TABLE OF CONTENTS
FRANKLIN INSTITUTIONAL
<TABLE>
<S> <C>
ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND ..................... PAGE 3
</TABLE>
Seeks a high level of current income, consistent with lower volatility of
principal.
FRANKLIN INSTITUTIONAL
<TABLE>
<S> <C>
ADJUSTABLE RATE SECURITIES FUND ............................. PAGE 6
</TABLE>
Seeks a high level of current income, with lower volatility of principal than a
fund that invests in fixed-rate securities.
For a current prospectus on one or more Franklin funds, please contact a
Franklin Templeton Institutional Services Representative, at 1-800/632-2000. A
prospectus contains more complete information about a fund, including fees and
expenses. Please be sure to read it carefully before investing money. To ensure
the highest quality of service, telephone calls to and from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
1
<PAGE>
[PHOTO]
CHARLES B. JOHNSON
Chairman of the Board
January 26, 1995
Dear Shareholder,
We are pleased to bring you this semi-annual report for Franklin's
Institutional Fiduciary Trust adjustable rate securities funds, covering the
period ended December 31, 1994.
Franklin's Institutional Fiduciary Trust was developed specifically to meet the
needs of institutional investors. Part of the $114 billion Franklin Templeton
Group, the Trust consists of nine separate and distinct series. This report
pertains to the two adjustable rate securities funds: Franklin Institutional
Adjustable U.S. Government Securities Fund and Franklin Institutional
Adjustable Rate Securities Fund. Each fund is managed to maintain a relatively
short average duration, and the objective for both funds is to seek a high
level of current income, with lower volatility of principal.
Recent volatility in the bond market has been unsettling to many investors.
Despite persistent interest rate volatility during the reporting period, we
maintained our long-term investment perspective rather than attempting to
predict the direction of interest rates. Our managers continually monitor
current economic conditions and adjust the portfolios in a way we believe will
best serve our shareholders.
Thank you for your continued support of Franklin's Institutional Fiduciary
Trust. We look forward to serving your investment needs in the months and years
to come.
Sincerely,
Charles B. Johnson
Chairman of the Board
Franklin's Institutional Fiduciary Trust
2
<PAGE>
OVERVIEW OF
THE ECONOMY
The fixed-income markets over the six-month period were affected by volatile
interest rates. From June 30 to December 31, 1994, the Federal Reserve Board
pushed up the federal funds rate -- the interest rate banks charge each other
for overnight loans -- from 4.25% to 5.50%. Since February 1994, the Federal
Reserve has acted on six occasions to tighten monetary policy and preempt
inflationary pressures in the economy.
The dramatic rise in short-term interest rates came in response to continued
strength in the economy. The Federal Reserve has targeted 2.5% to 3.0% as the
long-term, non-inflationary growth rate, and recent indications show growth
above this level. The Commerce Department's second estimate of third quarter
1994 gross domestic product (GDP) reported an annual growth rate of 3.9%. Many
economists expected the holiday shopping season to fuel fourth quarter 1994 GDP
and are predicting a (GDP) growth rate greater than 3% for the fourth quarter
1994, as well.
The significant rise in interest rates during the reporting period had a
negative effect on the performance of the mortgage-backed securities market.
Adjustable-rate mortgage-backed securities (ARMS) were also adversely affected
because of the lagging nature of their coupon adjustments, as well as the
interim caps embedded in these instruments. Relative to the broader
fixed-income market, however, ARMS with 1% to 2% annual caps performed close to
expectations, considering the implications of as much as a 350-basis-point rise
in short-term interest rates for the year.
If the economy continues to grow at a rapid pace, producing inflationary
pressures, the Federal Reserve seems likely to continue tightening credit. We
anticipate that short-term rates may rise through the first quarter of 1995,
although not as sharply as they did in 1994. When short-term rates stabilize,
ARMS should benefit for two reasons. First, a sustained period of stability may
provide an opportunity for many ARMS to reset and reflect current rates.
Additionally, a flatter yield curve could make adjustable rate mortgages less
attractive to homeowners seeking new mortgages, which may result in a reduced
supply of ARMS. Both factors may result in higher ARMS prices in the future.
[PHOTO]
T. Anthony Coffey, CFA
Portfolio Manager
Tony Coffey is a portfolio manager for the Franklin Adjustable U.S. Government
Securities Fund and Franklin Adjustable Rate Securities Fund. Prior to
receiving his MBA and joining Franklin, Mr. Coffey was an associate for
Analysis Group, Inc., an economic consulting firm.
Mr. Coffey received a Bachelor of Arts degree in Applied Mathematics and
Economics from Harvard University and a Master of Business Administration
degree from the University of California at Los Angeles. He is a Chartered
Financial Analyst (CFA), and is a member of the Security Analysts of San
Francisco and the Association for Investment Management and Research.
3
<PAGE>
FRANKLIN INSTITUTIONAL
ADJUSTABLE
U.S. GOVERNMENT
SECURITIES FUND
The Franklin Institutional Adjustable U.S. Government Securities Fund seeks a
high level of current income, consistent with lower volatility of principal, by
investing all of its assets in the U.S. Government Adjustable Rate Mortgage
Portfolio (the Mortgage Portfolio), which has an investment objective identical
to the fund's. The Mortgage Portfolio, in turn, invests primarily in
mortgage-backed securities created from pools of adjustable rate mortgages
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.1 Shown below is a breakdown of the issuing agencies for
securities held in the Mortgage Portfolio as of December 31, 1994.
Prices of ARMS, like many fixed-income securities, were adversely affected by
the sharp rise in short-term interest rates. ARMS have adjustable coupons that
reset at periodic intervals to reflect current rates. In a stable or slowly
changing interest rate environment, ARMS coupons can adjust accordingly. In a
sharply rising interest rate environment, however, coupons will remain below
market rates until an adjustment can occur, which causes prices of ARMS to
decline in the interim. Certain ARMS may also have interim caps, which limit
the level to which coupons may correct during a specified period of time. As
coupons reset to higher levels, the value of the securities should stabilize.
Although volatility in the bond market has been unsettling for many, we
maintain a positive outlook for the fund. The underlying portfolio continues to
hold securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, which have earned the fund a AAAf rating from Standard &
Poor's and a Aaa rating from Moody's -- the highest mutual fund credit ratings
possible.2 In addition, mortgage derivative holdings, such as interest-only
strips and collateralized mortgage obligations, are no longer part of the
underlying portfolio.
Entering 1995, we see a potentially flatter yield curve, with an overall
decline in interest rate volatility. We are actively positioning the fund to
perform well in such an environment, and our emphasis continues to be stability
of principal while maintaining a yield competitive with short-term
alternatives.
GRAPHIC MATERIAL (1) OMITTED - SEE APPENDIX
U.S. GOVERNMENT ADJUSTABLE
RATE MORTGAGE PORTFOLIO
Composition by Issuing Agency
December 31, 1994
4
<PAGE>
PERFORMANCE SUMMARY
Due largely to rising interest rates, the fund's net asset value fell, from
$9.40 on June 30, 1994 to $9.04 on December 31, 1994.
The Franklin Institutional Adjustable U.S. Government Securities Fund continued
to pursue its investment objective of providing high current income to its
shareholders, despite market conditions and their impact on the Fund's share
price. For the six-month period ended December 31, 1994, the Fund paid monthly
income distributions totaling 26.3 cents ($0.263) per share. Of course
dividends will vary based on the earnings of the Fund's underlying portfolio,
and past distributions are not necessarily predictive of future results.
