ThZeal - The Zeal

N-CSRS 1 ffrmtsemincsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-09869 --------- Franklin Floating Rate Master Trust ----------------------------------- (Exact name of registrant as specified in charter) One Franklin Parkway, San Mateo, CA 94403-1906 (Address of principal executive offices) (Zip code) Murray L. Simpson, One Franklin Parkway, San Mateo, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (650) 312-2000 -------------- Date of fiscal year end: 7/31 ---- Date of reporting period: 1/31/04 ------- Item 1. Reports to Stockholders. FRANKLIN FLOATING RATE MASTER TRUST FRANKLIN FLOATING RATE MASTER SERIES FINANCIAL HIGHLIGHTS

a Total return is not annualized for periods less than one year. b For the period March 24, 2000 (effective date) to July 31, 2000. c Annualized. See notes to financial statements. STATEMENT OF INVESTMENTS, JANUARY 31, 2003 (UNAUDITED)

a Non-income producing. b See Note 1(d) regarding senior floating rate interests. c See Note 1(c) regarding securities purchased on a delayed delivery basis. d See Note 1(i) regarding unfunded loan commitments. e See Note 1(b) regarding joint repurchase agreement. See notes to financial statements. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JANUARY 31, 2004 (UNAUDITED)

See notes to financial statements. FINANCIAL STATEMENTS (CONTINUED)

See notes to financial statements. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED JANUARY 31, 2004 (UNAUDITED) AND YEAR ENDED JULY 31, 2003

See notes to financial statements. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Franklin Floating Rate Master Trust (the Trust) is registered under the Investment Company Act of 1940 as a non-diversified, open-ended investment company. The Trust is organized as a partnership and consists of one series, the Franklin Floating Rate Master Series (the Fund). Shares of the Fund are issued in the form of partnership interests and are exempt from registration under the Securities Act of 1933. The Fund seeks current income and preservation of capital. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION The Fund invests primarily in senior secured corporate loans and senior secured debt that meet credit standards established by Franklin Advisers Inc. The Fund values its securities based on quotations provided by banks, broker/dealers or pricing services experienced in such matters. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. JOINT REPURCHASE AGREEMENT The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account to be used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the Fund based on its pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. At January 31, 2004, all repurchase agreements had been entered into on January 30, 2004. C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Fund may purchase securities on a when-issued or delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. D. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). E. INCOME TAXES No provision has been made for income taxes because all income and expenses are allocated to the partners for inclusion in their individual income tax returns. F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Discounts and premiums on securities purchased are amortized over the lives of the respective NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) securities. Facility fees are recognized as income over the expected term of the loan. The Fund's net investment income is proportionally allocated to the partners daily and distributed monthly. G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. H. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. I. UNFUNDED LOAN COMMITMENTS The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers' discretion. These commitments are disclosed in the accompanying Statement of Investments and Statement of Assets and Liabilities. 2. SHARES OF BENEFICIAL INTEREST At January 31, 2004, there were an unlimited number of shares authorized ($.01 par value). Transactions in the Fund's shares were as follows:

3. REVOLVING CREDIT FACILITY The Fund participates in a $200 million senior unsecured revolving credit facility to fund shareholder redemptions or meet unfunded loan commitments. The facility agreement ends on December 20, 2004. Interest is charged at the Federal Funds Rate plus .50%. Facility fees paid are amortized on a straight line basis over the term of the commitment. Annual commitment fees of .09% are charged on the unused portion of the facility and allocated among the participating funds based on net assets. During the period ended January 31, 2004, the Fund did not utilize the facility. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. TRANSACTIONS WITH AFFILIATES Certain officers and trustees of the Fund are also officers and/or directors of the following entities:

