As filed with the Securities and Exchange Commission on February 28, 1997
File No.
811-6242
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
This Amendment is being filed only under
the Investment Company Act of 1940
ADJUSTABLE RATE SECURITIES PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Deborah R. Gatzek 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Please Send Copy of Communications to:
Mark H. Plafker, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19102
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
FORM N-1A, PART A:
ITEM
Responses to Items 1 through 3 have been omitted pursuant to paragraph 4 of
Instruction F of the General Instructions to Form N-1A.
4. GENERAL DESCRIPTION OF REGISTRANT
ABOUT THE PORTFOLIO
The U.S. Government Adjustable Rate Mortgage Portfolio ("Portfolio") is one of
two no-load, open-end, diversified series of the Adjustable Rate Securities
Portfolios (the "Trust"), a management investment company, commonly called a
mutual fund. The Trust was organized as a Delaware business trust on February
15, 1991 and is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust's other series is the Adjustable Rate Securities Portfolio. As permitted
by applicable law, the Portfolio's shares of beneficial interest, par value of
$.01 per share, are sold only to other investment companies.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
UNITED STATES ("U.S.") GOVERNMENT. SHARES OF THE PORTFOLIO INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTMENT OBJECTIVE AND POLICIES OF THE PORTFOLIO
The investment objective of the Portfolio is to seek a high level of current
income, consistent with lower volatility of principal. The investment objective
is a fundamental policy of the Portfolio and may not be changed without
shareholder approval. Of course, there is no assurance that the Portfolio's
objective will be achieved. As the value of the Portfolio's portfolio securities
fluctuate, its net asset value per share also fluctuates.
The Portfolio pursues its investment objective by investing at least 65% of its
total assets in adjustable rate mortgage securities ("ARMS") or other securities
collateralized by or representing an interest in mortgages (collectively,
"mortgage securities"), that have interest rates which reset at periodic
intervals. All mortgage securities in which the Portfolio invests will be issued
or guaranteed by the U.S. government, its agencies or instrumentalities. The
Portfolio may also invest up to 35% of its total assets in (1) notes, bonds and
discount notes of the following U.S. government agencies or instrumentalities:
Federal Home Loan Banks, Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), and Small Business Administration, (2) obligations of or
guaranteed by the full faith and credit of the U.S. government and repurchase
agreements collateralized by such obligations, and (3) time and savings deposits
in commercial or savings banks or in institutions whose accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC"). The Portfolio's investment
in time deposits will not exceed 10% of its total assets.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. government securities, certificates of deposit of banks having
total assets in excess of $5 billion and repurchase agreements.
CHARACTERISTICS OF THE MORTGAGE SECURITIES
IN WHICH THE PORTFOLIO INVESTS
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage securities,
are interests in pools of mortgage loans. Most mortgage securities are
pass-through securities, which means that they provide investors with payments
consisting of both principal and interest as mortgages in the underlying
mortgage pool are paid off by the borrower. The dominant issuers or guarantors
of mortgage securities today are GNMA, FNMA, and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
mortgage securities from pools of conventional and federally insured and/or
guaranteed residential mortgages obtained from various entities, including
savings and loan associations, savings banks, commercial banks, credit unions,
and mortgage bankers.
The adjustable interest rate feature of the mortgages underlying the mortgage
securities in which the Portfolio invests generally will act as a buffer to
reduce sharp changes in the Portfolio's net asset value in response to normal
interest rate fluctuations. As the interest rates on the mortgages underlying
the Portfolio's investments are reset periodically, yields of portfolio
securities gradually align themselves to reflect changes in market rates so that
the market value of the Portfolio's securities will remain relatively stable as
compared to fixed-rate instruments and should cause the net asset value of the
Portfolio to fluctuate less significantly than it would if the Portfolio
invested in more traditional long-term, fixed-rate debt securities. During
periods of rising interest rates, changes in the coupon rate lag behind changes
in the market rate, resulting in possibly a lower net asset value until the
coupon resets to market rates. Thus, investors could suffer some principal loss
if they sold their Portfolio shares before the interest rates on the underlying
mortgages are adjusted to reflect current market rates. During periods of
extreme fluctuations in interest rates, the Portfolio's net asset value
fluctuates as well. Since most mortgage securities in the Portfolio's portfolio
generally have annual reset caps of 100 to 200 basis points, short-term
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Portfolio
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgages, resulting in both higher current yields
and lower price fluctuations. Furthermore, if prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the
Portfolio generally is able to reinvest such amounts in securities with a higher
current rate of return. The Portfolio, however, does not benefit from increases
in interest rates to the extent that interest rates rise to the point where they
cause the current coupon of adjustable rate mortgage securities held as
investments by the Portfolio to exceed the maximum allowable annual or lifetime
reset limits (or "cap rates") for a particular mortgage. Also, the Portfolio's
net asset value could vary to the extent that current yields on mortgage-backed
securities are different than market yields during interim periods between
coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Portfolio. Further, because
of this feature, the value of ARMS is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate mortgages is that for
certain types of ARMS, the rate of amortization of principal, as well as
interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of interest
due to an ARMS holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. It is these special characteristics which are unique to adjustable-rate
mortgages that the Portfolio's investment manager believes make them attractive
investments in seeking to accomplish the Portfolio's investment objective.
Many mortgage securities which are issued or guaranteed by GNMA, FHLMC, or FNMA
("Certificates") are called pass-through Certificates because a pro rata share
of both regular interest and principal payments (less GNMA's, FHLMC's, or FNMA's
fees and any applicable loan servicing fees), as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Portfolio). The principal and interest on
GNMA securities are guaranteed by GNMA, which guarantee is backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities issued or guaranteed
by FNMA and FHLMC are not backed by the full faith and credit of the U.S.
government; however, they are generally considered to offer minimal credit
risks. The yields provided by these mortgage securities have historically
exceeded the yields on other types of U.S. government securities with comparable
maturities in large measure due to the prepayment risks. (See "Risks of Mortgage
Securities" below.)
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Portfolio may also invest in
CMOs issued and guaranteed by U.S. government agencies or instrumentalities. A
CMO is a mortgage-backed security that separates mortgage pools into short-,
medium- and long-term components. Each component pays a fixed rate of interest
at regular intervals. These components enable an investor such as the Portfolio
to more accurately predict the pace at which principal is returned. The
Portfolio will not invest in privately issued CMOs except to the extent that it
invests in the securities of entities that are instrumentalities of the U.S.
government. CMOs purchased by the Portfolio may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer, and the guarantee is collateralized by
U.S. government securities; or
(3) securities in which the proceeds of the issuance are invested in mortgage
securities, and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
RESETS. The interest rates paid on the ARMS and CMOs in which the Portfolio
invests generally are readjusted at intervals of one year or less to an
increment over some predetermined interest-rate index. There are three main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure such as a cost of funds index, or a moving average of
mortgage rates. Commonly utilized indices include the one-, three- and five-year
constant maturity Treasury rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-, three-, six-month or one-year London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS and CMOs
in which the Portfolio invests frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change up
or down (1) per reset or adjustment interval, and (2) over the life of the loan.
Some residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase transactions, in
which the Portfolio purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Portfolio in each agreement, with the value of
the underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Portfolio to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Portfolio might also incur disposition costs in liquidating the collateral.
The Portfolio, however, intends to enter into repurchase agreements only with
financial institutions such as broker-dealers and banks which are deemed
creditworthy by the Portfolio's investment manager. A repurchase agreement is
deemed to a loan by the Portfolio under the 1940 Act. The U.S. government
security subject to resale (the collateral) is held on behalf of the Portfolio
by a custodian bank approved by the Board and is held pursuant to a written
agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase U.S.
government obligations on a "when-issued" or "delayed delivery" basis. These
transactions are arrangements under which the Portfolio purchases securities
with payment and delivery scheduled for a future time, generally within 30 to 60
days. The price is subject to market fluctuation and the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. Although the Portfolio will generally buy
U.S. government securities on a when-issued basis with the intention of
acquiring such securities, it may sell such securities before the settlement
date if it is deemed advisable. When the Portfolio is the buyer in such a
transaction, it maintains, in a segregated account with its custodian bank, cash
or high-grade marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Portfolio engages in when-issued and delayed delivery transactions, it does so
only for the purpose of acquiring portfolio securities consistent with the
Portfolio's investment objectives and policies, and not for the purpose of
investment leverage. In when-issued and delayed delivery transactions, the
Portfolio relies on the seller to complete the transaction. The other party's
failure may cause the Portfolio to miss a price or yield considered
advantageous. Securities purchased on a when-issued or delayed delivery basis do
not generally earn interest until their scheduled delivery date. The Portfolio
is not subject to any percentage limit on the amount of its assets which may be
invested in when-issued purchase obligations.
MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage "dollar rolls" in
which the Portfolio sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar (name,
type, coupon and maturity) securities on a specified future date. During the
roll period, the Portfolio foregoes principal and interest paid on the
mortgage-backed securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Portfolio may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Portfolio's total
assets at the time of the most recent loan. The borrower must deposit with the
Portfolio's custodian bank collateral with an initial market value of at least
102% of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Portfolio engages in security loan arrangements
with the primary objective of increasing its income either through investing the
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the
Portfolio continues to be entitled to all dividends or interest on any loaned
securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
ILLIQUID INVESTMENTS. The Portfolio's policy is not to invest more than 10% of
its net assets, at the time of purchase, in illiquid securities. Illiquid
securities are generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the Portfolio has
valued them. They include, among others, repurchase agreements and time deposits
of more than seven days duration.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
PORTFOLIO TURNOVER. The Portfolio's portfolio turnover rate for the fiscal years
ended October 31, 1996 and 1995 was 24.63% and 20.16%, respectively. High
portfolio turnover may increase the Portfolio's transaction costs.
OTHER POLICIES AND INVESTMENT RESTRICTIONS. The Portfolio is subject to a number
of additional investment restrictions that limit its activities to some extent.
Some of these restrictions may only be changed with shareholder approval. A list
of these restrictions and more information about the Portfolio's investment
policies are contained in Part B of this registration statement.
ADVANTAGES OF INVESTING IN THE PORTFOLIO
The Portfolio enables its shareholders to invest easily in mortgage securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Any guarantee will extend to the payment of interest and principal due on the
mortgage securities and will not provide any protection from fluctuations in the
market value of the mortgage securities. The Portfolio's investment manager
believes that by investing primarily in mortgage securities that provide for
variable rates of interest, the Portfolio achieves a higher, more consistent and
less volatile net asset value than is characteristic of mutual funds that invest
primarily in mortgage securities paying a fixed rate of interest.
Principal payments received on the Portfolio's mortgage securities are
reinvested by the Portfolio in other securities. The securities may have a
higher or lower yield than the mortgage securities already held by the
Portfolio, depending upon market conditions.
An investment in the Portfolio provides liquidity for the investor, who may
redeem at the current net asset value at any time in accordance with procedures
described under the caption "How to Sell Shares of the Portfolio" discussed
under Item 8 below.
POTENTIAL RISKS OF INVESTING IN THE PORTFOLIO
The value of the shareholder's shares will increase as the value of the
securities owned by the Portfolio increases and will decrease as the value of
the Portfolio's investments decrease. In this way, shareholders participate in
any change in the value of the securities owned by the Portfolio. In addition to
the factors that affect the value of any particular security that the Portfolio
owns, the value of Portfolio shares may also change with movements in the bond
market as a whole.
MORTGAGE SECURITIES. The mortgage securities in which the Portfolio principally
invests differ from conventional bonds in that principal is paid back over the
life of the mortgage security rather than at maturity. As a result, the holder
of the mortgage securities (i.e., the Portfolio) receives monthly scheduled
payments of principal and interest and may receive unscheduled principal
payments representing prepayments on the underlying mortgages. When the holder
reinvests the payments and any unscheduled prepayments of principal it receives,
it may receive a rate of interest that is lower than the rate on the existing
mortgage securities. For this reason, mortgage securities may be less effective
than other types of U.S. government securities as a means of "locking in"
long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
generally varies inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. Mortgage securities,
while having less risk of a decline during periods of rapidly rising rates, may
also have less potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased prepayments of
mortgages as interest rates decline. In addition, to the extent mortgage
securities are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the holder's principal
investment to the extent of the premium paid. On the other hand, if mortgage
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal will increase current and total
returns and will accelerate the recognition of income which, when distributed to
shareholders, is taxable as ordinary income.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Portfolio's holdings and thus affect the Portfolio's share prices. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Portfolio's
shares. Interest rates have increased and decreased in the past. These changes
are unpredictable and may happen again in the future.
GENERAL INFORMATION
The Trust is authorized to issue an unlimited number of shares of beneficial
interest. All shares of the Trust have one vote, and, when issued, are fully
paid and non-assessable.