At the end of the reporting period, the Fund's distribution rate was 5.89%,
based on an annualization of the dividends distributed over the last 30 days of
the period ($0.043727 per share) and the net asset value price of $9.04 on
December 31, 1994. The Fund provided a cumulative total return of -1.06% for
the six-month period ended December 31, 1994. Cumulative total return reflects
the change in value of an investment, assuming reinvestment of dividends and
capital gains, if any. Past performance is not predictive of future results.
We believe it is important to look at the Fund's return in relation to the
overall market. We encourage shareholders to look also at the fund's long-term
investment results when examining its recent performance.
PERFORMANCE FIGURES(3)
Period Ended December 31, 1994
<TABLE>
<CAPTION>
Since Inception
One-Year (12/2/91)
-------- ---------------
<S> <C> <C>
Cumulative Total Return(4) -1.68% 4.94%
Average Annual Total Return(5) -1.68% 1.57%
30-Day Standardized Yield:(6) 5.84%
Distribution Rate:(7) 5.89%
</TABLE>
GRAPHIC MATERIAL (2) OMITTED - SEE APPENDIX
1 Individual securities held by the Mortgage Portfolio, but not shares of the
Franklin Institutional Adjustable U.S. Government Securities Fund, are
guaranteed by the U.S. government, its agencies or instrumentalities, as to
timely payment of principal and interest.
2 The AAAf rating reflects Standard & Poor's assessment of the overall credit
quality of the fund's portfolio, based primarily on the fund's stated
investment objectives and policies. It considers, for example, the credit
quality of portfolio investments and management. The rating does not reflect
the yield or the market price of the fund's shares nor approval by Standard &
Poor's.
The Aaa rating reflects Moody's assessment of the investment quality of shares
in the fund and factors in the fund's investment objectives and policies, and
the creditworthiness of the fund's investments and management. Funds rated Aaa
are judged to be of an investment quality similar to Aaa-rated fixed-income
obligations, which indicates best quality. The rating does not consider the
prospective performance of a fund with respect to appreciation, the volatility
of net asset value, or yield and does not reflect approval by Moody's. Both
ratings are subject to change.
3 Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, is voluntarily waiving a portion of its fees,
which reduces expenses and increases the distribution rate, yield and total
return to shareholders. Without these reductions, the fund's distribution rate
and total return would have been lower, and the yield would have been 5.36%.
The fee waiver may be discontinued at any time.
4 Cumulative total return reflects the change in value of an investment over
the periods indicated, assuming reinvestment of dividends and capital gains.
5 Average annual total return represent the average annual change in value of
an investment over the periods indicated, assuming reinvestment of dividends
and capital gains.
6 Yield, calculated as required by the SEC, is based on earnings of the fund's
underlying portfolio during the 30 days ended on the date shown.
7 Based on an annualization of the fund's dividend for the 30-day period
($0.043727 per share) and the net asset value of $9.04 per share on December
31, 1994. Investment return and principal value fluctuate, so that your shares,
when redeemed, may be worth more or less than their original cost. Past
performance is not indicative of future results.
5
<PAGE>
FRANKLIN INSTITUTIONAL
ADJUSTABLE RATE
SECURITIES FUND
The Franklin Institutional Adjustable Rate Securities Funds seeks a high level
of current income, with lower volatility of principal than a fund that invests
in fixed-rate securities. The fund seeks to achieve its objective by investing
all of its assets in the Adjustable Rate Securities Portfolio, which in turn
invests in adjustable rate securities, including ARMS issued or guaranteed by
private institutions or by U.S. government agencies.8 Shown below is a list of
the top five issuers for the securities held in the Adjustable Rate Securities
Portfolio as of December 31, 1994.
Similar to the broader fixed-income market, the ARMS market was adversely
impacted by the sharp increases in short-term interest rates. Their adjustable
coupons enable ARMS to reset their yields at periodic intervals to reflect
current rates. In a stable or slowly changing interest rate environment, ARMS
coupons are able to adjust accordingly. In a sharply rising interest rate
environment, such as the one we have seen throughout 1994, coupons will remain
below market rates until an adjustment can occur, which causes ARMS' prices to
decline in the interim. Certain ARMS may also have interim caps, which limit
the level to which their coupons may adjust during a specified period of time.
As coupons reset to higher levels, the value of the securities should
stabilize.
Many investors may be unsettled by rising interest rates and their impact on
fixed-income securities. Despite recent declines, we maintain a positive
outlook for the fund. The securities in the underlying portfolio consist
primarily of high-quality, AAA- and AA-rated ARMS, which have earned the fund a
credit rating of Aa from Moody's Investors Service.9
In the upcoming year, we see potential for a reduction in interest rate
volatility, and a flatter yield curve. We are actively positioning the fund to
perform well in such an environment, and continue to emphasize stability of
principal while maintaining a yield competitive with short-term alternatives.
Adjustable Rate Securities Portfolio
Top Five Issuers
December 31, 1994
<TABLE>
<CAPTION>
Percent of
Issuer Total Net Assets
<S> <C>
1. Resolution Trust Company 28.1%
2. Residential Funding Corporation 19.1%
3. Prudential Home Mortgage Corporation 16.3%
4. Glendale 9.7%
5. Salomon 8.5%
</TABLE>
GRAPHIC MATERIAL (3) OMITTED - SEE APPENDIX
8 Individual securities held by the Adjustable Rate Securities Portfolio, but
not shares of the Franklin Institutional Adjustable Rate Securities Fund, are
guaranteed by private institutions, the U.S. government, its agencies or
instrumentalities, as to timely payment of principal and interest.
9 This rating reflects Moody's assessment of the investment quality of shares
in the fund and factors in the fund's investment objectives and policies,
creditworthiness of the fund's investments and management. The rating does not
consider the prospective performance of a fund with respect to appreciation,
the volatility of net asset value, or yield and does not reflect approval by
Moody's. The rating is subject to change.
6
<PAGE>
PERFORMANCE SUMMARY
As the sharp rise in short-term interest rates adversely affected ARMS, the
fund's net asset value per share fell 13 cents ($0.13) during the period, from
$9.77 on June 30, 1994 to $9.64 on December 31, 1994.
The Franklin Institutional Adjustable Rate Securities Fund continued to pursue
its investment objective of providing a high level of current income by
investing in adjustable-rate securities. For the six months ended December 31,
1994, the fund paid monthly income distributions totaling 27.6 cents ($0.276)
per share. Of course dividends will vary based on the earnings of the
underlying portfolio, and past distributions are not necessarily predictive of
future results.
At the end of the reporting period, the fund's distribution rate was 5.44%
based on an annualization of the dividends distributed over the last 30 days of
the period ($0.043067 per share) and the net asset value of $9.64 per share on
December 31, 1994. Of course, distributions will vary, depending on the
earnings of the underlying portfolio, and past performance cannot guarantee
future results.
The fund provided a cumulative total return of 1.51% for the six-month period
ended December 31, 1994. Cumulative total return reflects the change in value
of an investment, assuming reinvestment of dividends and capital gains, if any.
The total return figure reflects the overall fixed-income market, which has
been adversely affected by interest rate volatility.
In reviewing the fund's performance figures, we feel it is important for
shareholders to look at the return in relation to the overall market. In
addition, we believe they should consider the fund's long-term performance and
investment objectives, recognizing that short-term fluctuations are a natural
characteristic of the securities markets.
