terms and conditions for the use of such arrangements,
methods or devices as the Custodian may put into effect and modify from
time to time. The Trust shall safeguard any testkeys, identification codes
or other security devices which the Custodian shall make available to it.
The Custodian may electronically record any Proper Instructions given by
telephone, and any other telephone discussions, with respect to its
activities hereunder. As used in this Agreement, the term "Authorized
Persons" means such officers or such agents of the Trust as have been
designated by a resolution of the Board of Trustees or of the Executive
Committee, a certified copy of which has been provided to the Custodian, to
act on behalf of the Trust under this Agreement. Each of such persons shall
continue to be an Authorized Person until such time as the Custodian
receives Proper Instructions that any such officer or agent, is no longer
an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
the Trust:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties
under this Agreement, provided that all such payments shall be
accounted for to the Trust;
(b) endorse for collection, in the name of the Trust, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer
and other dealings with the Securities and property of the Trust
except as otherwise provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent,
certificate or other instrument or paper believed by it to be genuine and
to have been properly given or executed by or on behalf of the Trust. The
Custodian may receive and accept a certified copy of a resolution of the
Board of Trustees or Executive Committee as conclusive evidence (a) of the
authority of any person to act in accordance with such resolution or (b) of
any determination or of any action by the Board of Trustees or Executive
Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of
written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information in
its possession (to the extent permissible under applicable law) to the
entity or entities appointed by the Board of Trustees to keep the books of
account of the Trust and/or compute the net asset value per Share of the
outstanding Shares of the Trust.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 3la-1
and 3la-2 thereunder. All such records shall be the property of the Trust
and shall at all times during the regular business hours of the Custodian
be open for inspection by duly authorized officers, employees or agents of
the Trust and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Trust's request, supply the Trust
with a tabulation of Securities owned by the Trust and held by the
Custodian and shall, when requested to do so by the Trust and for such
compensation as shall be agreed upon between the Trust and the Custodian,
include certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time
between the Trust and the Custodian.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and
shall use reasonable care in carrying out such duties. The Custodian shall
be liable to the Trust for any loss which shall occur as the result of the
failure of a Foreign Custodian or a Foreign Securities Depository engaged
by such Foreign Custodian or the Custodian to exercise reasonable care with
respect to the safekeeping of securities and other assets of the Trust to
the same extent that the Custodian would be liable to the Trust if the
Custodian itself were holding such securities and other assets. In the
event of any loss to the Trust by reason of the failure of the Custodian, a
Foreign Custodian or a Foreign Securities Depository engaged by such
Foreign Custodian or the Custodian to utilize reasonable care, the
Custodian shall be liable to the Trust to the extent of the Trust's
damages, to be determined based on the market value of the property which
is the subject of the loss at the date of discovery of such loss and
without reference to any special conditions or circumstances. The Custodian
shall be held to the exercise of reasonable care in carrying out this
Agreement. The Trust agrees to indemnify and hold harmless the Custodian
and its nominees from all taxes, charges, expenses, assessments, claims and
liabilities (including legal fees and expenses) incurred by any of them in
connection with the performance of this Agreement, except such as may arise
from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian or Foreign
Securities Depository. The Custodian shall be entitled to rely, and may
act, on advice of counsel (who may be counsel for the Trust) on all matters
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice. The Custodian need not maintain any insurance for
the benefit of the Trust.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Trust. The Custodian
shall have no liability for any loss occasioned by delay in the actual
receipt of notice by the Custodian, agent, Subcustodian or by a Foreign
Custodian of any payment, redemption or other transaction regarding
securities in respect of which the Custodian has agreed to take action as
provided in Section 3 hereof. The Custodian shall not be liable for any
action taken in good faith upon Proper Instructions or upon any certified
copy of any resolution of the Board of Trustees and may rely on the
genuineness of any such documents which it may in good faith believe to be
validly executed. The Custodian shall not be liable for any loss resulting
from, or caused by, the direction of the Trust to maintain custody of any
Securities or cash in a foreign country including, but not limited to,
losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar
occurrences or events beyond the control of the Custodian. Finally, the
Custodian shall not be liable for any taxes, including interest and
penalties with respect thereto, that may be levied or assessed upon or in
respect of any assets of the Trust held by the Custodian.