The Trust has two series and was formerly named the Franklin Institutional U.S.
Government ARM Fund. On October 18, 1991, the Board approved a change in the
Trust's name and the addition of a second series of the Trust, the Adjustable
Rate Securities Portfolio, the shares of beneficial interest of which are
available only to other investment companies. Additional series may be added in
the future by the Board, the assets and liabilities of which will be separate
and distinct from any other series. On June 15, 1993, the Board approved a
change in the fiscal year end of the Trust to October 31 of each year from
January 31.
5. MANAGEMENT OF THE FUND
MANAGEMENT OF THE PORTFOLIO
THE BOARD. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Trust's and the Portfolio's
day-to-day operations.
INVESTMENT MANAGER. Franklin Advisers, Inc. ("Advisers"), at the address of
the registrant shown on the cover of this amendment to the registration
statement, manages the Portfolio's assets and makes its investment decisions.
Advisers also performs similar services for other funds. It is wholly owned
by Franklin Resources, Inc. ("Resources") a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $179 billion in assets.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolio is: Roger Bayston since 1991, Anthony Coffey since 1991 and Jack
Lemein since inception.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned
his Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with the Franklin Templeton Group since 1989.
He is a member of several securities industry-related associations.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
Pursuant to the management agreement, Advisers supervises and implements the
Portfolio's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Portfolio's business. Advisers
performs similar services for other funds and there may be times when the
actions taken with respect to the portfolio will differ from those taken by
Advisers on behalf of other funds. Neither Advisers (including its affiliates)
nor its officers, directors or employees nor the officers and trustees of the
Trust are prohibited from investing in securities held by the Portfolio or other
funds which are managed or administered by Advisers to the extent such
transactions comply with the Portfolio's Code of Ethics.
The Portfolio is responsible for its own operating expenses including, but not
limited to, Advisers' fee; taxes, if any; custodian, legal and auditing fees;
fees and expenses of trustees who are not members of, affiliated with or
interested persons of Advisers; salaries of any personnel not affiliated with
Advisers; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Portfolio's net assets; and printing
and other expenses which are not expressly assumed by Advisers.
Under the management agreement, the Portfolio is obligated to pay Advisers a fee
computed daily and payable monthly, at the annual rate as follows: 40/100 of 1%
for the first $5 billion of its average daily net assets; plus 35/100 of 1% of
its average daily net assets in excess of $5 billion up through $10 billion;
33/100 of 1% of its average daily net assets in excess of $10 billion up through
$15 billion; and 30/100 of 1% of its average daily net assets in excess of $15
billion.
During the fiscal year ended October 31, 1996, management fees before any
advance waiver, totaled 0.40% of the average daily net assets of the Portfolio.
Total operating expenses, including management fees before any advance waiver,
totaled 0.42% of the average daily net assets of the Portfolio. Pursuant to an
agreement by Advisers to limit its fees, the Portfolio paid management fees
totaling 0.23% of the average daily net assets of the Portfolio and operating
expenses totaling 0.25%. This arrangement may be terminated by Advisers at any
time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Portfolio shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. (Further information is included under "The Portfolio's Policies
Regarding Brokers Used on Portfolio Transactions" in Part B Item 17.)
The response to Item 5A has been omitted pursuant to paragraph 4 of Instruction
F of the General Instructions to Form N-1A.
6. CAPITAL STOCK AND OTHER SECURITIES
As discussed above, the Trust is a Delaware business trust. The Agreement and
Declaration of Trust permits the trustees to issue an unlimited number of full
and fractional shares of beneficial interest, with a par value of $.01 per
share, which may be issued in any number of series. Currently the Trust has two
series: one series representing interests in the Portfolio and the other series
representing interests in the Adjustable Rate Securities Portfolio. When issued
for payment as described in this registration statement as amended, shares are
validly issued, fully paid, and non-assessable and have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by each series and the net
assets of such series upon liquidation or dissolution.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
CONTROL PERSONS
As of February 3, 1997, the Franklin Adjustable U.S. Government Securities Fund
beneficially owned 40,694,648 shares (or 97.8%) of the Portfolio's outstanding
shares and, accordingly, may be deemed to be a controlling person under the 1940
Act.
DISTRIBUTIONS TO SHAREHOLDERS
As indicated below in response to Items 7 and 8, the Portfolio's shares have not
been registered under the Securities Act of 1933 (the "1933 Act"), which means
that its shares are restricted securities which may not be sold, redeemed or
reinvested unless registered or pursuant to an available exemption from that
Act. Accordingly, to the extent distributions to shareholders are reinvested in
additional shares, as discussed below, such transactions are subject to the
requirements of the 1933 Act.
There are two types of distributions which the Portfolio may make to its
shareholders:
1. INCOME DIVIDENDS. The Portfolio receives income primarily in the form of
interest and other income derived from its investments. This income, less the
expenses incurred in the Portfolio's operations, is its net investment income
from which income dividends may be distributed. Thus, the amount of dividends
paid per share may vary with each distribution. The Portfolio ordinarily
declares dividends from its net investment income on each day its net asset
value is calculated. The Portfolio's earnings for Saturdays, Sundays and
holidays are declared as dividends on the next business day. Daily allocations
of dividends will commence on the day funds are wired to the Portfolio. The
amount of the dividend may fluctuate from day to day depending on changes in the
factors that comprise the Portfolio's net investment income.
Dividends are declared daily and are reinvested monthly in the form of
additional shares of the Portfolio at the net asset value per share generally at
the close of business on the last business day of the month. Shareholders may
request to have their dividends paid out monthly in cash. Shareholders redeeming
all their shares at any time during the month will receive all dividends to
which they are entitled together with the redemption check.
2. CAPITAL GAIN DISTRIBUTIONS. The Portfolio may derive capital gains or losses
in connection with sales or other dispositions of its portfolio securities.
Distributions by the Portfolio derived from net short-term and net long-term
capital gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect any net short-term
and net long-term capital gains realized by the Portfolio as of October 31 of
such year. The Portfolio reserves the right to make more than one distribution
derived from net short-term and net long-term capital gains in any year or to
adjust the timing of these distributions for operational or other reasons.
TAX EFFECTS ON AN INVESTMENT IN THE PORTFOLIO
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders.
TAXATION OF THE PORTFOLIO
Each separate series of the Trust is treated as a separate entity for federal
income tax purposes. The Portfolio has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). By distributing all
of its income and meeting certain other requirements relating to the sources of
its income and diversification of its assets, the Portfolio will not be liable
for federal income or excise taxes.
TAXATION OF SHAREHOLDERS
For federal income tax purposes, any income dividends received from the
Portfolio, as well as any distributions derived from the excess of net
short-term capital gain over net long-term capital loss, are treated as ordinary
income whether received in cash or in additional shares. Distributions derived
from the excess of net long-term capital gain over net short-term capital loss
are treated as long-term capital gain regardless of the length of time Portfolio
shares have been owned and regardless of whether received in cash or in
additional shares.
It is not expected that any of the distributions to be paid by the Portfolio
will qualify for the corporate dividends received deduction.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, are treated as if received by the
shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Portfolio's shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Portfolio's shares, held for six months or less, is treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. The Portfolio will inform shareholders of the source of dividends
and distributions at the time they are paid and will promptly after the close of
each calendar year advise shareholders of the tax status for federal income tax
purposes of such dividends and distributions.
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned from direct obligations of the U.S.
government, none of the distributions of the Portfolio during the fiscal year
ended October 31, 1996 qualified for such tax-free treatment. Investments in
mortgage-backed securities (including GNMA, FNMA and FHLMC securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors with respect to the applicability of state
and local intangible property or income taxes to shares of the Portfolio and
distributions and redemption proceeds received from the Portfolio.
Shareholders who are not considered U.S. persons for federal income tax purposes
should consult with their financial or tax advisor regarding the applicability
of U.S. withholding taxes to distributions received by them from the Portfolio
and the application of foreign tax laws to these distributions.
Additional information in response to this item is contained under the
discussion captioned "General Information" in Item 4, above.
7. PURCHASE OF SECURITIES
The Portfolio's shares have not been registered under the 1933 Act, which means
that its shares may not be sold publicly. However, the Portfolio's shares may be
sold through private placements pursuant to available exemptions from that Act.
Shares of the Portfolio are sold only to other investment companies. All shares
are sold at net asset value without a sales charge. Shares are purchased at the
net asset value next determined after the Portfolio receives the order in proper
form. Funds should be wired to the Portfolio's bank account at Bank of America,
the Portfolio's custodian, for credit to the Portfolio's account. All
investments in the Portfolio are credited to the shareholder's account in the
form of full and fractional shares of the Portfolio (rounded to the nearest
1/1000 of a share). The Portfolio does not issue share certificates.
Shares may generally be purchased on business days except when the New York
Stock Exchange (the "NYSE") is closed. Federal Funds wire purchase orders are
not accepted on days when the Federal Reserve Bank system and the Portfolio's
custodian bank are closed.
VALUATION OF PORTFOLIO SHARES
The Portfolio is open for business each day the NYSE is open. The net asset
value per share of the Portfolio is determined as of the scheduled close of the
NYSE, generally 1:00pm Pacific time.
To calculate net asset value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding.
For additional information on how Portfolio shares are valued, refer to the
section titled "Calculation of Net Asset Value" in Part B, Item 19.
8. REDEMPTION OR REPURCHASE
HOW TO SELL SHARES OF THE PORTFOLIO
As stated above in response to Item 7, "Purchase of Securities," the Portfolio's
shares are restricted securities which may not be sold unless registered or
pursuant to an available exemption from the 1933 Act.
Redemptions are processed on any day on which the Portfolio is open for business
and are effected at the Portfolio's net asset value next determined after the
Portfolio receives a redemption request in good form.
Payment for redeemed shares is made promptly, but in no event later than seven
days after receipt of the redemption request in good form. Proceeds for
redemption orders cannot be wired on those business days when the Federal
Reserve Bank System and the custodian bank are closed. The right of redemption,
however, may be suspended or the date of payment postponed in accordance with
the rules under the 1940 Act. Redemptions are taxable events, and the amount
received upon redemption may be more or less than the amount paid for the shares
depending upon the fluctuations in the market value of the assets owned by the
Portfolio.
9. PENDING LEGAL PROCEEDINGS
Not Applicable
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
FORM N-1A, PART B:
10. COVER PAGE
Not Applicable
11. TABLE OF CONTENTS
Not Applicable
12. GENERAL INFORMATION AND HISTORY
Not Applicable
13. INVESTMENT OBJECTIVES AND POLICIES
As noted in response to Item 4, the Portfolio's investment objective is to seek
a high level of current income, consistent with lower volatility of principal by
following policies designed to achieve its objective. In addition to the
policies stated in response to Item 4, the Portfolio has adopted the following
restrictions as fundamental policies. These restrictions may not be changed
without the approval of a majority of the outstanding voting securities of the
Portfolio. Under the Investment Company Act of 1940, as amended (the "1940
Act"), this means the approval of (i) more than 50% of the outstanding shares of
the Portfolio or (ii) 67% or more of the shares of the Portfolio present at a
shareholder meeting if more than 50% of the outstanding shares of the Portfolio
are represented at the meeting in person or by proxy, whichever is less. The
Portfolio MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in an amount up to 20% of total asset value. The Portfolio will
not purchase additional investment securities while borrowings in excess of 5%
of total assets are outstanding.
2. Buy any securities on "margin" or sell any securities "short," except for any
delayed delivery or when-issued securities as described in the registration
statement as amended.
3. Lend any funds or other assets, except by the purchase of bonds, debentures,
notes or other debt securities as described in its registration statement as
amended, and except that securities of the Portfolio may be loaned to qualified
broker-dealers or other institutional investors if at least 102% cash collateral
is pledged and maintained by the borrower, provided such loans may not be made
if, as a result, the aggregate of such loans exceeds 10% of the value of the
Portfolio's total assets at the time of the most recent loan. Also, the entry
into repurchase agreements is not considered a loan for purposes of this
restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Portfolio may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the total assets of the Portfolio in
the securities of any one issuer, but this limitation does not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer, if to the knowledge of the Portfolio, one or
more of its officers, trustees or investment adviser, own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate. (Does not preclude investments in
securities collateralized by real estate or interests therein.)
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development program.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. ("Advisers") or its
affiliates.
13. Issue senior securities as defined in the 1940 Act except that this
restriction will not prevent the Portfolio from entering into repurchase
agreements or making borrowings, mortgages and pledges as permitted by
restriction #1 above.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
OTHER POLICIES. There are no restrictions or limitations on investments in
obligations of the U.S. government, or of corporations chartered by Congress as
federal government instrumentalities. The underlying assets of the Portfolio may
be retained in cash, including cash equivalents which are Treasury bills, and
short-term bank obligations such as certificates of deposit, bankers'
acceptances and repurchase agreements. It is intended, however, that only so
much of the underlying assets of the Portfolio be retained in cash as is deemed
desirable or expedient under then-existing market conditions. As noted elsewhere
in the registration statement as amended, the Portfolio may invest up to 10% of
its net assets in illiquid securities. Investments in savings deposits are
generally considered illiquid and will, together with other illiquid
investments, not exceed 10% of the Portfolio's net assets.