PERFORMANCE FIGURES(10)
Period Ended December 31 , 1994
<TABLE>
<CAPTION>
Since Inception
One-Year (12/2/91)
<S> <C> <C>
Cumulative Total Return(11) 1.21% 12.24%
Average Annual Total Return(12) 1.21% 3.93%
30-Day Standardized Yield:(13) 5.65%
Distribution Rate:(14) 5.44%
</TABLE>
GRAPHIC MATERIAL (4) OMITTED - SEE APPENDIX
10 Franklin Advisers, Inc., the fund's administrator and the manager of the
fund's underlying portfolio, is voluntarily waiving a portion of its fees,
which reduces expenses and increases the distribution rate, yield and total
return to shareholders. Without these reductions, the fund's distribution rate
and total return would have been lower, and the yield would have been 5.33%.
The fee waiver may be discontinued at any time.
11 Cumulative total return reflects the change in value of an investment over
the periods indicated, assuming reinvestment of dividends and capital gains.
12 Average annual total return reflects the average annual change in value of
an investment over the periods indicated, assuming reinvestment of dividends
and capital gains.
13 Yield, calculated as required by the SEC, is based on earnings of the fund's
underlying portfolio during the 30 days ended on the date shown.
14 Based on an annualization of the fund's dividend for the 30-day period
($0.043067 per share) and the net asset value of $9.64 per share on December
31, 1994.
Investment return and principal value fluctuate, so that your shares, when
redeemed, may be worth more or less than their original cost. Past performance
is not indicative of future results.
7
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.0%
3,901,308 U.S. Government Adjustable Rate Mortgage Portfolio (Note 1)......................................... $35,423,878
-----------
TOTAL INVESTMENTS (COST $39,149,323)100.0% ..................................................... 35,423,878
OTHER ASSETS AND LIABILITIES, NET............................................................... 11,396
-----------
NET ASSETS 100.0% .............................................................................. $35,435,274
===========
At December 31, 1994, the net unrealized depreciation based on the
cost of investments for income tax purposes of $39,149,323 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost .................................................................. $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value................................................................... (3,725,445)
-----------
Net unrealized depreciation........................................................................ $(3,725,445)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.0%
1,238,075 Adjustable Rate Securities Portfolio (Note 1) ..................................................... $11,935,047
-----------
TOTAL INVESTMENTS (COST $12,446,414)100.0% ................................................... 11,935,047
LIABILITIES IN EXCESS OF OTHER ASSETS, NET ................................................... (1)
-----------
NET ASSETS 100.0%............................................................................. $11,935,046
===========
At December 31, 1994, the net unrealized depreciation based on the
cost of investments for income tax purposes of $12,446,414 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ............................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ............................................................... (511,367)
-----------
Net unrealized depreciation .................................................................. $ (511,367)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
INSTITUTIONAL FRANKLIN
ADJUSTABLE U.S. INSTITUTIONAL
GOVERNMENT ADJUSTABLE RATE
SECURITIES FUND SECURITIES FUND
--------------- ---------------
<S> <C> <C>
Assets:
Investments:
At identified cost $ 39,149,323 $12,446,414
------------ -----------
At value 35,423,878 11,935,047
Prepaid expenses 19,403 --
------------ -----------
Total assets 35,443,281 11,935,047
------------ -----------
Liabilities:
Payables:
Shareholder servicing costs 1,874 --
Accrued expenses and
other liabilities 6,133 1
------------ -----------
Total liabilities 8,007 1
------------ -----------
Net assets, at value $ 35,435,274 $11,935,046
============ ===========
Net assets consist of:
Undistributed net
investment income $ 51,174 $ --
Unrealized depreciation
on investments (3,725,445) (511,367)
Accumulated net realized loss (27,758,015) (1,741,433)
Capital shares 66,867,560 14,187,846
------------ -----------
Net assets, at value $ 35,435,274 $11,935,046
============ ===========
Shares outstanding 3,917,668 1,238,120
============ ===========
Net asset value per share $9.04 $9.64
============ ===========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN
INSTITUTIONAL FRANKLIN
ADJUSTABLE U.S. INSTITUTIONAL
GOVERNMENT ADJUSTABLE RATE
SECURITIES FUND SECURITIES FUND
--------------- ---------------
<S> <C> <C>
Investment income:
Dividends $ 1,277,646 $ 577,952
----------- ---------
Expenses:
Administration fees (Note 5) -- --
Shareholder servicing costs
(Note 5) 2,634 3,000
Reports to shareholders 3,119 954
Professional fees 2,029 2,457
Registration and filing 1,208 168
Other expenses 2,531 864
Payments from administrator
(Note 5) -- (7,443)
----------- ---------
Total expenses 11,521 --
----------- ---------
Net investment income 1,266,125 577,952
----------- ---------
Realized and unrealized gain
(loss) on investments:
Net realized loss (1,279,292) (619,896)
Net unrealized appreciation
(depreciation) during the
period (391,537) 366,314
----------- ---------
Net realized and
unrealized loss
on investments (1,670,829) (253,582)
----------- ---------
Net increase (decrease) in
net assets resulting from
operations $ (404,704) $ 324,370
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
AND FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
FRANKLIN INSTITUTIONAL ADJUSTABLE FRANKLIN INSTITUTIONAL
U.S. GOVERNMENT SECURITIES FUND ADJUSTABLE RATE SECURITIES FUND
--------------------------------- -------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
12/31/94 06/30/94 12/31/94 06/30/94
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income......................................... $ 1,266,125 $ 12,365,091 $ 577,952 $ 2,912,554
Net realized loss from security transactions.................. (1,279,292) (19,999,149) (619,896) (1,118,153)
Net unrealized appreciation (depreciation) during the period.. (391,537) 7,745,260 366,314 (868,074)
------------ ------------- ------------- ------------
Net increase (decrease) in net assets resulting
from operations....................................... (404,704) 111,202 324,370 926,327
Distributions to shareholders from undistributed net
investment income............................................. (1,275,339) (12,435,248) (577,952) (2,912,554)
Decrease in net assets from capital share
transactions (Note 3)......................................... 14,622,684) (797,248,947) (19,009,864) (11,549,068)
------------ ------------- ------------- ------------
Net decrease in net assets.............................. (16,302,727) (809,572,993) (19,263,446) (13,535,295)
Net assets:
Beginning of period........................................... 51,738,001 861,310,994 31,198,492 44,733,787
------------ ------------- ------------- ------------
End of period................................................. $ 35,435,274 $ 51,738,001 $ 11,935,046 $ 31,198,492
============ ============= ============= ============
Undistributed net investment income included in net assets:
Beginning of period........................................... $ 60,388 $ 130,545 $ -- $ --
============ ============= ============= ============
End of Year................................................... $ 51,174 $ 60,388 $ -- $ --
============ ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Institutional Fiduciary Trust (the Trust) is a diversified, open-end management
investment company (mutual fund), registered under the Investment Company Act
of 1940, as amended. The Trust currently consists of nine separate and distinct
Funds. This report pertains to the Franklin Institutional Adjustable U.S.
Government Securities Fund (the Adjustable U.S. Government Fund) and the
Franklin Institutional Adjustable Rate Securities Fund (the Adjustable Rate
Securities Fund) included in the accompanying financial statements. Each of the
Funds issues a separate series of the Trust's shares and maintains a totally
separate and distinct investment portfolio.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION:
The Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund
(the Funds) invest all of their assets in the Adjustable Rate Securities
Portfolios (the Portfolios), which is a no-load, open-end, diversified
management investment company that has two separate and distinct portfolios
consisting of: U.S. Government Adjustable Rate Mortgage Portfolio (the ARM
Portfolio) and Adjustable Rate Securities Portfolio. The value of such
investment reflects the Funds' proportionate interest in the net assets of the
Portfolios. As of December 31, 1994, the Adjustable U.S. Government Fund owns
approximately 5% of the ARM Portfolio and the Adjustable Rate Securities Fund
owns 34% of the Adjustable Rate Securities Portfolio. The Portfolios' shares
held by the Funds are valued at the net asset value of the Portfolios. The
unaudited financial statements of the Portfolios, including the statements of
investments, are included elsewhere in this report and should be read in
conjunction with the Funds' financial statements.