The Fund pays an investment management fee to Advisers of .80% per year of the average daily net assets of the Fund. The Fund pays an administrative fee to FT Services based on the average net assets of the Fund as follows: ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS ------------------------------------------------------------------------ .150% First $200 million .135% Over $200 million, up to and including $700 million .100% Over $700 million, up to and including $1.2 billion .075% In excess of $1.2 billion FT Services and Advisers agreed in advance to waive administrative fees and management fees, as noted in the Statement of Operations. At January 31, 2003, the shares of the Fund were owned by the following entities: PERCENTAGE OF ENTITY SHARES OUTSTANDING SHARES ------------------------------------------------------------------------------- Franklin Floating Rate Fund PLC 41,965,122 99.96% Franklin Resources Inc. 10,000 .02% Templeton Investment Counsel Inc. 10,000 .02% --------------------------------------------- TOTAL 41,985,122 100.00% --------------------------------------------- 5. INCOME TAXES At January 31, 2004, net unrealized appreciation (depreciation) based on the cost of investment for income tax purposes of $431,194,486 were as follows: Unrealized appreciation $ 4,046,857 Unrealized depreciation (323,433) --------------------- Net unrealized appreciation (depreciation) $ 3,723,424 --------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Net realized gains (loss) differ for financial statement and tax purposes primarily due to differing treatments of bond premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the period ended January 31, 2004 aggregated $267,023,207 and $85,710,410, respectively. At January 31, 2004, the Fund did not participate in any soft commission arrangements. 7. CREDIT RISK The Fund has 98.50% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. 8. PARTNERSHIP DISTRIBUTIONS For the period ended January 31, 2004, the Fund made the following distributions: PAYMENT DATE AMOUNT PER SHARE 08/29/2003 $ 0.030857 09/30/2003 $ 0.029927 10/31/2003 $ 0.030294 11/28/2003 $ 0.030032 12/31/2003 $ 0.028570 01/30/2004 $ 0.027523 Daily distribution information is available at the registered office upon request. 9. OTHER CONSIDERATIONS Advisers, as the Fund's Manager, may serve as a member of various bondholders' steering committees, on credit committees, or may represent the Fund in certain corporate restructuring negotiations. Currently the Manger serves in one or more of these capacities for Adelphia Communications Corp. As a result of this involvement, Advisers may be in possession of certain material non-public information. If the Fund's Manager, while in possession of such information, seeks to sell any of its holdings in these securities it will comply with all applicable federal securities laws. 10. RECENT LITIGATION On July 6, 2003, Adelphia Communications Corp. ("Adelphia") and related parties, along with its Official Committee of Unsecured Creditors, filed and adversary proceeding in the Adelphia bankruptcy case in the U.S. Bankruptcy Court (SDNY) against more than 360 banks, financial services companies, insurance companies, investment banks, mutual funs and other parties that had arranged for the sale of, or purchased the bank debt of, Adelphia or its related parties. Named Defendants included Franklin Advisers Inc., Franklin CLOs I - III, Franklin Floating Rate Daily Access Fund, Franklin Floating Rate Master Series, and Franklin Floating Rate Trust. The Complaint alleges that the purchasers of this bank debt knew, or should have known, that the loan proceeds would not benefit Adelphia, but instead would be used to enrich Adelphia insiders. It seeks avoidance of the loans and recovery of intentionally fraudulent transfers. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Although it is not possible to predict the outcome of these matters at this early stage of the proceedings, the Fund's management does not expect that the result will have a material adverse effect on the financial condition of the Fund. 11. REGULATORY MATTERS On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the "Company"), alleging violations of the Massachusetts Uniform Securities Act. The complaint arises from activity that occurred in 2001 during which time an officer of a Company subsidiary was negotiating an agreement with an investor relating to investments in a mutual fund and a hedge fund. The Fund, in addition to other entities within Franklin Templeton Investments, including the Company and other funds, has been named in shareholder class actions related to the matter described above. The Fund's management believes that the claims made in the lawsuit are without merit and it intends to defend vigorously against the allegations. It is anticipated that the Fund may be named in additional similar civil actions related to the matter described above. In addition, as part of ongoing investigations by the U.S. Securities and Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of California, the New York Attorney General, the California Attorney General, the U.S. Attorney for the District of Massachusetts, the Florida Department of Financial Services, and the Commissioner of Securities and the Attorney General of the State of West Virginia, relating to certain practices in the mutual fund industry, including late trading, market timing and sales compensation arrangements, the Company and its subsidiaries, as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and its current employees are providing documents and information in response to these requests and subpoenas. In addition, the Company has responded to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. The Staff of the SEC has informed the Company that it intends to recommend that the Commission authorize an action against the Fund's investment adviser relating to the frequent trading issues that are the subject of the SEC's investigation. These issues were previously disclosed as being under investigation by government authorities and the subject of an internal inquiry by the Company in its Annual Report on Form 10-K and on its public website. The Company currently is in discussions with the SEC Staff in an effort to resolve the issues raised in their investigation. Such discussions are preliminary and the Fund's management has been advised that the Company cannot predict the likelihood of whether those discussions will result in a settlement and, if so, the terms of such settlement. The impact, if any, of these matters on the Fund is uncertain at this time. If the Company finds that it bears responsibility for any unlawful or improper conduct, it has committed to making the Fund or its shareholders whole, as appropriate. Item 2. Code of Ethics. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(A), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers financial and accounting officer. Item 3. Audit Committee Financial Expert. (a)(1) The registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial expert is Frank W.T. LaHaye, and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. Item 4. Principal Accountant Fees and Services. N/A Item 5. Audit Committee of Listed Registrants. N/A Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A Item 9. Submission of Matters to a Vote of Security Holders. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. Item 10. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) Changes in Internal Controls. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. Item 11. Exhibits. (A) Code of Ethics for Principal Executive and Senior Financial Officers. (B)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Diomedes Loo-Tam, Chief Financial Officer (B)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Diomedes Loo-Tam, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN FLOATING RATE MASTER TRUST By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date March 31, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date March 31, 2004 By /s/Diomedes Loo-Tam Chief Financial Officer Date March 31, 2004