The Portfolio may purchase securities issued or guaranteed by the U.S.
government, or one of its agencies or instrumentalities. Government National
Mortgage Association ("GNMA") guarantees are backed by the full faith and
credit of the U.S. Treasury. No assurances can be given, however, that the
U.S. government will provide such financial support to the obligations of the
other U.S. government agencies or instrumentalities in which the Portfolio
invests, since it is not obligated to do so. These agencies and
instrumentalities are supported by either the issuer's right to borrow an
amount limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality, or the credit of the agency or
instrumentality.
Several of the funds in the Franklin Group of FundsAE, including the Portfolio,
are major purchasers of government securities and seek to negotiate attractive
prices for such securities and to pass on any savings derived from such
negotiations to their shareholders in the form of higher current yields.
FLOATERS. The Portfolio may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, at an accelerated speed, to
short-term interest rates. The Portfolio may also invest up to 5% of its assets
in super floaters. These are instruments that float at a greater than 1 to 1
ratio with the London Interbank Offered Rate ("LIBOR") and are used as a hedge
against the risk that LIBOR floaters become "capped" and can no longer float
higher.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). The Portfolio may also
invest in REMICs issued and guaranteed by U.S. government agencies or
instrumentalities.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to Collateralized Mortgage
Obligations ("CMOs") in that they issue multiple classes of securities. As with
CMOs, the mortgages which collateralize the REMICs in which the Portfolio may
invest include mortgages backed by GNMA certificates or other mortgage
pass-throughs issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
STRIPPED MORTGAGE SECURITIES. The Portfolio may also invest in stripped mortgage
securities, which are derivative multi-class mortgage securities. The stripped
mortgage securities in which the Portfolio may invest are issued and guaranteed
by agencies or instrumentalities of the U.S. government. Stripped mortgage
securities have greater market volatility than other types of mortgage
securities in which the Portfolio invests.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class receiving some of the interest and most of the principal from the mortgage
assets, while the other class receives most of the interest and the remainder of
the principal. In the most extreme case, one class receives all of the interest
(the interest-only or "IO" class), while the other class receives all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive not only to changes in prevailing interest rates
but also to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the securities are rated in the highest rating
categories, AAA or Aaa, by Standard & Poor's Corporation or Moody's Investors
Service, respectively.
Stripped mortgage securities are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. As these
securities were only recently developed, traditional trading markets have not
yet been established for all such securities. Accordingly, some of these
securities may generally be illiquid. The staff of the SEC (the "Staff") has
indicated that only government-issued IO or PO securities backed by fixed-rate
mortgages may be deemed to be liquid, if procedures with respect to determining
liquidity are established by a fund's board. The Portfolio's Board of Trustees
(the "Board") may, in the future, adopt procedures which would permit the
Portfolio to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 10% of the Portfolio's net assets. Such position may be changed in
the future, without notice to shareholders, in response to the Staff's continued
reassessment of this matter as well as to changing market conditions.
14. MANAGEMENT OF THE REGISTRANT
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Portfolio,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's and the Portfolio's day-to-day operations. The
affiliations of the officers and Board members and their principal occupations
for the past five years are shown below. Members of the Board who are considered
"interested persons" of the Trust under the 1940 Act are indicated by an
asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Harris J. Ashton (64)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director, trustee
or managing general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 31 of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (40)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President and Trustee
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.
(software firm); Director, FischerImaging Corporation (medical imaging systems);
and director or trustee, as the case may be, of 27 of the investment companies
in the Franklin Templeton Group of Funds.
*William J. Lippman (72)
One Parker Plaza
Fort Lee, NJ 07024
Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc. and officer
and/or director or trustee of seven of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information and financial services);
Director, Fund American Enterprises Holdings, Inc. (financial services), MCI
Communications Corporation, CCC Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Source One Mortgage Services
Corporation (financial services), Shoppers Express (home shopping), Spacehab,
Inc. (aerospace services); and director, trustee or managing general partner, as
the case may be, of 53 of the investment companies in the Franklin Templeton
Group of Funds; formerly Chairman, Hambrecht and Quist Group (venture capital
and investment banking); Director, H & Q Healthcare Investors (investment
trust); and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin Templeton Services, Inc.; Executive Vice
President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most of the other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
The table above shows the officers and Board members who are affiliated with
Franklin Templeton Distributors, Inc. ("Distributors") and Advisers.
Nonaffiliated members of the Board are currently paid $50 per month plus $50 per
meeting attended. As shown above, some of the nonaffiliated Board members also
serve as directors, trustees or managing general partners of other investment
companies in the Franklin Templeton Group of Funds. They may receive fees from
these funds for their services. The following table provides the total fees paid
to nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES RECEIVED IN THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH
NAME FROM THE FUNDS** EACH SERVES***
TRUST*
Frank H. Abbott, III $1,150 $165,236 32
Harris J. Ashton $1,150 $343,591 56
S. Joseph Fortunato $1,150 $360,411 58
David Garbellano $1,150 $148,916 31
Frank W.T. LaHaye $1,100 $139,233 27
Gordon S. Macklin $1,150 $335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Trust or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Franklin Resources, Inc.
("Resources") may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively,
of Charles E. Johnson.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
a. As of February 3, 1997, Franklin Adjustable U.S. Government Securities Fund,
a series of the Franklin Investors Securities Trust, ("FIST") owned 97.8% of the
outstanding voting securities of the Portfolio. Accordingly, the Franklin
Adjustable U.S. Government Securities Fund could be deemed to control the
Portfolio, as that term is defined under the 1940 Act. FIST was organized as a
Massachusetts business trust and is located at the address of the registrant set
forth on the cover of this amendment to the registration statement.
b. Except for the companies referred to in this item, no person was known to
hold beneficially or of record more than 5% of the Portfolio's outstanding
shares of beneficial interest.
c. Not Applicable
16. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Portfolio's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Portfolio to buy, hold
or sell and the selection of brokers through whom the Portfolio's portfolio
transactions are executed. Advisers activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Portfolio's investment activities. Under the terms of the management agreement,
Advisers provides office space and office furnishings, facilities and equipment
required for managing the business affairs of the Portfolio; maintains all
internal bookkeeping, clerical, secretarial and administrative personnel and
services. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Trust and its Portfolios.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Portfolio. Similarly, with
respect to the Portfolio, Advisers is not obligated to recommend, buy or sell,
or to refrain from recommending, buying or selling any security that Advisers
and access persons, as defined by the 1940 Act, may buy or sell for its or their
own account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Portfolio or other funds that
it manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Portfolio's Code of Ethics.
Please see "Investment Advisory and Other Services - Summary of Code of Ethics"
below.
MANAGEMENT FEES. For the fiscal years ended October 31, 1996, 1995 and 1994,
management fees, before any advance waiver, totaled $1,891,159, $2,456,413 and
$4,787,133, respectively. Under an agreement by Advisers to limit its fees, the
Portfolio paid management fees totaling $1,090,876, $68,077 and $0 during each
of these periods, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until February 28,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Portfolio's outstanding voting securities,
and in either event by a majority vote of the Board members who are not parties
to the management agreement or interested persons of any such party (other than
as members of the Board), cast in person at a meeting called for that purpose.
The management agreement may be terminated without penalty at any time by the
Board or by a vote of the holders of a majority of the Portfolio's outstanding
voting securities, or by Advisers on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
SHAREHOLDER SERVICING AGENT. Franklin/Templeton Investor Services, Inc.
("Investor Services"), a wholly owned subsidiary of Resources, is the Trust's
shareholder servicing agent and acts as the Trust's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a
fixed fee per account.
CUSTODIANS. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Portfolio. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Portfolio shares. The custodians do not participate in
decisions relating to the purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Portfolio's independent auditors. During the fiscal year ended
October 31, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Annual Report to
shareholders of the Trust for the fiscal year ended October 31, 1996.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
17. BROKERAGE ALLOCATION
THE PORTFOLIO'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
Since most purchases by the Portfolio are principal transactions at net prices,
the Portfolio incurs little or no brokerage costs. The Portfolio deals directly
with the selling or buying principal or market maker without incurring charges
for the services of a broker on its behalf, unless it is determined that a
better price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The Portfolio seeks to
obtain prompt execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical information,
as well as for special services provided by the dealers in the execution of
orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from brokers or dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Advisers to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staff of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Trust's officers are satisfied that the best execution is obtained,
consistent with internal policies the sale of Portfolio shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, Inc., it may sometimes receive certain fees when the Portfolio tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Portfolio, any portfolio securities
tendered by the Portfolio will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers will
be reduced by the amount of any fees received by Distributors in cash, less any
costs and expenses incurred in connection with the tender.
If purchases or sales of securities by the Portfolio and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by Advisers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Portfolio is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Portfolio.
During the fiscal years ended October 31, 1996, 1995 and 1994, the Portfolio
paid no brokerage commissions.
As of October 31, 1996, the Portfolio did not own securities of its regular
broker-dealers.
18. CAPITAL STOCK AND OTHER SECURITIES
The information provided in response to this item is in addition to the
information provided in response to Item 4 in Part A.
Shares for an initial investment as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are credited to an
account in the name of an investor on the books of the Portfolio. The Portfolio
does not issue share certificates. Shares have no preemptive, subscription or
conversion rights.
An investment in the Portfolio is not a deposit insured by the FDIC and is not
an obligation of or guaranteed by any bank.
19. PURCHASE, REDEMPTION AND PRICING OF
SECURITIES BEING OFFERED
The information provided in response to this item is in addition to the
information provided in response to Items 7 and 8 in Part A.
REDEMPTIONS IN KIND
The Trust has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of each series' net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the Securities and Exchange Commission. In the
case of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of the
Portfolio, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Portfolio. In
these circumstances, the securities distributed would be valued at the price
used to compute the Portfolio's net assets and you may incur brokerage fees in
converting the securities to cash. The Portfolio does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
CALCULATION OF NET ASSET VALUE
We calculate the net asset value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this amendment to the registration statement, the
Portfolio is informed that the NYSE observes the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Portfolio, cash
and receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. 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. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the net asset value of the Portfolio's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Portfolio's net asset value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, 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 issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Portfolio may utilize a pricing service, bank or Securities Dealer to perform
any of the above described functions.
REINVESTMENT DATE
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount or value of
the shares acquired.
20. TAX STATUS
The information provided in response to this item is in addition to the
information provided in response to Item 6 in Part A.
As stated in response to Item 6, the Portfolio has elected and intends to
continue to qualify to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The
Board reserves the right not to maintain the qualification of the Portfolio as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, the Portfolio will be subject to
federal and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Portfolio's
available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Portfolio) to shareholders by December 31 of each year in order to
avoid the imposition of a federal excise tax. Under these rules, certain
distributions which are declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder until the following
January, are treated for tax purposes as if paid by the Portfolio and received
by the shareholder on December 31 of the calendar year in which they are
declared. The Portfolio intends, as a matter of policy, to declare dividends in
December as necessary to avoid the imposition of this tax, but the Portfolio
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.
Redemptions and exchanges of the Portfolio's shares are taxable transactions for
federal and state income tax purposes. For most shareholders, gain or loss will
be recognized in an amount equal to the difference between the shareholder's
basis in its shares and the amount received, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss is capital gain or loss and is long-term for federal income tax purposes
if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares is disallowed to
the extent other shares of the Portfolio are purchased (through reinvestment of
dividends or otherwise) within 30 days before or after such redemption.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain with respect to
such shares.
21. UNDERWRITERS
Not Applicable
22. CALCULATION OF PERFORMANCE DATA
Not Applicable
23. FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
ADJUSTABLE RATE SECURITIES PORTFOLIO
FORM N-1A, PART A:
ITEM
Responses to Items 1 through 3 have been omitted pursuant to paragraph 4 of
Instruction F of the General Instructions to Form N-1A.