B. INCOME TAXES:
The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is
required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date. Dividend
income from the Portfolios and estimated expenses are accrued daily.
Dividends are declared daily from net investment income and reinvested monthly
in the form of additional shares of the Fund at net asset value. Daily
allocations of dividends will commence on the date of receipt of an investor's
funds.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At June 30, 1994, for income tax purposes, the Trust had accumulated capital
loss carryovers as follows:
<TABLE>
<CAPTION>
ADJUSTABLE U.S. ADJUSTABLE RATE
GOVERNMENT FUND SECURITIES FUND
--------------- ---------------
<S> <C> <C>
Capital loss carryovers expiring: 2001.......................... $ 6,444,126 $ 1,762
2002.......................... 20,034,597 1,111,813
----------- ----------
$26,478,723 $1,113,575
=========== ==========
</TABLE>
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Funds are the same as for financial statement purposes at December 31,
1994.
12
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
3. TRUST SHARES
At December 31, 1994, there were an unlimited number of no par value shares of
beneficial interest authorized. Transactions in the Funds' shares for the six
months ended December 31, 1994 and year ended June 30, 1994 were as follows:
<TABLE>
<CAPTION>
FRANKLIN INSTITUTIONAL FRANKLIN INSTITUTIONAL
ADJUSTABLE U.S. GOVERNMENT ADJUSTABLE RATE
SECURITIES FUND SECURITIES FUND
-------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ -------- --------
<S> <C> <C> <C> <C>
Six months ended December 31, 1994
Shares sold..................................................... 349,813 $ 3,259,813 144,130 $ 1,398,907
Shares issued in reinvestment of distributions.................. 25,215 232,880 12,233 118,924
Shares redeemed................................................. (1,844,701) (17,018,027) (2,083,776) (20,258,559)
Changes from exercise of exchange privilege:
Shares sold..................................................... -- -- -- --
Shares redeemed................................................. (119,524) (1,097,350) (27,803) (269,136)
---------- ------------- ---------- -------------
Net decrease.................................................... (1,589,197) $ (14,622,684) (1,955,216) $ (19,009,864)
========== ============= ========== =============
Year ended June 30, 1994
Shares sold..................................................... 11,524,948 $ 113,179,875 14,968,560 $ 150,016,324
Shares issued in reinvestment of distributions.................. 562,589 5,510,131 65,788 655,952
Shares redeemed................................................. (93,006,718) (907,271,659) (15,741,814) (156,743,765)
Changes from exercise of exchange privilege:
Shares sold..................................................... 1,586,444 15,635,155 2,659,335 26,673,334
Shares redeemed................................................. (2,489,057) (24,302,449) (3,214,086) (32,150,913)
---------- ------------- ---------- -------------
Net decrease.................................................... (81,821,794) $(797,248,947) (1,262,217) $ (11,549,068)
=========== ============= ========== =============
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the six months ended December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
FRANKLIN INSTITUTIONAL
ADJUSTABLE FRANKLIN INSTITUTIONAL
U.S. GOVERNMENT ADJUSTABLE RATE
SECURITIES FUND SECURITIES FUND
---------------------- ----------------------
<S> <C> <C>
Purchases...................................................................... $ 4,265,084 $ 1,156,217
----------- -----------
Sales.......................................................................... $19,277,354 $20,166,036
=========== ===========
</TABLE>
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of an administration agreement,
provides administrative services, office space and facilities, and receives
fees computed monthly on the last day of the month at an annualized rate of
5/100 of 1% of the average daily net assets. The terms of the agreement provide
that annual aggregate expenses of the Trust be limited to the extent necessary
to comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Trust's shares are
registered. The Trust's expenses did not exceed these limitations; however, for
the six months ended December 31, 1994, Franklin Advisers, Inc. agreed in
advance to waive a portion of the administrative fees for the Adjustable U.S.
Government Fund and the Adjustable Rate Securities Fund by $11,318 and $5,178,
in an effort to minimize the Trust's expenses. Additionally, Franklin Advisers,
Inc. made payment of $7,443 for other expenses as shown in the Statement of
Operations for the Adjustable Rate Securities Fund.
Pursuant to a shareholder servicing agreement with Franklin/Templeton Investor
Services, Inc., the Trust pays costs on a per shareholder account basis.
Shareholder servicing costs incurred for the six months ended December 31, 1994
were $2,634 and $3,000, of which $436 and $109 were paid to Franklin/Templeton
Investor Services, Inc., for the Adjustable U.S. Government Securities Fund and
Adjustable Rate Securities Fund, respectively.
Certain officers and trustees of the Trust are also officers and/or directors
of Franklin Advisers, Inc., and Franklin/Templeton Investor Services, Inc. (all
wholly-owned subsidiaries of Franklin Resources, Inc.).
13
<PAGE>
INSTITUTIONAL FIDUCIARY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
---------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
PERIOD VALUE AT NET & UNREALIZED TOTAL FROM FROM NET VALUE AT
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT END TOTAL
JUNE 30 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME OF PERIOD RETURN++
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND:
1992(1) $10.00 $.373 $(.010) $ .363 (.373) $ 9.99 3.70%
1993 9.99 .480 (.130) .350 (.480) 9.86 4.01
1994 9.86 .360 (.467) (.107) (.353) 9.40 (1.11)
1994* 9.40 .265 (.362) (.097) (.263) 9.04 (1.06)
FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND:
1992(2) 10.00 .239 .040 .279 (.239) 10.04 2.82
1993 10.04 .559 -- .559 (.559) 10.04 5.72
1994 10.04 .437 (.270) .167 (.437) 9.77 1.65
1994* 9.77 .276 (.130) .146 (.276) 9.64 1.51
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------
RATIO OF RATIO OF
PERIOD NET ASSETS AT EXPENSES NET INCOME PORTFOLIO
ENDED END OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
JUNE 30 (IN 000'S) NET ASSETS** NET ASSETS RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND:
1992(1) $1,265,392 .05%+ 6.24%+ 62.79%
1993 861,311 .05 4.89 66.55
1994 51,738 .05 3.49 29.47
1994* 35,435 .05+ 5.64+ 9.59
FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND:
1992(2) -- -- 7.13+ --
1993 44,734 -- 5.56 74.77
1994 31,198 -- 4.32 197.22
1994* 11,935 -- 5.61+ 5.57
</TABLE>
(1) For the period November 1, 1991 (effective date of registration) to June
30, 1992.
(2) For the period January 3, 1992 (effective date of registration) to June
30, 1992.
+Annualized
++Total return measures the change in value of an investment over the periods
indicated, assuming reinvestment of dividends and capital gains, if any, at
net asset value and is not annualized.
*For the six months ended December 31, 1994.