Section 12. LIMITED LIABILITY OF THE TRUST
The Custodian acknowledges that it has received notice of and accepts
the limitations of the Trust's liability as set forth in its Agreement and
Declaration of Trust. The Custodian agrees that the Trust's obligation
hereunder shall be limited to the assets of the Trust, and that the
Custodian shall not seek satisfaction of any such obligation from the
shareholders of the Trust nor from any Trustee, officer, employee, or agent
of the Trust.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its execution
and shall continue in full force and effect until terminated as hereinafter
provided. This Agreement may be terminated by the Trust or the Custodian by
60 days notice in Writing to the other provided that any termination by the
Trust shall be authorized by a resolution of the Board of Trustees, a
certified copy of which shall accompany such notice of termination, and
provided further, that such resolution shall specify the names of the
persons to whom the Custodian shall deliver the assets of the Trust held by
it. If notice of termination is given by the Custodian, the Trust shall,
within 60 days following the giving of such notice, deliver to the
Custodian a certified copy of a resolution of the Board of Trustees
specifying the names of the persons to whom the Custodian shall deliver
assets of the Trust held by it. In either case the Custodian will deliver
such assets to the persons so specified, after deducting therefrom any
amounts which the Custodian determines to be owed to it hereunder
(including all costs and expenses of delivery or transfer of Trust assets
to the persons so specified). If within 60 days following the giving of a
notice of termination by the Custodian, the Custodian does not receive from
the Trust a certified copy of a resolution of the Board of Trustees
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Trust held by it, the Custodian, at its election, may deliver
such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one
or more resolutions as aforesaid is delivered to the Custodian. The
obligations of the parties hereto regarding the use of reasonable care,
indemnities and payment of fees and expenses shall survive the termination
of this Agreement.
Section 14. MISCELLANEOUS
14.1 RELATIONSHIP. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and the Trust or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to the
Trust or the Trust of investment banking, securities dealing or brokerages
services or any other banking or financial services.
14.2 FURTHER ASSURANCES. Each party hereto shall furnish to the other
party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 ATTORNEYS' FEES. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other
party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (including allocated costs and
disbursements of in-house counsel), in addition to any other relief to
which the prevailing party may be entitled.
14.4 NOTICES. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to
the intended recipient at the following address (or at such other address
as the intended recipient shall have specified in a written notice given to
the other parties hereto):
IF TO THE TRUST:
Franklin Principal Maturity Trust
c/o Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Fund Manager
IF TO THE CUSTODIAN:
Bank of America NT & SA
Global Custody Services #8005
555 South Flower Street
Los Angeles, CA 90071
Attention: Manager
14.5 HEADINGS. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the
interpretation hereof.
14.6 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of California
(without giving effect to principles of conflict of laws).
14.8 FORCE MAJEURE. Subject to the provisions of section 11 hereof
regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an
event of default or a breach of this agreement, or give rise to any
liability whatsoever on the part of one party hereto to the other, to the
extent that such failure to perform, delay or default arises out of a cause
beyond the control and without negligence of the party otherwise chargeable
with failure, delay or default; including, but not limited to: action or
inaction of governmental, civil or military authority; fire; strike;
lockout or other labor dispute; flood; war; riot; theft; earthquake;
natural disaster; breakdown of public or common carrier communications
facilities; computer malfunction; or act, negligence or default of the
other party. This paragraph shall in no way limit the right of either party
to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 WAIVER. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of
any person in the exercise of any power, right, privilege or remedy
hereunder, shall operate as a waiver thereof; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude any
other or further exercise thereof or of any other power, right, privilege
or remedy.
14.11 AMENDMENTS. This Agreement may not be amended, modified, altered
or supplemented other than by means of an agreement or instrument executed
on behalf of each of the parties hereto.
14.12 SEVERABILITY. In the event that any provision of this Agreement,
or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those
as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall
continue to be valid and enforceable to the fullest extent permitted by
law.
14.13 PARTIES IN INTEREST. None of the provisions of this Agreement is
intended to provide any rights or remedies to any person other than the
Trust and the Custodian and their respective successors and assigns, if
any.
14.14 Entire Agreement. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior agreements and
understandings between the parties hereto relating to the subject matter
hereof.