4. GENERAL DESCRIPTION OF REGISTRANT
ABOUT THE PORTFOLIO
The Adjustable Rate Securities Portfolio ("Portfolio") is one of two no-load,
open-end, diversified series of the Adjustable Rate Securities Portfolios (the
"Trust"), a management investment company, commonly called a mutual fund. The
Trust was organized as a Delaware business trust on February 15, 1991 and is
registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Trust's other
series is the U.S. Government Adjustable Rate Mortgage Portfolio. As permitted
by applicable law, the Portfolio's shares of beneficial interest, par value of
$.01 per share, are sold only to other investment companies.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
UNITED STATES ("U.S.") GOVERNMENT. SHARES OF THE PORTFOLIO INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTMENT OBJECTIVE AND POLICIES OF THE PORTFOLIO
The investment objective of the Portfolio is to seek a high level of current
income, consistent with lower volatility of principal than a fund that invests
in fixed-rate securities. The investment objective is a fundamental policy of
the Portfolio and may not be changed without shareholder approval. Of course,
there is no assurance that the Portfolio's investment objective will be
achieved.
The Portfolio will seek to achieve its investment objective by investing at
least 65% of its total assets in adjustable rate securities, collateralized by
or representing an interest in mortgages, including adjustable rate mortgage
securities ("ARMS") issued or guaranteed by private institutions or by the U.S.
government, its agencies or instrumentalities, and other adjustable rate
asset-backed securities (collectively, "ARS,") which have interest rates that
reset at periodic intervals. The Portfolio may invest in ARMS issued by
commercial banks, savings and loan institutions, insurance companies, including
private mortgage insurance companies, mortgage bankers, mortgage conduits of
investment banks, finance companies, real estate companies and private
corporations and others, so long as they are consistent with the Portfolio's
investment objective. Private mortgage securities which are not issued or
guaranteed by the U.S. government are generally structured with one or more
types of credit enhancement.
The Portfolio may also invest up to 35% of its total assets in: (a) notes, bonds
and discount notes of Federal Home Loan Banks, Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), and Small Business Administration; (b)
obligations of or guaranteed by the full faith and credit of the U.S. government
and repurchase agreements collateralized by such obligations; (c) time and
savings deposits (including certificates of deposit) in commercial or savings
banks or in institutions whose accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC"); and (d) asset-backed and mortgage-backed
securities issued by private and government entities. These securities may
either be fixed rate or adjustable rate securities. The Portfolio's investment
in time deposits will not exceed 10% of its total assets.
The Portfolio will only invest in securities rated at least AA by Standard &
Poor's Corporation ("S&P") or Aa by Moody's Investors Service ("Moody's"), two
nationally recognized statistical rating agencies. The Portfolio may also invest
in unrated securities if the Portfolio's investment manager determines that they
are of comparable quality to the ratings above.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. government securities, certificates of deposit of banks having
total assets in excess of $5 billion, and repurchase agreements.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. A mortgage security is an
interest in a pool of mortgage loans. The primary issuers or guarantors of
mortgage securities are GNMA, FNMA, and FHLMC. GNMA creates mortgage securities
from pools of government guaranteed or insured (Federal Housing Authority or
Veterans Administration) mortgages originated by mortgage bankers, commercial
banks, and savings and loan associations. FNMA and FHLMC issue mortgage
securities from pools of conventional and federally insured and/or guaranteed
residential mortgages obtained from various entities, including savings and loan
associations, savings banks, commercial banks, credit unions, and mortgage
bankers.
The principal and interest on GNMA securities are guaranteed by GNMA and the
guarantee is backed by the full faith and credit of the U.S. government.
Mortgage securities of FNMA and FHLMC are not backed by the full faith and
credit of the U.S. government. FNMA guarantees full and timely payment of all
interest and principal, and FHLMC guarantees timely payment of interest and the
ultimate collection of principal. Securities issued by FNMA are supported by the
agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by FHLMC are supported only by the credit of
the agency. There is no guarantee that the government will support government
agency securities and, accordingly, they may involve a risk of non-payment of
principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, securities issued by them are
generally considered to be high quality investments having minimal credit risks.
The yields on these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities due largely
to their prepayment risk. (See "What are the Portfolio's Potential Risks?")
The Portfolio may invest in private mortgage securities. Private issuers of
mortgage securities may be both the originators of the underlying mortgage loans
as well as the guarantors of the mortgage securities. Pools of conventional
residential mortgage loans created by private issuers generally offer a higher
rate of interest than government and government-related pools because there are
no direct or indirect government guarantees of payment. Timely payment of
interest and principal is, however, generally supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurance companies or the mortgage poolers. The insurance and
guarantees and the creditworthiness of their issuers will be considered when
determining whether a mortgage security meets the Portfolio's quality standards.
The Portfolio may buy mortgage securities without insurance or guarantees if,
through an examination of the loan experience and practices of the poolers,
Advisers determines that the securities meet the Portfolio's quality standards.
Most mortgage securities are pass-through securities. This means that they
provide investors with payments consisting of a pro rata share of both regular
interest and principal payments, as well as unscheduled early prepayments, on
the underlying mortgage pool. Guarantees as to the timely payment of principal
and interest do not extend to the value or yield of mortgage securities nor do
they extend to the value of the Portfolio's or the Fund's shares.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage securities,
are interests in pools of mortgage loans. The interest rates on the mortgages
underlying ARMS are reset periodically. As the interest rates are reset, the
yields of the securities will gradually align themselves to reflect changes in
market rates so that their market value will remain relatively stable as
compared to fixed rate securities. As a result, the Portfolio's Net Asset Value
should fluctuate less significantly than if the Portfolio invested in more
traditional long-term, fixed rate securities. During periods of rising interest
rates, changes in the interest rates on mortgages underlying ARMS lag behind
changes in the market rate. This may result in a lower Net Asset Value until the
interest rate resets to market rates. Thus, you could suffer some principal loss
if you sell your shares of the Fund before the interest rates on the underlying
mortgages in the Portfolio reset to reflect current market rates. During periods
of extreme fluctuation in interest rates, the Portfolio's and thus the Fund's
Net Asset Value will fluctuate as well. A portion of the ARMS in which the
Portfolio may invest may not reset for up to five years. Since most mortgage
securities held by the Portfolio will generally have annual reset limits or caps
of 100 to 200 basis points, short-term fluctuations in interest rates above
these levels could cause these mortgage securities to "cap out" and behave more
like long-term, fixed rate debt securities.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, the Portfolio may participate in increases in interest rates,
resulting in both higher current yields and lower price fluctuations. This
differs from fixed rate mortgages, which generally decline in value during
periods of rising interest rates. If prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, the Portfolio
generally will be able to reinvest these amounts in securities with a higher
current rate of return. The Portfolio, however, will not benefit from increases
in interest rates to the extent that interest rates exceed the maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage
security.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Portfolio. Further, because
of this feature, the value of ARMS is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate mortgages is that for
certain types of ARMS, the rate of amortization of principal, as well as
interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of interest
due to an ARMS holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. It is these special characteristics which are unique to adjustable-rate
mortgages that the Portfolio's investment manager believes make them attractive
investments in seeking to accomplish the Portfolio's objective.
Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term, fixed-rate mortgages. As new types
of mortgage-related securities are developed and offered to investors, the
Portfolio may invest in them if doing so is consistent with the Portfolio's
objective, policies and quality standards.
ADJUSTABLE RATE SECURITIES. The Portfolio will invest primarily in ARS. ARS are
debt securities with interest rates which, rather than being fixed, are adjusted
periodically pursuant to a pre-set formula and interval. As stated above, the
Portfolio invests primarily in ARS. The interest paid on ARS and, therefore, the
current income earned by the Portfolio by investing in ARS, will be a function
primarily of the indices upon which adjustments are based and the applicable
spread relating to the ARS. (See the discussion of "Resets" below.)
The interest rates paid on ARS are generally readjusted periodically to an
increment over the chosen interest rate index. These readjustments occur at
intervals ranging from one to sixty months. The degree of volatility in the
market value of the securities held by the Portfolio and of the net asset value
of Portfolio shares will be a function primarily of the length of the adjustment
period and the degree of volatility in the applicable indeces. It will also be a
function of the maximum increase or decrease of the interest-rate adjustment on
any one adjustment date, in any one year and over the life of the securities.
These maximum increases and decreases are typically referred to as "caps" and
"floors," respectively. The Portfolio does not seek to maintain an overall
average cap or floor, although Advisers considers caps or floors in selecting
ARS for the Portfolio.
While the Portfolio does not attempt to maintain a constant net asset value per
share, during periods in which short-term interest rates move within the caps
and floors of the securities held by the Portfolio, the fluctuation in market
value of the ARS in the Portfolio is expected to be relatively limited, since
the interest rate on the Portfolio's ARS generally adjust to market rates within
a short period of time. In periods of substantial short-term volatility in
short-term interest rates, the value of the Portfolio's holdings may fluctuate
more substantially since the caps and floors of its ARS may not permit the
interest rate to adjust to the full extent of the movements in short-term rates
during any one adjustment period. In the event of dramatic increases in interest
rates, the lifetime caps on the ARS may prevent such securities from adjusting
to prevailing rates over the term of the loans. In this case, the market values
of the ARS may be substantially reduced with a corresponding decline in the
Portfolio's net asset value.
For a discussion of the Portfolio's investments in adjustable-rate asset-backed
securities, including the risk of such investments, see "Investment Objective
and Policies of the Portfolio - Asset-Backed
Securities" below.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMO") AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMIC") AND MULTI-CLASS PASS-THROUGHS. The Portfolio may invest in
CMOs and REMICs issued or guaranteed by U.S. government agencies or
instrumentalities. It may also invest in CMOs and REMICs issued by certain
financial institutions and other mortgage lenders and in multi-class
pass-through securities.
CMOs and REMICs are debt instruments issued by special purpose entities that are
secured by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are equity interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on underlying collateral provides the funds to pay debt service on CMOs
or REMICs or to make scheduled distributions on the multi-class pass-through
securities. Unless the context indicates otherwise, the discussion of CMOs below
may also apply to REMICs and multi-class pass-through securities.
CMOs are issued in multiple classes. Each class, often referred to as a
"tranche," is issued at a specified coupon rate or adjustable rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than the
stated maturities or final distribution dates. Interest is paid or accrues on
all classes of a CMO on a monthly, quarterly or semi-annual basis. The principal
and interest on the underlying mortgages may be allocated among several classes
of a series of a CMO in many ways. In a common structure, payments of principal,
including any principal prepayments, on the underlying mortgages are applied to
the classes of a series of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will be
made on any class of a CMO until all other classes having an earlier stated
maturity or final distribution date have been paid in full.
One or more tranches of a CMO may have coupon rates that reset periodically at a
specified increment over an index such as the London Interbank Offered Rate
("LIBOR"). These adjustable rate tranches, known as "floating rate CMOs," will
be deemed to be treated as ARMS by the Portfolio. Floating rate CMOs may be
backed by fixed-rate or adjustable-rate mortgages. To date, fixed-rate mortgages
have been more commonly utilized for this purpose. Floating rate CMOs are
typically issued with lifetime caps on the coupon rate. These caps, similar to
the caps on ARMS, represent a ceiling beyond which the coupon rate on a floating
rate CMO may not be increased regardless of increases in the underlying interest
rate index.
Yields on privately issued CMOs have been historically higher than the yields on
CMOs issued or guaranteed by U.S. government agencies or instrumentalities. The
risk of loss due to default on privately issued CMOs instruments, however, is
higher since they are not guaranteed by the U.S. government. The trustees of the
Portfolio believe that accepting the risk of loss relating to its investments in
privately issued CMOs is justified by the higher yield the Portfolio will earn
in light of the historic loss experience on such instruments. The Portfolio does
not invest in subordinated privately issued CMOs.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the underlying mortgages include
those backed by GNMA certificates or other mortgage pass-throughs issued or
guaranteed by the U.S. government, its agencies or instrumentalities or issued
by private entities and that are not guaranteed by any government agency or
instrumentality.
The Portfolio's investment manager currently intends to limit investment in
fixed-rate CMOs and REMICS to planned amortization classes ("PACs") and
sequential pay classes. A PAC is retired according to a payment schedule in
order to have a stable average life and yield even if expected prepayment rates
change. Within a specified broad range of prepayment possibilities, the
retirement of all classes is adjusted so that the PAC bond amortization schedule
will be met. Thus, PAC bonds offer more predictable amortization schedules at
the expense of less predictable cash flows for the other bonds in the structure.
Within a given structure, the Portfolio currently intends to buy the PAC bond
with the shortest remaining average life. A sequential pay CMO is structured so
that only one class of bonds will receive principal until it is paid off
completely. Then the next sequential pay CMO class will begin receiving
principal until it is paid off. The Portfolio currently intends to buy
sequential pay CMO securities in the class with the shortest remaining average
life.
To the extent any privately issued CMOs and REMICs in which the Portfolio
invests are considered by the SEC to be investment companies, the Portfolio will
limit its investments in such securities in a manner consistent with the
provisions of the 1940 Act.