**During the periods indicated below, the Manager agreed to waive in advance a
portion of its administration fees and made payments of other expenses
incurred by the Funds in the Trust. Had such action not been taken, the
ratios of expenses to average net assets would have been as follows:
<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE
NET ASSETS
-----------------
<S> <C>
FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND:
1992(1).............................................................. .07%+
1993................................................................. .06
1994................................................................. .07
1994*................................................................ .10+
FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND:
1992(2).............................................................. --
1993................................................................. .08
1994................................................................. .07
1994*................................................................ .12+
</TABLE>
14
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 92.7%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 30.1%
$ 7,213,337 FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 7.125%, 11/01/16 ................... $ 7,272,992
7,388,042 FHLMC, Cap 11.60%, Margin 2.25% + CMT, Resets Annually, 7.662%, 11/01/21 .................... 7,475,407
3,720,136 FHLMC, Cap 11.939%, Margin 2.127% + CMT, Resets Annually, 7.137%, 07/01/20 .................. 3,723,437
21,604,284 FHLMC, Cap 12.17%, Margin 2.18% + CMT, Resets Annually, 6.165%, 03/01/23 .................... 21,603,204
1,357,298 FHLMC, Cap 12.176%, Margin 2.015% + CMT, Resets Annually, 6.593%, 04/01/20 .................. 1,329,659
4,730,925 FHLMC, Cap 12.177%, Margin 2.265% + CMT, Resets Annually, 6.60%, 07/01/20 ................... 4,720,338
5,138,349 FHLMC, Cap 12.616%, Margin 2.167% + CMT, Resets Annually, 7.298%, 09/01/21 .................. 5,187,893
3,315,028 FHLMC, Cap 12.723%, Margin 2.189% + CMT, Resets Annually, 6.734%, 04/01/19 .................. 3,324,022
6,818,566 FHLMC, Cap 12.79%, Margin 2.07% + CMT, Resets Annually, 6.563%, 04/01/19 .................... 6,897,061
1,154,960 FHLMC, Cap 12.80%, Margin 2.05% + CMT, Resets Annually, 7.482%, 11/01/18 .................... 1,170,963
9,482,050 FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 6.585%, 04/01/18 ................... 9,497,050
4,749,002 FHLMC, Cap 12.875%, Margin 1.875% + CMT, Resets Annually, 5.844%, 07/01/17 .................. 4,757,668
1,116,770 FHLMC, Cap 12.998%, Margin 2.195% + CMT, Resets Annually, 7.226%, 02/01/19 .................. 1,126,824
8,142,179 FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 6.648%, 09/01/19 ................... 8,159,106
8,373,888 FHLMC, Cap 13.045%, Margin 1.875% + CMT, Resets Annually, 6.777%, 12/01/18 .................. 8,342,067
6,469,012 FHLMC, Cap 13.07%, Margin 2.12% + CMT, Resets Annually, 6.445%, 04/01/22 .................... 6,458,578
4,464,323 FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 6.729%, 12/01/16 .................. 4,477,374
2,630,318 FHLMC, Cap 13.16%, Margin 2.115% + CMT, Resets Annually, 6.688%, 07/01/19 ................... 2,636,657
4,703,290 FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 7.416%, 10/01/18 .................. 4,761,809
2,162,146 FHLMC, Cap 13.269%, Margin 2.249% + CMT, Resets Annually, 6.051%, 05/01/19 .................. 2,136,127
1,054,143 FHLMC, Cap 13.286%, Margin 2.164% + CMT, Resets Annually, 6.031%, 10/01/19 .................. 1,042,692
3,330,053 FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 6.46%, 03/01/19 ................... 3,328,001
981,962 FHLMC, Cap 13.302%, Margin 2.04% + CMT, Resets Annually, 6.411%, 04/01/18 .................. 979,744
2,191,610 FHLMC, Cap 13.306%, Margin 2.057% + CMT, Resets Annually, 6.499%, 12/01/18 .................. 2,192,787
3,449,544 FHLMC, Cap 13.36%, Margin 2.242% + CMT, Resets Annually, 6.50%, 07/01/20 .................... 3,451,821
6,714,267 FHLMC, Cap 13.364%, Margin 2.225% + CMT, Resets Annually, 6.266%, 07/01/19 .................. 6,649,664
12,956,154 FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 6.404%, 04/01/19 .................... 12,939,313
8,328,317 FHLMC, Cap 13.562%, Margin 2.388% + CMT, Resets Annually, 6.862%, 07/01/21 .................. 8,366,445
12,140,828 FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 6.781%, 07/01/20 ................... 12,180,966
16,002,104 FHLMC, Cap 13.74%, Margin 2.306% + CMT, Resets Annually, 6.56%, 04/01/21 .................... 16,121,320
960,945 FHLMC, Cap 13.77%, Margin 2.057% + CMT, Resets Annually, 6.589%, 02/01/19 .................. 962,465
6,868,053 FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.048%, 11/01/19 .................. 6,921,191
5,473,782 FHLMC, Cap 14.277%, Margin 2.412% + CMT, Resets Annually, 7.154%, 07/01/19 .................. 5,520,298
3,810,372 FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Every 3 Years, 7.622%, 12/01/21 ............ 3,804,227
1,891,291 FHLMC, Cap 14.451%, Margin 2.00% + CMT, Resets Annually, 7.154%, 12/01/18 .................. 1,908,928
4,719,767 FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 6.212%, 02/01/19 ................... 4,747,553
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $212,336,031) ............................ 206,175,651
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 59.7%
2,379,364 FNMA, Cap 11.49%, Margin 2.225% + CMT, Resets Annually, 7.60%, 09/01/21 ..................... 2,408,416
3,628,736 FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 6.72%, 11/01/18......... 3,627,418
19,654,214 FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 5.875%, 11/01/17 ................... 19,395,250
6,689,500 FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 6.879%, 03/01/19 ..................... 6,712,639
15,915,084 FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Annually, 6.056%, 01/01/19 .............. 15,839,758
11,891,769 FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 5.195%, 09/01/18 .................... 11,534,409
12,543,368 FNMA, Cap 12.729%, Margin 1.875% + NCI, Resets Annually, 5.771%, 07/01/29 ................. 12,323,221
5,228,242 FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.454%, 01/01/19 .................. 5,214,904
5,842,777 FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 6.685%, 11/01/20 ................... 5,844,139
20,174,417 FNMA, Cap 12.797%, Margin 1.75% + NCI, Resets Monthly, 5.735%, 12/01/28 ..................... 19,782,509
8,888,819 FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 6.201%, 05/01/19 .................... 8,829,033
4,381,176 FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 6.993%, 06/01/17 ........ 4,426,157
8,808,499 FNMA, Cap 12.85%, Margin 2.078% + 5CMT, Resets Every 5 Years, 7.981%, 10/01/17 ............. 8,970,505
9,356,361 FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 6.203%, 07/01/17 ........ 9,253,544
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
$ 2,792,269 FNMA, Cap 12.911%, Margin 2.00% + 6 Month DR, Resets Semi-Annually, 6.27%, 02/01/18.......... $ 2,783,401
11,456,018 FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 5.195%, 02/01/19..................... 11,111,754
5,457,966 FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 6.608%, 12/01/19.................... 5,458,032
7,534,537 FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Monthly, 6.514%, 06/01/19....................... 7,528,850
15,820,521 FNMA, Cap 13.017%, Margin 1.25% + COFI, Resets Monthly, 5.289%, 07/01/17..................... 15,285,772
10,250,571 FNMA, Cap 13.021%, Margin 1.986% + CMT, Resets Annually, 6.826%, 07/01/22.................... 10,391,044
15,516,028 FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.835%, 02/01/20...................... 15,476,447
8,508,036 FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 6.151%, 12/01/20.......... 8,489,037
7,915,814 FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 6.123%, 04/01/19................... 7,927,783
8,974,953 FNMA, Cap 13.099%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 6.224%, 07/01/20......... 8,797,806
20,808,837 FNMA, Cap 13.125%, Margin 1.25% + COFI, Resets Monthly, 5.377%, 04/01/18..................... 20,014,439
6,204,507 FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 6.559%, 04/01/19.................... 6,201,938