14.15 Variations of Pronouns. Whenever required by the context hereof,
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the date first above written.
"Custodian": BANK OF AMERICA, NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ Illegible
Its Vice President
"Trust": FRANKLIN PRINCIPAL MATURITY TRUST
By /s/ Deborah R. Gatzek
Its Secretary
By /s/ Harmon E. Burns
Its Vice President
FRANKLIN PRINCIPAL MATURITY TRUST
List of Persons Authorized to Give Instructions
and Other Information
The address of Franklin Principal Maturity Trust (the "Fund") to which
notices may be sent is 777 Mariners Island Boulevard, San Mateo, California
94404.
The persons named below have been duly elected, have duly qualified, and
now are officers of the Fund, holding the respective offices below set opposite
their names, and the signatures set opposite their names are their genuine
signatures. Each such person has been authorized by the Board of Trustees to
give instructions on behalf of the Fund.
NAME POSITION SIGNATURE
Charles B. Johnson President /s/ Charles B. Johnson
Rupert H. Johnson, Jr. Vice President /s/ Rupert H. Johnson, Jr.
Harmon E. Burns Vice President /s/ Harmon E. Burns
Kenneth V. Domingues Vice President /s/ Kenneth V. Domingues
Treasurer & Chief
Financial & Accounting Officer
Kenneth L. Koskella Vice President /s/ Kenneth L. Koskella
Edward V. McVey Vice President /s/ Edward V. McVey
R. Martin Wiskemann Vice President /s/ R. Martin Wiskemann
Charles E. Johnson Vice President /s/ Charles E. Johnson
Deborah R. Gatzek Secretary /s/ Deborah R. Gatzek
Loretta Fry Assistant /s/ Loretta Fry
Secretary
Philip Scatena Assistant /s/ Philip Scatena
Treasurer
The name and address of legal counsel for the Fund is Gaston & Snow, 101
California Street, Suite 3000, San Francisco, California 94111.
The name and address of the Transfer Agent, Registrar and Dividend
Disbursing Agent with respect to the Fund's common shares of beneficial interest
is National Westminster Bank, NJ, One Exchange Place, Jersey City, New Jersey
07302.
The name and address of the Custodian of the Fund's assets is Bank of
America NT & SA, 555 South Flower Street, Los Angeles, California 90071.
Witness my hand and the seal of the Fund this 19th day of January, 1989
By: /s/ Deborah R. Gatzek
Secretary
[SEAL OF FRANKLIN PRINCIPAL
MATURITY TRUST]
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing General
Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day, other
than a Saturday or Sunday, that is not a day on which banking institutions are
authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection 2.1
hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1 hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1 hereof.
"Foreign Securities Depository" shall have the meaning provided in Section
4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A under the
heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1 hereof.
"Securities System Account" shall have the meaning provided in Subsection
3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is identified
as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7 hereof,
but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer agent
for each Investment Company.
"Writing" shall mean a communication in writing, a communication by telex,
facsimile transmission, bankwire or other teleprocess or electronic instruction
system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: Vice President
By: ______________________________
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing
to act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: ______________________
Title: ______________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________
Harmon E. Burns
Title: Vice President
By: ______________________
Deborah R. Garzek
Title: Vice President & Secretary
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Advantaged International Bond California Limited
Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund Investment
Grade Intermediate Bond
Fund Income Securities
Fund U.S. Government
Securities Fund Zero
Coupon Fund -2000 Zero
Coupon Fund -2005 Zero Coupon
Fund -2010 Adjustable U.S. Government
Fund Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity
Fund Templeton Developing
Markets Equity Fund Templeton
Global Growth Fund Global
Asset Allocation Fund Small
Cap Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
Franklin Principal Maturity Trust
777 Mariners Island Blvd.
San Mateo, California 94404
Gentlemen:
The undersigned hereby subscribes for the purchase of 107,600 shares of
beneficial interest (the "Shares") of the Franklin Principal Maturity Trust (the
"Trust") for a total investment of $1,000,680.00. In connection with said
subscription, the undersigned hereby represents that:
1. The Shares are being purchased for the account of the undersigned solely
for investment purposes and not with a view to or for any distribution thereof,
and there is no present reason to anticipate any change in circumstances or any
other occasion or event which would cause the undersigned to sell the Shares
after the purchase thereof.