RESETS. The interest rates paid on the ARMS, ARS and CMOs generally are
readjusted at intervals of one year or less to an increment over some
predetermined interest rate index, although some securities in which the
Portfolio invests may have intervals as long as five years. There are three main
categories of indices: those based on the LIBOR; those based on U.S. Treasury
securities; and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-, three- and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-, three-, six-month or one-year LIBOR,
the prime rate of a specific bank, or commercial paper rates. Some indices, such
as the one-year constant maturity Treasury rate, closely mirror changes in
market interest rate levels. Others, such as the 11th District Home Loan Bank
Cost of Funds index, tend to lag behind changes in market rate levels and tend
to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize ARMS and CMOs will
frequently have caps and floors that limit the maximum amount by which the loan
rate to the residential borrower may change up or down (1) per reset or
adjustment interval and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting interest rate
changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE SECURITIES. The Portfolio may invest in stripped mortgage
securities, which are derivative multi-class mortgage securities. The stripped
mortgage securities in which the Portfolio may invest will only be issued or
guaranteed by the U.S. government, its agencies or instumentalities. Stripped
mortgage securities have greater market volatility than other types of mortgage
securities in which the Portfolio invests.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class receiving some of the interest and most of the principal from the mortgage
assets, while the other class receives most of the interest and the remainder of
the principal. In the most extreme case, one class receives all of the interest
(the interest-only or "IO" class), while the other class receives all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive not only to changes in prevailing interest rates
but also to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and, a rapid rate of principal payments may
have a material adverse effect on the yield to maturity of any such IOs held by
the Portfolio. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the securities are rated in the
highest rating categories, AAA or Aaa, by S&P or Moody's, respectively.
Stripped mortgage securities are purchased and sold by institutional investors,
such as the Portfolio, through several investment banking firms acting as
brokers or dealers. As these securities were only recently developed,
traditional trading markets have not yet been established for all stripped
mortgage securities. Accordingly, some of these securities may generally be
illiquid. The staff of the SEC has indicated that only government-issued IO or
PO securities which are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Portfolio's Board of Trustees (the "Board") may, in the
future, adopt procedures which would permit the Portfolio to acquire, hold, and
treat as liquid government-issued IO and PO securities. At the present time,
however, all such securities will continue to be treated as illiquid and will,
together with any other illiquid investments, not exceed 10% of the Portfolio's
net assets. This position may be changed in the future, without notice to
shareholders, in response to the SEC staff's continued reassessment of this
matter, as well as to changing market conditions.
FLOATERS. Up to 5% of the Portfolio's assets may be invested in inverse
floaters and super floaters. Please see Part B, Item 13 for more information
about these investments.
ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed securities,
including adjustable-rate asset-backed securities, that have interest rates that
reset at periodic intervals. Asset-backed securities are similar to
mortgage-backed securities. The underlying assets, however, include assets such
as receivables on home equity and credit card loans, and receivables regarding
automobiles, mobile home and recreational vehicle loans and leases. The assets
are securitized either in a pass-through structure (similar to a mortgage
pass-through structure) or in a pay-through structure (similar to the CMO
structure). The Portfolio may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting asset-backed securities is of a shorter maturity than mortgage loans
and historically has been less likely to experience substantial prepayment.
DERIVATIVES. Some of the types of investments discussed in this Prospectus may
be considered "derivatives." Derivatives are broadly defined as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset. To the extent indicated, the Portfolio may invest in
CMOs, REMICs, uncovered mortgage dollar rolls, multi-class pass-throughs,
stripped mortgage securities, other asset-backed securities, and structured
notes. Some, all or the component parts of these instruments may be considered
derivatives. The Portfolio may use these instruments to help manage risks
relating to interest rates and other market factors, increase liquidity, and/or
invest in a particular instrument in a more efficient or less expensive way. The
Portfolio will not necessarily use these instuments or investment strategies to
the full extent permitted unless the Portfolio's investment manager believes
that doing so will help the Portfolio reach its investment objective, and not
all instruments or strategies will be used at all times.
OTHER INVESTMENT POLICIES
MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage "dollar rolls" in
which the Portfolio sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar (name,
type, coupon and maturity) securities on a specified future date. During the
roll period, the Portfolio forgoes principal and interest paid on the
mortgage-backed securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop"), as well as by the interest earned on
the cash proceeds of the initial sale. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase transactions in
which the Portfolio purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Portfolio in each agreement, with the value of
the underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Portfolio to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Portfolio might also incur disposition costs in liquidating the collateral.
The Portfolio, however, intends to enter into repurchase agreements only with
financial institutions such as broker-dealers and banks that are deemed
creditworthy by the Portfolio's investment manager. A repurchase agreement is
deemed to be a loan by the Portfolio under the 1940 Act. The U.S. government
security subject to resale (the collateral) will be held on behalf of the
Portfolio by a custodian bank approved by the Board and will be held pursuant to
a written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase any
securities for its portfolio on a "when-issued" or "delayed delivery" basis.
These transactions are arrangements under which the Portfolio purchases
securities with payment and delivery scheduled for a future time, generally in
30 to 60 days. Purchases of securities on a when-issued or delayed delivery
basis are subject to market fluctuation and are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was entered into. Although the Portfolio
will generally buy securities on a when-issued basis with the intention of
acquiring such securities, it may sell such securities before the settlement
date if it is deemed advisable. When the Portfolio is the buyer, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent the Portfolio engages
in when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the Portfolio's
investment objective and policies and not for the purpose of investment
leverage. In when-issued and delayed delivery transactions, the Portfolio relies
on the seller to complete the transaction. The other party's failure to do so
may cause the Portfolio to miss a price or yield considered advantageous.
Securities purchased on a when-issued or delayed delivery basis do not generally
earn interest until their scheduled delivery date. The Portfolio is not subject
to any percentage limit on the amount of its assets which may be invested in
when-issued purchase obligations.
LOANS OF PORTFOLIO SECURITIES. Consistent with the procedures approved by the
Board and subject to the following conditions, the Portfolio may lend its
portfolio securities to qualified securities dealers or other institutional
investors provided that such loans do not exceed 10% of the value of the
Portfolio's total assets at the time of the most recent loan. The borrower must
deposit with the Portfolio's custodian bank collateral with an initial market
value of at least 102% of the initial market value of the securities loaned,
including any accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
102%. This collateral shall consist of cash. The lending of securities is a
common practice in the securities industry. The Portfolio may engage in security
loan arrangements with the primary objective of increasing the Portfolio's
income either through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Portfolio continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. The Portfolio may borrow from banks from time to time to increase its
investments. Borrowings may be secured or unsecured, and at fixed or variable
rates of interest. The Portfolio will borrow only to the extent that the value
of its assets, less its liabilities (excluding borrowings), is equal to at least
300% of its borrowings. If the Portfolio does not meet the 300% test, it will be
required to reduce its debt within three business days to the extent necessary
to meet that test. This may require the Portfolio to sell a portion of its
investments at a disadvantageous time.
Borrowing for investment purposes is a speculative investment technique known as
"leveraging." When the Portfolio leverages its assets, the net asset value of
the Portfolio may increase or decrease at a greater rate than if the Portfolio
were not leveraged. The interest payable on the amount borrowed increases the
Portfolio's expenses, (and thus reduces the income to the Portfolio), and if the
appreciation and income produced by the investments purchased with the
borrowings do not exceed the cost of the borrowing, the investment performance
of the Portfolio is reduced by leveraging.
The Portfolio may not borrow money or pledge any of its assets, except that
borrowings (and a pledge of assets in connection there with) for temporary or
defensive purposes may be made from banks in an amount up to 20% of its assets.
ILLIQUID INVESTMENTS. The Portfolio's policy is not to invest more than 10% of
its net asset, at the time of purchase, in illiquid securities. Illiquid
securities are generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the Portfolio has
valued them. They include, among others, repurchase agreements and time and
savings deposits of more than seven days' duration.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
PORTFOLIO TURNOVER. The Portfolio's portfolio turnover rate for the fiscal
years ended October 31, 1996 and 1995, was 46.78% and 50.29%, respectively.
OTHER POLICIES AND RESTRICTIONS. The Portfolio is subject to a number of
additional investment restrictions that limit its activities to some extent.
Some of thses restrictions may only be changed with the shareholder approval. A
list of these restrictions and more information concerning the policies are
contained in Part B of this registration statement.
ADVANTAGES OF INVESTING IN THE PORTFOLIO
The Portfolio enables its shareholders to invest easily in ARS which are rated
at least AA by S&P or Aa by Moody's or, if unrated, will be deemed to be of
comparable quality by Advisers, or such ARS which are issued or guaranteed by
the U.S. government, its agencies or instrumentalities. Any guarantee will
extend to the payment of interest and principal due on the securities and will
not provide any protection from fluctuations in the market value of the
securities. The Portfolio's investment manager believes that by investing
primarily in ARS which provide for variable rates of interest, the Portfolio
will achieve a more consistent and less volatile net asset value than is
characteristic of mutual funds that invest primarily in securities paying a
fixed rate of interest.
Principal payments received on the Portfolio's mortgage securities will be
reinvested by the Portfolio in other securities. These securities may have a
higher or lower yield than the mortgage securities already held by the
Portfolio, depending on market conditions.
An investment in the Portfolio provides liquidity for the investor, who may
redeem at the current net asset value at any time in accordance with the
procedures described under the caption "How to Sell Shares of the Portfolio"
discussed under Item 8 below.
WHAT ARE THE PORTFOLIO'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Portfolio increases and will decrease as the value of the Portfolio's
investments decrease. In this way, you participate in any change in the value of
the securities owned by the Portfolio.
MORTGAGE SECURITIES. The mortgage securities in which the Portfolio invests
differ from conventional bonds in that principal is paid back over the life of
the mortgage security rather than at maturity. As a result, the holder of the
mortgage securities (i.e., the Portfolio) receives monthly scheduled payments of
principal and interest, and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When the holder reinvests
the payments and any unscheduled prepayments of principal it receives, it may
receive a rate of interest which is lower than the rate on the existing mortgage
securities. For this reason, mortgage securities may be less effective than
other types of U.S. government securities as a means of "locking in" long-term
interest rates. In general, fixed-rate mortgage securities have greater exposure
to this "prepayment risk" than ARMS.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. ARMS, however,
have less risk of a decline during periods of rapidly rising rates, but, like
other mortgage securities, may also have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. To the extent
market interest rates increase beyond the applicable cap or maximum rate on ARMS
or beyond the coupon rates of fixed-rate mortgage securities, the market value
of the mortgage security would likely decline to the same extent as a
conventional fixed-rate security.
In addition, to the extent mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments may result in some
loss of the holder's principal investment to the extent of the premium paid. On
the other hand, if mortgage securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal will
increase current and total returns and will accelerate the recognition of income
which, when distributed to shareholders, is taxable as ordinary income.
With respect to pass-through mortgage pools issued by non-governmental issuers,
there can be no assurance that the private insurers associated with such
securities can meet their obligations. Although the market for such
non-governmentally issued or guaranteed mortgage securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. These securities are subject to the Portfolio's limit
with respect to illiquid investments in securities.
ADJUSTABLE RATE SECURITIES. ARS have several characteristics that should be
considered before investing in the Portfolio. As indicated above, the interest
rate reset features of ARS held by the Portfolio reduces the effect on the net
asset value of Portfolio shares caused by changes in market interest rates. The
market value of ARS and, therefore, the Portfolio's net asset value, however,
may vary to the extent that the current interest rate on such securities differs
from market interest rates during periods between the interest reset dates. A
portion of the ARS in which the Portfolio may invest may not reset for up to
five years. These variations in value occur inversely to changes in the market
interest rates. Thus, if market interest rates rise above the current rates on
the securities, the value of the securities will decrease; conversely, if market
interest rates fall below the current rate on the securities, the value of the
securities will rise. If investors in the Portfolio sold their shares during
periods of rising rates before an adjustment occurred, such investors may suffer
some loss. The longer the adjustment intervals on ARS held by the Portfolio, the
greater the potential for fluctuations in the Portfolio's net asset value.
Investors in the Portfolio will receive increased income as a result of upward
adjustments of the interest rates on ARS held by the Portfolio in response to
market interest rates. The Portfolio and its shareholders, however, will not
benefit from increases in market interest rates once such rates rise to the
point where they cause the rates on such ARS to reach their maximum adjustment
date, annual or lifetime caps. In addition, because of their interest rate
adjustment feature, ARS are not an effective means of "locking-in" attractive
interest rates for periods in excess of the adjustment period.
In the case of privately issued ARMS where the underlying mortgage assets carry
no agency or instrumentality guarantee, the mortgagors on the loans underlying
the ARMS are often qualified for such loans on the basis of the original payment
amounts. The mortgagor's income may not be sufficient to enable them to continue
making their loan payments as such payments increase, resulting in a greater
likelihood of default. Conversely, any benefits to the Portfolio and its
shareholders from an increase in the Portfolio's net asset value caused by
falling market interest rates is reduced by the potential for a decline in the
interest rates paid on ARS held by the Portfolio. The Portfolio, therefore, is
not designed for investors seeking capital appreciation.