4,368,130 FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 6.744%, 11/01/26........ 4,378,829
4,645,653 FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 6.121%, 06/01/19..................... 4,610,718
10,219,298 FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 7.188%, 10/01/19..................... 10,291,692
8,862,462 FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Semi-Annually, 7.433%, 04/01/03................ 8,834,315
17,962,578 FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 6.584%, 09/01/22.................... 18,051,476
15,572,949 FNMA, Cap 13.644%, Margin 2.011% + CMT, Resets Annually, 6.556%, 01/01/18.................... 15,573,510
9,409,868 FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 6.476%, 03/01/21.................... 9,386,258
11,757,296 FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 6.622%, 12/01/20.................... 11,754,027
5,341,698 FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 5.804%, 03/01/19..................... 5,341,538
6,745,026 FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.778%, 07/01/24.......... 6,487,529
6,244,736 FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 5.809%, 02/01/19..................... 6,252,230
4,563,436 FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 6.726%, 12/01/18..................... 4,570,210
9,950,256 FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 6.657%, 01/01/19.................... 9,954,614
3,008,569 FNMA, Cap 14.142%, Margin 2.118% + CMT, Resets Annually, 6.331%, 03/01/21.................... 3,063,903
17,038,110 FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Every 5 Years, 8.057%, 05/01/21............... 17,351,475
11,742,434 FNMA, Cap 14.887%, Margin 1.720% + CMT, Resets Annually, 6.064%, 01/01/16.................... 11,712,538
5,018,643 FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 6.926%, 05/01/19.................... 5,068,579
2,316,562 FNMA, Cap 15.381%, Margin 2.168% + CMT, Resets Annually, 6.701%, 02/01/20.................... 2,317,499
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $424,295,158)........................ 408,629,145
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 2.9%
12,092,970 GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.125%, 07/20/23...................... 11,960,093
7,786,450 GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.125%, 08/20/23...................... 7,722,795
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $21,013,184)...................... 19,682,888
------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $657,644,373).......................... 634,487,684
------------
GOVERNMENT SECURITIES 1.4%
10,000,000 U.S. Treasury Notes, 4.00% - 4.25%, 01/31/96 - 05/15/96 (COST $9,805,095).................... 9,638,445
------------
TOTAL LONG TERM INVESTMENTS (COST $667,449,468)........................................ 644,126,129
------------
aSHORT TERM INVESTMENTS
GOVERNMENT SECURITIES 4.8%
34,810,000 U.S. Treasury Bills, 5.54% - 6.65%, 09/21/95 - 12/14/95 (COST $32,752,469)................... 32,697,364
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $700,201,937)..................... 676,823,493
------------
b,cRECEIVABLES FROM REPURCHASE AGREEMENTS
8,117 Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $7,548) (COST $7,543)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99........................ 7,543
------------
TOTAL INVESTMENTS (COST $700,209,480) 98.9%....................................... 676,831,036
OTHERS ASSETS AND LIABILITIES, NET 1.1%........................................... 7,190,180
------------
NET ASSETS 100.0%................................................................. $684,021,216
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
VALUE
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
At December 31, 1994, the net unrealized depreciation based
on the cost of investments for income tax purposes of
$700,209,480 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ............................................................ $ 36,610
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ............................................................ (23,415,054)
------------
Net unrealized depreciation................................................................. $(23,378,444)
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
<TABLE>
<S> <C>
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
CMT - 1 Year Constant Maturity Treasury Index
COFI - 11th District Cost of Funds Index
DR - Discount Rate
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate
</TABLE>
aCertain short-term securities are traded on a discount basis; the rates shown
are the discount rates at the time of the purchase by the Fund. Other
securities bear interest at the rates shown, payable at fixed dates or upon
maturity.
bFace amount for repurchase agreements is for the underlying collateral.
cSee Note 1(f) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ADJUSTABLE RATE SECURITIES PORTFOLIO (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 85.7%
$ 3,396,104 Glendale Federal Bank, Cap 12.25%, Margin 1.78% + CMT, Resets Monthly, 7.822%, 03/25/30 ......... $ 3,387,614
1,426,892 Homeowners Federal Savings, Cap 13.00%, Margin 1.75% + CMT, Resets Annually, 6.354%, 12/01/17 ... 1,412,624
2,461,435 PHMS, Cap 10.88%, Margin 2.50% + CMT, Resets Annually, 7.885%, 01/25/22 ......................... 2,487,588
3,231,816 PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 6.865%, 12/22/22 ......................... 3,209,597
3,455,213 RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.548%, 11/25/22 .......................... 3,429,300
3,444,180 RFC, Cap 11.73%, Margin 1.00% + COFI, Resets Semi-Annually, 4.916%, 07/25/19 .................... 3,239,683
1,875,578 RTC, Cap 12.66%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 7.361%, 04/26/21 .............. 1,814,622
3,792,369 RTC, Cap 13.85%, Margin 0.90% + CMT, Resets Annually, 6.936%, 04/25/22 .......................... 3,678,599
2,660,100 RTC, Cap 14.69%, Margin 1.55% + CMT, Resets Annually, 7.359%, 06/25/22 .......................... 2,590,273
1,805,534 RTC, Cap 16.48%, Margin NACR - 0.15%, Resets Annually, 7.405%, 07/25/20 ......................... 1,751,367
3,007,064 Salomon Brothers Mortgage Securities, Cap 14.00%, Margin 0.96% + NACR, Resets Annually, 7.528%,
10/26/16 ....................................................................................... 2,976,994
-----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $31,407,983) .............................. 29,978,261
-----------
aSHORT TERM INVESTMENTS
GOVERNMENT SECURITIES 13.7%
3,715,000 U.S. Treasury Bills, 5.54%, 09/21/95 ............................................................ 3,538,121
1,300,000 U.S. Treasury Notes, 3.875%, 10/31/95 ........................................................... 1,265,744
-----------
TOTAL GOVERNMENT SECURITIES (COST $4,828,170) ............................................. 4,803,865
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $36,236,153) ......................... 34,782,126
-----------
b,cRECEIVABLES FROM REPURCHASE AGREEMENTS
5,411 Joint Repurchase Agreement, 5.838%, 01/01/95 (Maturity Value $5,576) (COST $5,572)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99 .......................... 5,572
-----------
TOTAL INVESTMENTS (COST $36,241,725) 99.4%............................................ 34,787,698
OTHER ASSETS AND LIABILITIES, NET .6% ................................................ 200,704
-----------
NET ASSETS 100.0%..................................................................... $34,988,402
===========
At December 31, 1994, the net unrealized depreciation based on
the cost of investments for income tax purposes of $36,241,725
was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost ........................................................ $ --
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value ........................................................ (1,454,027)
-----------
Net unrealized depreciation .................................................................. $(1,454,027)
===========
</TABLE>
PORTFOLIO ABBREVIATIONS:
CMT - 1 Year Constant Maturity Treasury Index
COFI - 11th District Cost of Funds Index
NACR - National Average Contract Rate
PHMS - Prudential Home Mortgage Securities
RFC - Residential Finance Corp.
RTC - Resolution Trust Corp.