2. There are no agreements or arrangements or arrangements between the
undersigned and the Trust, or any of its officers, trustees, employees or the
proposed investment manager of the Trust, or any affiliated persons thereof with
respect to the resale or future distribution of the Shares.
3. Any sale or transfer of the Shares will be made in compliance with the
applicable state and federal securities laws.
4. The undersigned has received a copy of the preliminary prospectus dated
December 22, 1988, describing the nature and proposed operations of the Trust
and the Shares and has received or has access to other information about the
Trust.
5. The undersigned is aware that the Shares to be issued and sold pursuant
to this subscription agreement will be issued and sold in a nonpublic offering
pursuant to Section 4(2) of the Securities Act of 1933, and that there is no
registration statement in effect as to the Shares.
6. The undersigned is aware that, in issuing and selling these Shares, the
Trust is relying upon aforementioned representations.
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Dated: January 11, 1989 By: /s/ Harmon E. Burns
Harmon E. Burns
Senior Vice President
POWER OF ATTORNEY
The undersigned officers and trustees of Franklin Principal Maturity Trust (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute, and
to file any of the documents referred to below relating to Amendments to the
Registrant's Registration Statement on Form N-2 under the Investment Company Act
of 1940, with all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority. Each of the undersigned grants to
each of said attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes as he could
do if personally present, thereby ratifying all that said attorneys-in-fact and
agents, may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 14th day of December, 1995.
/S/ EDWARD B. JAMIESON /S/ CHARLES B. JOHNSON
Edward B. Jamieson, Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ DAVID W. GARBELLANO
S. Joseph Fortunato, David W. Garbellano,
Trustee Trustee
/S/ RUPERT H. JOHNSON, JR. /S/ FRANK W. T. LAHAYE
Rupert H. Johnson, Jr., Frank W. T. LaHaye,
Trustee Trustee
/S/ GORDON S. MACKLIN /S/ GORDON S. MACKLIN
Gordon S. Macklin, Diomedes Loo-Tam,
Trustee Principal Accounting Officer
/S/ MARTIN L. FLANAGAN
Martin L. Flanagan,
Principal Financial Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of Franklin Principal
Maturity Trust (the "Trust").
As Secretary of the Trust, I further certify that the following resolution
was adopted by a majority of the Trustees of the Trust present at a meeting held
at 777 Mariners Island Boulevard, San Mateo, California on December 14, 1995.
RESOLVED, that a Power of Attorney, substantially in the form of the
Power of Attorney presented to this Board, appointing Harmon E.
Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene and Mark
H. Plafker as attorneys-in-fact for the purpose of filing documents
with the Securities and Exchange Commission, be executed by each
Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: December 14, 1995 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
PRINCIPAL MATURITY TRUST NOVEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 250,469,738
<INVESTMENTS-AT-VALUE> 243,118,254
<RECEIVABLES> 4,653,473
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 247,771,727
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 72,966,698
<TOTAL-LIABILITIES> 72,966,698
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,357,844
<SHARES-COMMON-STOCK> 20,462,600
<SHARES-COMMON-PRIOR> 20,462,600
<ACCUMULATED-NII-CURRENT> 533,928
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,734,945)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,351,798)
<NET-ASSETS> 174,805,029
<DIVIDEND-INCOME> 403,635
<INTEREST-INCOME> 15,587,852
<OTHER-INCOME> 0
<EXPENSES-NET> (5,527,166)
<NET-INVESTMENT-INCOME> 10,464,321
<REALIZED-GAINS-CURRENT> (3,339,040)
<APPREC-INCREASE-CURRENT> 22,265,305
<NET-CHANGE-FROM-OPS> 29,390,586
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,093,398)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 17,297,188
<ACCUMULATED-NII-PRIOR> 2,090,458
<ACCUMULATED-GAINS-PRIOR> (323,358)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 999,478
<INTEREST-EXPENSE> 4,228,649
<GROSS-EXPENSE> 5,527,166
<AVERAGE-NET-ASSETS> 166,514,291
<PER-SHARE-NAV-BEGIN> 7.700
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> .911
<PER-SHARE-DIVIDEND> (.591)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.540
<EXPENSE-RATIO> 3.320
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