ASSET-BACKED SECURITIES. Asset-backed securities entail certain risks not
present with mortgage-backed securities as they do not have the benefit of the
same type of security interests in the underlying collateral. Credit card
receivables are generally unsecured, and a number of state and federal consumer
credit laws give debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the outstanding balance. In the case of automobile
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing such receivables due
to the large number of vehicles involved in a typical issuance and the technical
requirements imposed under state laws. Therefore, recoveries on repossessed
collateral may not always be available to support payments on the securities. In
the case of a home equity loan, there is a risk that the homeowner will default
and there will not be enough money left to pay off the home equity loan after
paying off the first mortgage. (For more information concerning the risks of
investing in asset-backed securities, see Part B, Item 13.)
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Portfolio's holdings and thus the Portfolio's share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to have a negative effect on the value of the Portfolio's shares.
Interest rates have increased and decreased in the past. These changes are
unpredictable and may happen again in the future.
GENERAL INFORMATION
The Trust is authorized to issue an unlimited number of shares of beneficial
interest. All shares of the Trust have one vote, and, when issued, are fully
paid and non-assessable.
The Trust has two series and was formerly named the Franklin Institutional U.S.
Government ARM Fund. On October 18, 1991, the Board approved a change in the
Trust's name and the addition of the Portfolio as the Trust's second series.
Additional series may be added in the future by the Board, the assets and
liabilities of which will be separate and distinct from any other series. On
June 15, 1993, the Board approved a change in the fiscal year end of the Trust
to October 31 of each year from January 31.
5. MANAGEMENT OF THE FUND
MANAGEMENT OF THE PORTFOLIO
THE BOARD. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Trust's and the Portfolio's
day-to-day operations.
INVESTMENT MANAGER . Franklin Advisers, Inc. ("Advisers"), at the address of
the registrant shown on the cover of this amendment to the registration
statement, manages the Portfolio's assets and makes its investment decisions.
Advisers also performs similar services for other funds. It is wholly owned
by Franklin Resources, Inc. ("Resources"), a publicly owned company engaged
in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisers and its affiliates manage over $179 billion in
assets.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolio is: Roger Bayston since 1991, Anthony Coffey since 1991 and Jack
Lemein since inception.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisers or an affiliate since earning his MBA degree in 1991.
Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned
his Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with Advisers or an affiliate since 1989. He
is a member of several securities industry-related associations.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Pursuant to the management agreement, Advisers supervises and implements the
Portfolio's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Portfolio's business. Advisers
performs similar services for other funds and there may be times when the
actions taken with respect to the portfolio will differ from those taken by
Advisers on behalf of other funds. Neither Advisers (including its affiliates)
nor its officers, directors or employees nor the officers and trustees of the
Trust are prohibited from investing in securities held by the Portfolio or other
funds which are managed or administered by Advisers to the extent such
transactions comply with the Portfolio's Code of Ethics.
The Portfolio is responsible for its own operating expenses including, but not
limited to, Advisers' fee; taxes, if any; custodian, legal and auditing fees;
fees and expenses of trustees who are not members of, affiliated with or
interested persons of Advisers; salaries of any personnel not affiliated with
Advisers; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Portfolio's net assets; and printing
and other expenses which are not expressly assumed by Advisers.
Under the management agreement, the Portfolio is obligated to pay Advisers a fee
computed daily and payable monthly, at the annual rate as follows: 40/100 of 1%
for the first $5 billion of its average daily net assets; plus 35/100 of 1% of
its average daily net assets in excess of $5 billion up through $10 billion;
33/100 of 1% of its average daily net assets in excess of $10 billion up through
$15 billion; and 30/100 of 1% of its average daily net assets in excess of $15
billion.
During the fiscal year ended October 31, 1996, management fees before any
advance waiver, totaled 0.40% of the average daily net assets of the Portfolio.
Total operating expenses, including management fees before any advance waiver,
totaled 0.47% of the average daily net assets of the Portfolio. Pursuant to an
agreement by Advisers to limit its fees, the Portfolio paid management fees
totaling 0.18% of the average daily net assets of the Portfolio and operating
expenses totaling 0.25%. This arrangement may be terminated by Advisers at any
time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Portfolio shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. (Further information is included under "The Portfolio's Policies
Regarding Brokers Used on Portfolio Transactions" in Part B, Item 17.)
The response to Item 5A has been omitted pursuant to paragraph 4 of Instruction
F of the General Instructions to Form N-1A.
6. CAPITAL STOCK AND OTHER SECURITIES
As discussed above, the Trust is a Delaware business trust. The Agreement and
Declaration of Trust permits the trustees to issue an unlimited number of full
and fractional shares of beneficial interest, with a par value of $.01 per
share, which may be issued in any number of series. Currently the Trust has two
series: one series representing interests in the Portfolio and the other series
representing interests in the U.S. Government Adjustable Rate Mortgage
Portfolio. When issued for payment as described in this registration statement
as amended, shares are validly issued, fully paid, and non-assessable and have
no preemptive, conversion, or sinking rights. Shares of each series have equal
and exclusive rights as to dividends and distributions as declared by each
series and the net assets of such series upon liquidation or dissolution.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
CONTROL PERSONS
As of February 3, 1997, the Franklin Adjustable Rate Securities Fund and the
Franklin Institutional Adjustable Rate Securities Fund beneficially owned
1,568,095 shares (or 77.1%) and 463,773 shares (or 22.8%), respectively, of the
Portfolio's outstanding shares and, accordingly, each may be deemed to be a
controlling person under the 1940 Act.
DISTRIBUTIONS TO SHAREHOLDERS
As indicated below in response to Items 7 and 8, the Portfolio's shares have not
been registered under the Securities Act of 1933 (the "1933 Act"), which means
that its shares are restricted securities which may not be sold, redeemed or
reinvested unless registered or pursuant to an available exemption from that
Act. Accordingly, to the extent distributions to shareholders are reinvested in
additional shares, as discussed below, such transactions are subject to the
requirements of the 1933 Act.
There are two types of distributions which the Portfolio may make to its
shareholders:
1. INCOME DIVIDENDS. The Portfolio receives income primarily in the form of
interest and other income derived from its investments. This income, less the
expenses incurred in the Portfolio's operations, is its net investment income
from which income dividends may be distributed. Thus, the amount of dividends
paid per share may vary with each distribution. The Portfolio ordinarily
declares dividends from its net investment income on each day its net asset
value is calculated. The Portfolio's earnings for Saturdays, Sundays and
holidays are declared as dividends on the next business day. Daily allocations
of dividends will commence on the day funds are wired to the Portfolio. The
amount of the dividend may fluctuate from day to day depending on changes in the
factors that comprise the Portfolio's net investment income.
Dividends are declared daily and are reinvested monthly in the form of
additional shares of the Portfolio at the net asset value per share generally at
the close of business on the last business day of the month. Shareholders may
request to have their dividends paid out monthly in cash. Shareholders redeeming
all their shares at any time during the month will receive all dividends to
which they are entitled together with the redemption check.
2. CAPITAL GAIN DISTRIBUTIONS. The Portfolio may derive capital gains or losses
in connection with sales or other dispositions of its portfolio securities.
Distributions by the Portfolio derived from net short-term and net long-term
capital gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect any net short-term
and net long-term capital gains realized by the Portfolio as of October 31 of
such year. The Portfolio reserves the right to make more than one distribution
derived from net short-term and net long-term capital gains in any year or to
adjust the timing of these distributions for operational or other reasons.
TAX EFFECTS ON AN INVESTMENT IN THE PORTFOLIO
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders.
TAXATION OF THE PORTFOLIO
Each separate series of the Trust is treated as a separate entity for federal
income tax purposes. The Portfolio has elected and intends to continue to
qualify to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code). By distributing all
of its income and meeting certain other requirements relating to the sources of
its income and diversification of its assets, the Portfolio will not be liable
for federal income or excise taxes.
TAXATION OF SHAREHOLDERS
For federal income tax purposes, any income dividends received from the
Portfolio, as well as any distributions derived from the excess of net
short-term capital gain over net long-term capital loss, are treated as ordinary
income whether received in cash or in additional shares. Distributions derived
from the excess of net long-term capital gain over net short-term capital loss
are treated as long-term capital gain regardless of the length of time Portfolio
shares have been owned and regardless of whether received in cash or in
additional shares.
None of the distributions paid by the Fund for the fiscal year ended October 31,
1996 qualified for the corporate dividends-received deduction and it is not
expected that distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, is treated as if received by the
shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Portfolio's shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Portfolio's shares, held for six months or less, is treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
The Portfolio will inform shareholders of the source of dividends and
distributions at the time they are paid and will promptly after the close of
each calendar year advise shareholders of the tax status for federal income tax
purposes of such dividends and distributions.
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned from direct obligations of the U.S.
Government, none of the distributions of the Portfolio during the fiscal year
ended October 31, 1996 qualified for such tax-free treatment. Investments in
mortgaged-backed securities (including GNMA, FNMA, and FHLMC securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors with respect to the applicability of state
and local intangible property or income taxes to shares of the Portfolio and
distributions and redemption proceeds received from the Portfolio.
Shareholders who are not considered U.S. persons for federal income tax purposes
should consult with their financial or tax advisor regarding the applicability
of U.S. withholding taxes to distributions received by them from the Portfolio
and the application of foreign tax laws to these distributions.
Additional information in response to this item is contained under the
discussion captioned "General Information" in Item 4, above.
7. PURCHASE OF SECURITIES
The Portfolio's shares have not been registered under the 1933 Act, which means
that its shares may not be sold publicly. However, the Portfolio's shares may be
sold through private placements pursuant to available exemptions from that Act.
Shares of the Portfolio are sold only to other investment companies. All shares
are sold at net asset value without a sales charge. Shares are purchased at the
net asset value next determined after the Portfolio receives the order in proper
form. Funds should be wired to the Portfolio's bank account at Bank of America,
the Portfolio's custodian, for credit to the Portfolio's account. All
investments in the Portfolio are credited to the shareholder's account in the
form of full and fractional shares of the Portfolio (rounded to the nearest
1/1000 of a share). The Portfolio does not issue share certificates.
Shares may generally be purchased on business days except when the New York
Stock Exchange (the "NYSE") is closed. Federal Funds wire purchase orders are
not accepted on days when the Federal Reserve Bank system and the Portfolio's
custodian are closed.
VALUATION OF PORTFOLIO SHARES
The Portfolio is open for business each day the NYSE is open. The net asset
value per share of the Portfolio is determined as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time.
To calculate Net Asset Value per share, the Portfolio's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Portfolio's assets are valued
as described under "Calculation of Net Asset Value" in Part B, Item 19.
8. REDEMPTION OR REPURCHASE
HOW TO SELL SHARES OF THE PORTFOLIO
As stated above in response to Item 7, "Purchase of Securities," the Portfolio's
shares are restricted securities which may not be sold unless registered or
pursuant to an available exemption from the 1933 Act.
Redemptions are processed on any day on which the Portfolio is open for business
and are effected at the Portfolio's net asset value next determined after the
Portfolio receives a redemption request in good form.
Payment for redeemed shares is made promptly but in no event later than seven
days after receipt of the redemption request in good form. Proceeds for
redemption orders cannot be wired on those business days when the Federal
Reserve Bank System and the Custodian are closed. The right of redemption,
however, may be suspended or the date of payment postponed in accordance with
the rules under the 1940 Act. Redemptions are taxable events, and the amount
received upon redemption may be more or less than the amount paid for the shares
depending upon the fluctuations in the market value of the assets owned by the
Portfolio.
9. PENDING LEGAL PROCEEDINGS
Not Applicable
ADJUSTABLE RATE SECURITIES PORTFOLIOS
ADJUSTABLE RATE SECURITIES PORTFOLIO
FORM N-1A, PART B:
10. COVER PAGE
Not Applicable
11. TABLE OF CONTENTS
Not Applicable
12. GENERAL INFORMATION AND HISTORY
Not Applicable
13. INVESTMENT OBJECTIVES AND POLICIES
As noted in response to Item 4, the Portfolio's investment objective is to seek
a high level of current income, consistent with lower volatility of principal by
following policies designed to achieve its objective. In addition to the
policies stated in response to Item 4, the Portfolio has adopted the following
restrictions as fundamental policies. These restrictions may not be changed
without the approval of a majority of the outstanding voting securities of the
Portfolio. Under the Investment Company Act of 1940, as amended (the"1940 Act"),
this means the approval of (i) more than 50% of the outstanding shares of the
Portfolio or (ii) 67% or more of the shares of the Portfolio present at a
shareholder meeting if more than 50% of the outstanding shares of the Portfolio
are represented at the meeting in person or by proxy, whichever is less. The
Portfolio MAY NOT:
1. Borrow money or mortgage or pledge any of its assets in an amount exceeding
33 1/3% of the value of the Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount borrowed)
at the time the borrowing was made.