TB - Treasury Bill Rate
aCertain short-term securities are traded on a discount basis; the rates shown
are the discount rates at the time of purchase by the Fund. Other securities
bear interest at the rates shown, payable at fixed dates or upon maturity.
bFace amount for repurchase agreements is for the underlying collateral.
cSee Note 1(f) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Assets:
Investments in securities:
At identified cost.......................................................... $ 700,201,937 $36,236,153
============= ===========
At value.................................................................... 676,823,493 34,782,126
Receivables from repurchase agreements, at value and cost.................... 7,543 5,572
Receivables:
Interest................................................................... 4,705,033 193,611
Investment securities sold................................................. 3,336,674 46,413
Prepaid expenses............................................................. 14,861 59,367
Unamortized organization costs (Note 2)...................................... -- 4,575
------------- -----------
Total assets.............................................................. 684,887,604 35,091,664
------------- -----------
Liabilities:
Payables:
Capital shares repurchased.................................................. 738,482 89,941
Management fees............................................................. -- 6,390
Accrued expenses and other liabilities....................................... 127,906 6,931
------------- -----------
Total liabilities......................................................... 866,388 103,262
------------- -----------
Net assets, at value.......................................................... $ 684,021,216 $34,988,402
============= ===========
Net assets consist of:
Unrealized depreciation on investments....................................... $ (23,378,444) $(1,454,027)
Accumulated net realized loss................................................ (133,219,899) (2,287,843)
Capital shares............................................................... 752,934 36,299
Additional paid-in capital................................................... 839,866,625 38,693,973
------------- -----------
Net assets, at value.......................................................... $684,021,216 $34,988,402
============= ===========
Shares outstanding............................................................ 75,293,379 3,629,866
============= ===========
Net asset value per share..................................................... $ 9.08 $ 9.64
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE TWO MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Investment income:
Interest (Note 1).................................................... $ 7,007,131 $ 355,089
----------- ---------
Expenses:
Management fees, net (Note 6)........................................ -- 13,146
Custodian fees....................................................... 6,089 642
Professional fees.................................................... 5,079 589
Trustees' fees and expenses.......................................... 809 --
Reports to shareholders.............................................. 260 557
Amortization of organization costs (Note 2).......................... -- 366
Other................................................................ 2,957 83
----------- ---------
Total expenses..................................................... 15,194 15,383
----------- ---------
Net investment income............................................. 6,991,937 339,706
----------- ---------
Realized and unrealized loss on investments:
Net realized loss.................................................... (3,491,304) (184,737)
Net unrealized appreciation (depreciation)........................... (4,415,521) 3,287
----------- ---------
Net realized and unrealized loss on investments....................... (7,906,825) (181,450)
----------- ---------
Net increase (decrease) in net assets resulting
from operations..................................................... $ (914,888) $ 158,256
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE TWO MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
AND THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
---------------------------------- ---------------------------
FOR THE TWO FOR THE FOR THE TWO FOR THE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
12/31/94 10/31/94 12/31/94 10/31/94
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income...................................... $ 6,991,937 $ 47,964,106 $ 339,706 $ 4,221,967
Net realized loss from security transactions............... (3,491,304) (67,057,492) (184,737) (1,993,495)
Net unrealized appreciation (depreciation) on
investments .............................................. (4,415,521) (12,751,845) 3,287 (1,410,266)
------------ --------------- ----------- ------------
Net increase (decrease) in net assets
resulting from operations.............................. (914,888) (31,845,231) 158,256 818,206
Distributions to shareholders from undistributed
net investment income (Note 1)............................. (6,991,937) (47,964,106) (339,706) (4,221,967)
Decrease in net assets from capital share
transactions (Note 4)...................................... (55,543,073) (1,302,948,561) (6,448,901) (79,286,725)
------------ --------------- ----------- ------------
Net decrease in net assets............................... (63,449,898) (1,382,757,898) (6,630,351) (82,690,486)
Net assets (there is no undistributed net investment
income at beginning or end of period):
Beginning of period........................................ 747,471,114 2,130,229,012 41,618,753 124,309,239
------------ --------------- ----------- ------------
End of period.............................................. $684,021,216 $ 747,471,114 $34,988,402 $ 41,618,753
============ =============== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is a no load, open-end,
diversified management investment company (mutual fund) registered under the
Investment Company Act of 1940 as amended. The Trust currently has two separate
portfolios (the Portfolios) consisting of the U.S. Government Adjustable Rate
Mortgage Portfolio (Mortgage Portfolio) and the Adjustable Rate Securities
Portfolio (Securities Portfolio). The shares of the Trust are issued in private
placements and are thus exempt from registration under the Securities Act of
1933.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITIES VALUATIONS:
Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Other securities
for which market quotations are readily available are valued at current market
values, obtained from a pricing service, which are based on a variety of
factors, including recent trades, institutional size trading in similar types
of securities (considering yield, risk and maturity) and/or developments
related to specific securities. Portfolio securities which are traded both in
the over-the-counter market and on a securities exchange are valued according
to the broadest and most representative market as determined by the Manager.
Securities for which market quotations are not readily available, if any, are
valued at their fair value as determined following procedures approved by the
Board of Trustees. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.
B. INCOME TAXES:
The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is
required. Each Portfolio is treated as a separate entity in the determination
of compliance with the Internal Revenue Code.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount, if any, is
amortized as required by the Internal Revenue Code. The Fund normally declares
dividends from its net investment income daily and distributes monthly. Daily
allocations of net investment income will commence on the date of receipt of an
investor's funds. Dividends are normally declared each day the New York Stock
Exchange is open for business equal to the Portfolio's total net investment
income and are payable to shareholders of record at the beginning of business
on the ex-date. Once each month, dividends are reinvested in additional shares
of the Portfolio or paid in cash as requested by the shareholders.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Portfolios based
on the ratio of net assets of each Portfolio to the combined net assets. In all
other respects, expenses are charged to each Portfolio as incurred on a
specific identification basis.
F. REPURCHASE AGREEMENTS:
The Trust 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 with government securities dealers recognized by
the Federal Board and/or member banks of the Federal Reserve System. The value
and face amount of the Joint Repurchase Agreement are allocated to the Trust
based on its pro rata interest.
In a repurchase agreement, the Trust purchases a U.S. Government security from
a dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Trust to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. Government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Trust, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Trust's custodian and held until resold to the
dealer or bank. At December 31, 1994, all outstanding joint repurchase
agreements held by the Trust has been entered into on December 30, 1994.
22
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Securities Portfolio are amortized on a
straight-line basis over a period of five years, from December 26, 1991, the
effective date of registration. In the event Franklin Resources, Inc. (which
was the sole shareholder prior to December 26, 1991) redeems its seed money
shares within the five-year period, the pro rata share of the then-unamortized
deferred organization cost will be deducted from the redemption price paid to
Franklin Resources, Inc. New investors purchasing shares of the portfolio
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1994, for tax purposes, the Portfolios had accumulated capital
loss carryovers as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Capital loss carryovers
Expiring in: 2000...... $ 45,446,278 $ 57,701
2001...... 17,175,340 50,908
2002...... 67,102,060 1,987,888
------------ ----------
$129,723,678 $2,096,497
============ ==========
</TABLE>
For tax purposes the aggregate cost of securities and unrealized depreciation
of the Trust are the same as for financial statement purposes at December 31,
1994.
4. TRUST SHARES
At December 31, 1994, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in each of the Portfolio's shares
for the two months ended December 31, 1994, and the year ended October 31, 1993
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Two months ended December 31, 1994
Shares sold.................................. 132,651 $ 1,215,111 212,591 $ 2,053,905
Shares issued in reinvestment of
distributions .............................. 767,496 6,992,002 36,294 350,071
Shares redeemed.............................. (6,974,577) (63,750,186) (916,029) (8,852,877)
----------- --------------- ----------- -------------
Net decrease................................. (6,074,430) $ (55,543,073) (667,144) $ (6,448,901)
=========== =============== =========== =============
Year ended October 31, 1994
Shares sold.................................. 3,234,621 $ 31,184,230 9,103,489 $ 90,799,027
Shares issued in reinvestment of
distributions .............................. 5,053,223 47,948,131 426,689 4,211,388
Shares redeemed.............................. (143,954,457) (1,382,080,922) (17,497,118) (172,994,477)
Changes from exercise of the exchange
privilege:
Shares redeemed............................ -- -- (132,789) (1,302,663)
------------ --------------- ----------- -------------
Net decrease................................. (135,666,613) $(1,302,948,561) (8,099,729) $ (79,286,725)
============ =============== =========== =============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the two months ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Purchases.............. $14,360,705 --
=========== ==========
Sales.................. $87,956,084 $6,646,856
=========== ==========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Trust, and receives fees computed monthly on the average daily net assets of
the Trust during the month. The Trust pays a fee equal to an annualized rate of
40/100 of 1% for the first $5 billion of net assets, 35/100 of 1% of net assets
in excess of $5 billion
23
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
up to and including $10 billion, 33/100 of 1% of net assets in excess of $10
billion up to and including $15 billion, and 30/100 of 1% of net assets in
excess of $15 billion. The terms of the management agreement provide that
aggregate annual expenses of the Trust be limited to the extent necessary to
comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Trust's shares are
registered. The Trust's expenses did not exceed these limitations; however, for
the two months ended December 31, 1994, Franklin Advisers, Inc. agreed in
advance to waive $476,021 and $11,315 of the management fees for the Mortgage
Portfolio and Securities Portfolio, respectively.
As of December 31, 1994, 71,392,071 shares of the Mortgage Portfolio were owned
by the Franklin Adjustable U.S. Government Securities Fund and 3,901,308 shares
were owned by the Franklin Institutional Adjustable U.S. Government Securities
Fund. This represents 95% and 5%, respectively, of the outstanding shares of
the Mortgage Portfolio.
As of December 31, 1994, 2,390,522 shares of the Securities Portfolio were
owned by the Franklin Adjustable Rate Securities Fund and 1,238,075 shares were
owned by the Franklin Institutional Adjustable Rate Securities Fund. This
represents 66% and 34%, respectively, of the outstanding shares of the
Securities Portfolio. The remaining 1,269 shares of the Securities Portfolio
were owned by Franklin Resources, Inc.
Certain officers and Trustees of the Trust are also officers and/or directors
of Franklin Advisers, Inc., a wholly-owned subsidiary of Franklin Resources,
Inc.
7. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period by Fund are as follows:
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------
NET
REALIZED & DISTRI- DISTRI- NET
NET ASSET NET UNREALIZED BUTIONS BUTIONS ASSET
YEAR VALUES AT INVEST- GAIN TOTAL FROM FROM NET FROM TOTAL VALUES
ENDED BEGINNING MENT (LOSS) ON INVESTMENT INVESTMENT CAPITAL DISTRI- AT END TOTAL
JAN. 31, OF YEAR INCOME SECURITIES OPERATIONS INCOME GAINS BUTIONS OF YEAR RETURN+
- -------- --------- ------- ---------- ---------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992 $10.00 $.493 $ .01 $ .506 $(.493) $(.003) $(.496) $10.01 5.13%
1993 10.01 .544 (.100) .444 (.544) -- (.544) 9.91 4.53
1993** 9.91 .313 (.090) .223 (.313) -- (.313) 9.82 2.28
1994*** 9.82 .415 (.630) (.215) (.415) -- (.415) 9.19 (2.22)
1994**** 9.19 .090 (.110) (.020) (.090) -- (.090) 9.08 (.22)
ADJUSTABLE RATE SECURITIES PORTFOLIO
1992 10.00 -- -- -- -- -- -- 10.00 --
1993 10.00 .599 .020 .619 (.599) -- (.599) 10.02 6.36
1993** 10.02 .368 .010 .378 (.368) -- (.368) 10.03 3.83
1994*** 10.03 .469 (.340) .129 (.469) -- (.469) 9.69 1.32
1994**** 9.69 .092 (.050) .042 (.092) -- (.092) 9 64 .44
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------
RATIO OF
NET EXPENSES RATIO OF NET
ASSETS TO AVERAGE INVESTMENT
AT END NET INCOME TO PORTFOLIO
OF YEAR ASSETS++ AVERAGE TURNOVER
(IN 000'S) (SEE NOTE 6) NET ASSETS RATE
---------- ------------ ------------ ---------
<C> <C> <C> <C>
$4,315,658 .31%* 7.25%* 48.96%
4,201,411 .30 5.49 66.44
2,130,229 .27* 4.15* 76.55
747,471 .08 4.01 56.43
684,021 .01* 5.86* 2.10
-- -- -- --
44,656 -- 5.80 88.92
124,309 .11* 4.76* 158.70
41,619 .25 4.55 192.06
34,988 .25* 5.53* --*
</TABLE>
*Annualized.
**For the nine months ended October 31, 1993.
***For the year ended October 31, 1994.
****For the two months ended December 31, 1994.
(1) For the period May 20, 1991 (effective date) to January 31, 1992.
(2) For the period December 26, 1991 (effective date) to January 31, 1992.
+Total return measures the change in value of an investment over the period
indicated. It assumes reinvestment of dividends and capital gains, if any, at
net asset value and is not annualized.
++During the periods indicated below, Franklin Advisers, Inc., the investment
manager, agreed to waive in advance a portion of its management fees and made
payments of other expenses incurred by the Portfolios. Had such action not been
taken, the ratios of expenses to average net assets would have been as follows:
<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992................................................... .41%*
1993................................................... .42
1993**................................................. .41*
1994***................................................ .42
1994****............................................... .41*
ADJUSTABLE RATE SECURITIES PORTFOLIO
1993................................................... .64
1993**................................................. .47*
1994***................................................ .43
1994****............................................... .43*
</TABLE>
24
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304(a) OF REGULATION S-T)
Graphic Material (1)
This chart shows in pie chart format the portfolio
composition as a percentage of total net assets.
<TABLE>
<CAPTION>
U.S. Government Adjustable
Rate Mortgage Portfolio
Composition by Issuing Agency
December 31, 1994
<S> <C>
FNMA 60.37%
FHLMC 30.46%
Other 6.26%
GNMA 2.91%
</TABLE>
Graphic Material (2)
This chart shows in table format the fund's cumulative
and average annual total returns, the 30-day standardized
yield and the distribution rate.
<TABLE>
<CAPTION>
Performance Figures
Period Ended December 31, 1994
One-Year Since Inception
(12/2/91)
<S> <C> <C> <C>
Cumulative Total Return -1.68% 4.94%
Average Annual Total Return -1.68% 1.57%
30-Day Standardized Yield 5.84%
Distribution Rate 5.89%
</TABLE>
Graphic Material (3)
This chart shows in table format the top
five issues the portfolio holds as a percentage
of total net assets.
<TABLE>
<CAPTION>
Adjustable Rate Securities Portfolio
Top Five Issuers
December 31, 1994
Issuer Percent of Total Net Assets
<S> <C>
Resolution Trust Company 28.1%
Residential Funding Corportation 19.1%
Prudential Home Mortgage Corporation 16.3%
Glendale 9.7%
Salomon 8.5%
</TABLE>
Graphic Material (4)
This chart shows in table format the fund's cumulative
and average annual total returns, the 30-day standardized
yield and the distribution rate.
<TABLE>
<CAPTION>
Performance Figures
Period Ended December 31, 1994
One Year Since
Inception
(12/2/91)
<S> <C> <C> <C>
Cumulative Total Return 1.21% 12.24%
Average Annual Total Return 1.21% 3.93%
30-Day Standardized Yield 5.65%
Distribution Rate 5.44%
</TABLE>