2. Buy any securities on "margin" or sell any securities "short," except for any
delayed delivery or when-issued securities as described in the registration
statement as amended.
3. Lend any funds or other assets, except by the purchase of bonds, debentures,
notes or other debt securities as described in the registration statement as
amended, and except that securities of the Portfolio may be loaned to qualified
broker-dealers or other institutional investors if at least 102% cash collateral
is pledged and maintained by the borrower, provided such loans may not be made
if, as a result, the aggregate of such loans exceeds 10% of the value of the
Portfolio's total assets at the time of the most recent loan. Also, the entry
into repurchase agreements is not considered a loan for purposes of this
restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Portfolio may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the total assets of the Portfolio in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer, if to the knowledge of the Portfolio, one or
more of its officers, trustees or investment adviser, own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate. (Does not preclude investments in
securities collateralized by real estate or interests therein.)
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development program.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or pursuant to an exemption therefrom, granted by the
Securities and Exchange Commission (the "SEC"). To the extent permitted by
exemptions which may be granted under the 1940 Act, the Portfolio may invest in
shares of one or more money market funds managed by Franklin Advisers, Inc.
("Advisers") or its affiliates.
13. Issue senior securities as defined in the 1940 Act except that this
restriction will not prevent the Portfolio from entering into repurchase
agreements or making borrowings, mortgages and pledges as permitted by
restriction #1 above.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
OTHER POLICIES. There are no restrictions or limitations on investments in
obligations of the U.S. government, or of corporations chartered by Congress as
federal government instrumentalities. The underlying assets of the Portfolio may
be retained in cash, including cash equivalents which are Treasury bills, and
short-term bank obligations such as certificates of deposit, bankers'
acceptances and repurchase agreements. It is intended, however, that only so
much of the underlying assets of the Portfolio be retained in cash as is deemed
desirable or expedient under then-existing market conditions. As noted elsewhere
in the registration statement as amended, the Portfolio may invest up to 10% of
its total net assets in illiquid securities. Investments in savings deposits are
generally considered illiquid and will, together with other illiquid
investments, not exceed 10% of the Portfolio's net assets.
To the extent indicated in this amendment to the registration statement, the
Portfolio may invest in CMOs and REMICs. CMOs and REMICs may be issued by
governmental or government related entities or by non-governmental entities such
as banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers. Privately issued CMOs and
REMICs include obligations issued by such non-governmental entities which are
collateralized by (a) mortgage securities issued by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association or the
Government National Mortgage Association ("GNMA"), (b) pools of mortgages which
are guaranteed by an agency or instrumentality of the U.S. government, or (c)
pools of mortgages which are not guaranteed by an agency or instrumentality of
the U.S. Government and which may or may not be guaranteed by the private
issuer.
The Portfolio may purchase securities issued or guaranteed by the U.S.
government, or one of its agencies or instrumentalities. GNMA guarantees are
backed by the full faith and credit of the U.S. Treasury. No assurances can
be given, however, that the U.S. government will provide such financial
support to the obligations of the other U.S. government agencies or
instrumentalities in which the Portfolio invests, since it is not obligated
to do so. These agencies and instrumentalities are supported by either the
issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury, the discretionary authority of the U.S. government to
purchase certain obligations of an agency or instrumentality, or the credit
of the agency or instrumentality.
FLOATERS. The Portfolio may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, at an accelerated speed, to
short-term interest rates. The Portfolio may also invest up to 5% of its assets
in super floaters. These are instruments that float at a greater than 1 to 1
ratio with the London Interbank Offered Rate ("LIBOR") and are used as a hedge
against the risk that LIBOR floaters become "capped" and can no longer float
higher.
ASSET-BACKED SECURITIES. The Portfolio may invest a portion of its assets in
asset-backed securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets. The rate of payments may be affected by economic and various
other factors. Therefore, the yield may be difficult to predict and actual yield
to maturity may be more or less than the anticipated yield to maturity. The
credit quality of most asset-backed securities depends primarily on the credit
quality of the assets underlying the securities, how well the entities issuing
the securities are insulated from the credit risk of the originator or
affiliated entities, and the amount of credit support provided to the
securities.
Credit supported asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, these
securities may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from the ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payments of the obligations on at
least some of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of these approaches. The Portfolio does not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal and
interest, with the result that defaults on the underlying assets are borne first
by the holders of the subordinated class), creation of "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in the issue.
14. MANAGEMENT OF THE REGISTRANT
OFFICERS AND TRUSTEES
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Portfolio, including general supervision and review of its
investment activities. The Board, in turn, elects the officers of the Trust who
are responsible for administering the Trust's and the Portfolio's day-to-day
operations. The affiliations of the officers and Board members and their
principal occupations for the past five years are shown below. Members of the
Board who are considered "interested persons" of the Trust under the 1940 Act
are indicated by an asterisk (*).
NAME, AGE AND POSITIONS AND OFFICES PRINCIPAL OCCUPATION
ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Harris J. Ashton (64)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director, trustee
or managing general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 31 of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (40)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President and Trustee
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.
(software firm); Director, FischerImaging Corporation (medical imaging systems);
and director or trustee, as the case may be, of 27 of the investment companies
in the Franklin Templeton Group of Funds.
*William J. Lippman (72)
One Parker Plaza
Fort Lee, NJ 07024
Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc. and officer
and/or director or trustee of seven of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information and financial services);
Director, Fund American Enterprises Holdings, Inc.(financial services), MCI
Communications Corporation, CCC Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Source One Mortgage Services
Corporation (financial services), Shoppers Express (home shopping), Spacehab,
Inc. (aerospace services); and director, trustee or managing general partner, as
the case may be, of 53 of the investment companies in the Franklin Templeton
Group of Funds; formerly Chairman, Hambrecht and Quist Group (venture capital
and investment banking); Director, H & Q Healthcare Investors (investment
trust); and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin Templeton Services, Inc.; Executive Vice
President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most of the other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc.and Franklin Templeton Distributors,
Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory Services, Inc.,
Franklin Investment Advisory Services, Inc., and officer of 61 of the investment
companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
The table above shows the officers and Board members who are affiliated with
Franklin Templeton Distributors, Inc. ("Distributors") and Advisers.
Nonaffiliated members of the Board are currently paid $50 per month plus $50 per
meeting attended. As shown above, some of the nonaffiliated Board members also
serve as directors, trustees or managing general partners of other investment
companies in the Franklin Templeton Group of Funds. They may receive fees from
these funds for their services. The following table provides the total fees paid
to nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS
IN THE FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP OF
TOTAL FEES FROM THE FRANKLIN FUNDS ON WHICH
RECEIVED TEMPLETON GROUP OF EACH SERVES***
FROM THE FUNDS**
NAME TRUST*
Frank H. Abbott, III $1,150 $165,236 32
Harris J. Ashton 1,150 343,591 56
S. Joseph Fortunato 1,150 360,411 58
David Garbellano 1,150 148,916 31
Frank W.T. LaHaye 1,100 139,233 27
Gordon S. Macklin 1,150 335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 171
U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Trust or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Franklin Resources, Inc.
("Resources") may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively,
of Charles E. Johnson.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
a. As of February 3, 1997, Franklin Adjustable Rate Securities Fund, a series of
the Franklin Investors Securities Trust ("FIST"), and Franklin Institutional
Adjustable Rate Securities Fund, a series of the Institutional Fiduciary Trust
("IFT"), beneficially owned 77.1% and 22.8%, respectively, of the outstanding
voting securities of the Portfolio and could be deemed to control the Portfolio,
as that term is defined under the 1940 Act. Both FIST and IFT were organized as
Massachusetts business trusts and are located at the address of the registrant
set forth on the cover of this amendment to the registration statement.
b. Except for the companies referred to in this item, no person was known to
hold beneficially or of record more than 5% of the Portfolio's outstanding
shares of beneficial interest.
c. Not Applicable
16. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Portfolio's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Portfolio to buy, hold
or sell and the selection of brokers through whom the Portfolio's portfolio
transactions are executed. Advisers activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Porfolio's investment activities. Under the terms of the management agreement,
Advisers provides office space and office furnishings, facilities and equipment
required for managing the business affairs of the Portfolio; maintains all
internal bookkeeping, clerical, secretarial and administrative personnel and
services. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Trust and the Portfolio.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Portfolio. Similarly, with
respect to the Portfolio, Advisers is not obligated to recommend, buy or sell,
or to refrain from recommending, buying or selling any security that Advisers
and access persons, as defined by the 1940 Act, may buy or sell for its or their
own account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Portfolio or other funds that
it manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Portfolio's Code of Ethics.
Please see "Investment Advisory and Other Services - Summary of Code of Ethics"
below.
MANAGEMENT FEES. For the fiscal years ended October 31, 1996, 1995, and 1994
management fees, before any advance waiver, totaled $89,969, $119,324, $372,319
respectively. Under an agreement by Advisers to limit its fees, the Porfolio
paid management fees totaling $41,378, $55,384 and $205,735 during each of these
periods, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until February 28,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Portfolio's outstanding voting securities,
and in either event by a majority vote of the Board members who are not parties
to the management agreement or interested persons of any such party (other than
as members of the Board), cast in person at a meeting called for that purpose.
The management agreement may be terminated without penalty at any time by the
Board or by a vote of the holders of a majority of the Portfolio's outstanding
voting securities, or by Advisers on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
SHAREHOLDER SERVICING AGENT. Franklin/Templeton Investor Services, Inc.
("Investor Services"), a wholly owned subsidiary of Resources, is the Trust's
shareholder servicing agent and acts as the Trust's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a
fixed fee per account.
CUSTODIANS. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Portfolio. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Portfolio shares. The custodians do not participate in
decisions relating to the purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Portfolio's independent auditors. During the fiscal year ended
October 31, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Annual Report to
shareholders of the Trust for the fiscal year ended October 31, 1996
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
17. BROKERAGE ALLOCATION
THE PORTFOLIO'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
Since most purchases by the Portfolio are principal transactions at net prices,
the Portfolio incurs little or no brokerage costs. The Portfolio deals directly
with the selling or buying principal or market maker without incurring charges
for the services of a broker on its behalf, unless it is determined that a
better price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The Portfolio seeks to
obtain prompt execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical information,
as well as for special services provided by the dealers in the execution of
orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from brokers or dealers effecting
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services permits Advisers to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staff of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Trust's officers are satisfied that the best execution is obtained,
consistent with internal policies the sale of Portfolio shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the
Portfolio's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, Inc., it may sometimes receive certain fees when the Portfolio tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Portfolio, any portfolio securities
tendered by the Portfolio will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers will
be reduced by the amount of any fees received by Distributors in cash, less any
costs and expenses incurred in connection with the tender.
If purchases or sales of securities by the Portfolio and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by Advisers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Portfolio is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Portfolio.
During the fiscal years ended October 31, 1996, 1995 and 1994, the Portfolio
paid no brokerage commissions.
As of October 31, 1996, the Portfolio did not own securities of its regular
broker-dealers.
18. CAPITAL STOCK AND OTHER SECURITIES
The information provided in response to this item is in addition to the
information provided in response to Item 4 in Part A.
Shares for an initial investment as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are credited to
an account in the name of an investor on the books of the Portfolio. The
Portfolio does not issue share certificates.
An investment in the Portfolio is not a deposit insured by the FDIC and is not
an obligation of or guaranteed by any bank.
19. PURCHASE, REDEMPTION AND PRICING OF
SECURITIES BEING OFFERED
The information provided in response to this item is in addition to the
information provided in response to Items 7 and 8 in Part A.
REDEMPTIONS IN KIND
The Trust has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of each series' net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the SEC. In the case of redemption requests in
excess of these amounts, the Board reserves the right to make payments in whole
or in part in securities or other assets of the Portfolio, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Portfolio. In these circumstances, the
securities distributed would be valued at the price used to compute the
Portfolio's net assets and you may incur brokerage fees in converting the
securities to cash. The Portfolio does not intend to redeem illiquid securities
in kind. If this happens, however, you may not be able to recover your
investment in a timely manner.
CALCULATION OF NET ASSET VALUE
We calculate the net asset value per share as of the scheduled close of the New
York Stock Exchange, generally 1:00 p.m. Pacific time, each day that the New
York Stock Exchange is open for trading. As of the date of this amended
registration statement, the Trust is informed that the New York Stock Exchange
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Portfolio, cash
and receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. 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. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the net asset value of the Portfolio's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Portfolio's net asset value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, 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 issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Portfolio may utilize a pricing service, bank or Securities Dealer to perform
any of the above described functions.
REINVESTMENT DATE
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount or value of
the shares acquired.
20. TAX STATUS
The information provided in response to this item is in addition to the
information provided in response to Item 6 in Part A.
As stated in response to Item 6, the Portfolio has elected and intends to
continue to qualify to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The
trustees reserve the right not to maintain the qualification of the Portfolio as
a regulated investment company if they determine such course of action to be
beneficial to the shareholders. In such case, the Portfolio would be subject to
federal and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders would be ordinary dividend income to the extent of
the Portfolio's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Portfolio) to shareholders by December 31 of each year in order to
avoid the imposition of a federal excise tax. Under these rules, certain
distributions which are declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder until the following
January, are treated for tax purposes as if paid by the Portfolio and received
by the shareholder on December 31 of the calendar year in which they are
declared. The Portfolio intends, as a matter of policy, to declare dividends in
December as necessary to avoid the imposition of this tax, but the Portfolio
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.
Redemptions and exchanges of the Portfolio's shares are taxable transactions for
federal and state income tax purposes. For most shareholders, gain or loss will
be recognized in an amount equal to the difference between the shareholder's
basis in its shares and the amount received, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss is capital gain or loss and is long-term for federal income tax purposes
if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares is disallowed to
the extent other shares of the Portfolio are purchased (through reinvestment of
dividends or otherwise) within 30 days before or after such redemption.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain with respect to
such shares.
21. UNDERWRITERS
Not Applicable
22. CALCULATION OF PERFORMANCE DATA
Not Applicable
23. FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to shareholders
of the Trust for the fiscal year ended October 31, 1996, including the auditors'
report, are incorporated herein by reference.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
FORM N-1A
PART C - OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements incorporated herein by reference to the Registrant's
Annual Report to Shareholders dated October 31, 1996, as filed with the
SEC electronically on form type N-30D on January 10, 1997
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net Assets -
October 31, 1996
(iii) Statements of Assets and Liabilities - October 31, 1996
(iv) Statements of Operations - for the year ended October 31, 1996
(v) Statements of Changes in Net Assets - for the years ended
October 31, 1996 and 1995
(vi) Notes to Financial Statements
(b) Exhibits:
The following exhibits are incorporated by reference, except as otherwise noted:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust of Franklin
Institutional U.S. Government ARM Fund dated
February 12, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(ii) Certificate of Trust of Franklin Institutional
U.S. Government ARM Fund dated February 12, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(iii) Certificate of Amendment to the Certificate of
Trust of Franklin Institutional U.S. Government
ARM Fund dated October 18, 1991 as filed with the
office of the Secretary of the State of Delaware
on February 15, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(iv) Certificate of Amendment to the Certificate of
Trust of Franklin Institutional U.S. Government
ARM Fund dated March 7, 1991 as filed with the
Office of the Secretary of State of Delaware on
March 14, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(v) Certificate of Amendment to the Certificate of Trust of
Adjustable Rate Securities Portfolio dated May 14, 1992 as
filed with the Office of the Secretary of State of Delaware on
June 12,
1992
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(2) copies of the existing By-Laws or instruments
corresponding thereto;
(i) By-Laws of Franklin Institutional U.S. Government
ARM Fund
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(i) Management Agreement between Franklin
Institutional U.S. Government ARM Fund and
Franklin Advisers, Inc. dated June 3, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(ii) Management Agreement between Adjustable Rate
Securities Portfolios and Franklin Advisers, Inc.
dated November 5, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(iii) Amendment to Management Agreement (dated June 3, 1991) between
Registrant and Franklin Advisers, dated August 1, 1995
(iv) Amendment to Management Agreement (dated November
5, 1991) between Registrant and Franklin
Advisers, Inc. dated August 1, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
Not Applicable
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such; any
such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and similar
investments of the Registrant, including the schedule of
remuneration;
(i) Custodian Agreement between Registrant and Bank
of America NT & SA dated May 1, 1991
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(ii) Master Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(iii) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
Not Applicable
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan
Not Applicable
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited).
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(ii) Certificate of Secretary dated February 16, 1995
Filing: Amendment No. 9 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1996
(27) Financial Data Schedule
(i) Financial Data Schedule for Adjustable Rate
Securities Portfolio
(ii) Financial Data Schedule for U.S. Government
Adjustable Rate Mortgage Portfolio
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
TITLE OF CLASS as of November 30, 1996
- -------------- ------------------------
Shares of Beneficial Interest
of:
Adjustable Rate Securities
Portfolio Four
U.S. Government Adjustable
Rate Mortgage Portfolio Three
ITEM 27 INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws (Exhibit 2).
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Notwithstanding the provisions contained in the Registrant's By-Laws, in
the absence of authorization by the appropriate court on the merits pursuant to
Section 5 of Article VI of said By-Laws, any indemnification under said Article
shall be made by Registrant only if authorized in the manner provided in either
subsection (a) or (b) of Section 6 of Article VI.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Franklin Advisers, Inc., a wholly owned subsidiary of Franklin Resources,
Inc., the investment manager for the Registrant, is the investment manager or
administrator for numerous other U.S. registered open-end and closed-end
investment companies. The officers and directors of the Registrant's investment
advisor also serve as officers and/or directors, and/or portfolio managers for
(1) the advisor's corporate parent, Franklin Resources, Inc., and/or (2) other
investment companies in the Franklin Templeton Group of Funds. For additional
information please see Part B and Schedules A and D of Form ADV of the Funds'
investment manager (SEC File 801-26292), incorporated herein by reference, which
sets forth the officers and directors of the investment manager and information
as to any business, profession, vocation or employment of a substantial nature
engaged in by those officers and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
Not Applicable
ITEM 30 LOCATIONS OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
kept by the Registrant or its shareholder services agent, Franklin/Templeton
Investor Services, Inc., at their respective principal business offices, both of
which are at 777 Mariners Island Blvd., San Mateo, California 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A
or Part B.
ITEM 32 UNDERTAKING
The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee or trustees when requested in writing to do so by the record holders of
not less than 10 per cent of the Registrant's outstanding shares and to assist
its shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder communications.
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, the State of California, on the 28th day
of February 1997.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
By CHARLES E. JOHNSON*
Charles E. Johnson,
President
By /s/ Larry L. Greene
Attorney-in-Fact
(pursuant to Power of Attorney previously filed)
ADJUSTABLE RATE SECURITIES PORTFOLIOS
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust of *
Franklin Institutional U.S. Government
ARM Fund dated February 12, 1991
EX-99.B1(ii) Certificate of Trust of Franklin *
Institutional U.S. Government ARM Fund
dated February 12, 1991
EX-99.B1(iii) Certificate of Amendment to the *
Certificate of Trust of Franklin
Institutional U.S. Government ARM Fund
dated October 18, 1991
EX-99.B(iv) Certificate of Amendment to the *
Certificate of Trust of Franklin
Institutional U.S. Government ARM Fund
dated March 7, 1991
EX-99.B1(v) Certificate of Amendment to the *
Certificate of Trust of Adjustable
Rate Securities Portfolio dated May
14, 1992
EX-99.B2(i) By-Laws of Franklin Institutional U.S. *
Government ARM Fund
EX-99.B5(i) Manangement Agreement between Franklin *
Institutional U.S. Government ARM Fund
and Franklin Advisers, Inc. dated June
3, 1991
EX-99.B5(ii) Management Agreement between *
Adjustable Rate Securities Portfolios
and Franklin Advisers, Inc. dated
November 5, 1991
EX-99.B5(iii) Amendment to Management Agreement Attached
(dated June 3, 1991) between
Registrant and Franklin Advisers, Inc.
dated August 1, 1995
EX-99.B5(iv) Amendment to Management Agreement Attached
(dated November 5, 1991) between
Registrant and Franklin Advisers, Inc.
dated August 1, 1995
EX-99.B8(i) Custodian Agreement between Registrant *
and Bank of America NT & SA dated May
1, 1991
EX-99.B8(ii) Mater Custody Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B8(iii) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B17(i) Power of Attorney dated February 16, *
1995
EX-99.B17(ii) Certificate of Secretary dated *
February 16, 1995
EX-27.B1 Financial Date Schedule for Adjustable Attached
Rate Securities Portfolio
EX-27.B2 Financial Data Schedule for U.S. Attached
Government Adjustable Rate Mortgage
Portfolio
*Incorporated by Reference
AMENDMENT TO MANAGEMENT AGREEMENT
This Amendment dated as of August 1, 1995, is to the Management
Agreement dated June 3, 1991, by and between ADJUSTABLE RATE SECURITIES
PORTFOLIOS, a Delaware business trust (the "Trust"), on behalf of the U.S.
GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (the "Fund"), formerly Franklin
Institutional U.S. Government Arm Fund, a series of the Trust, and FRANKLIN
ADVISERS, INC., a California corporation (the "Manager"). The undersigned
parties, intending to be legally bound, hereby agree as follows:
(1) Paragraph 4 B. is amended to read:
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain cost and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Management Agreement dated June 3, 1991,
remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and
year first above written.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
On behalf of U.S. Government Adjustable
Rate Mortgage Portfolio
By /s/ Deborah R. Gatzek
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
AMENDMENT TO MANAGEMENT AGREEMENT
This Amendment dated as of August 1, 1995, is to the Management
Agreement dated November 5, 1991, by and between ADJUSTABLE RATE SECURITIES
PORTFOLIOS, a Delaware business trust (the "Trust"), on behalf of the ADJUSTABLE
RATE SECURITIES PORTFOLIO (the "Fund"), a series of the Trust, and FRANKLIN
ADVISERS, INC., a California corporation (the "Manager"). The undersigned
parties, intending to be legally bound, hereby agree as follows:
(1) Paragraph 4 B. is amended to read:
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain cost and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Management Agreement dated November 5,
1991, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and
year first above written.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
On behalf of Adjustable Rate
Securities Portfolio
By /s/ Deborah R. Gatzek
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ADJUSTABLE RATE SECURITIES PORTFOLIOS OCTOBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> ADJUSTABLE RATE SECURITIES PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 19,050,053
<INVESTMENTS-AT-VALUE> 18,645,902
<RECEIVABLES> 1,920,398
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 20,566,300
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 32,053
<TOTAL-LIABILITIES> 32,053
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,682,114
<SHARES-COMMON-STOCK> 2,083,336
<SHARES-COMMON-PRIOR> 2,760,971
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,743,716)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (404,151)
<NET-ASSETS> 20,534,247
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,447,481
<OTHER-INCOME> 0
<EXPENSES-NET> (56,372)
<NET-INVESTMENT-INCOME> 1,391,109
<REALIZED-GAINS-CURRENT> (37,828)
<APPREC-INCREASE-CURRENT> 139,862
<NET-CHANGE-FROM-OPS> 1,493,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,391,109)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 741,450
<NUMBER-OF-SHARES-REDEEMED> (1,560,875)
<SHARES-REINVESTED> 141,790
<NET-CHANGE-IN-ASSETS> (6,544,653)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,705,888)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 89,969
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 104,963
<AVERAGE-NET-ASSETS> 22,483,590
<PER-SHARE-NAV-BEGIN> 9.810
<PER-SHARE-NII> 0.607
<PER-SHARE-GAIN-APPREC> 0.050
<PER-SHARE-DIVIDEND> (0.607)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.860
<EXPENSE-RATIO> 0.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ADJUSTABLE RATE SECURITIES PORTFOLIOS OCTOBER 31, 1996 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 381,367,161
<INVESTMENTS-AT-VALUE> 380,757,717
<RECEIVABLES> 26,905,332
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 407,663,049
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,232,052
<TOTAL-LIABILITIES> 1,232,052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 544,861,030
<SHARES-COMMON-STOCK> 43,397,073
<SHARES-COMMON-PRIOR> 56,035,644
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (137,820,589)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (609,444)
<NET-ASSETS> 406,430,997
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 30,994,231
<OTHER-INCOME> 0
<EXPENSES-NET> (1,180,414)
<NET-INVESTMENT-INCOME> 29,813,817
<REALIZED-GAINS-CURRENT> (419,303)
<APPREC-INCREASE-CURRENT> 2,011,283
<NET-CHANGE-FROM-OPS> 31,405,797
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (29,813,817)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,516,434
<NUMBER-OF-SHARES-REDEEMED> (24,351,072)
<SHARES-REINVESTED> 3,196,067
<NET-CHANGE-IN-ASSETS> (116,370,960)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (137,401,286)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,891,159
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,980,697
<AVERAGE-NET-ASSETS> 472,677,613
<PER-SHARE-NAV-BEGIN> 9.33
<PER-SHARE-NII> .589
<PER-SHARE-GAIN-APPREC> .040
<PER-SHARE-DIVIDEND> (.589)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.37
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
