As filed with the Securities and Exchange Commission on February 26, 1998.
File No.
811-6242
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
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 (650) 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
ADJUSTABLE RATE SECURITIES PORTFOLIO
FORM N-1A, PART A:
ITEM
Responses to Items 1 through 3 have been omitted pursuant to paragraph 3 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 (the "Mortgage
Portfolio") and the Adjustable Rate Securities Portfolio (the "Securities
Portfolio") are the no-load, diversified series of the Adjustable Rate
Securities Portfolios (the "Trust"), an open-end management investment company,
commonly called a mutual fund. Each series may individually or together be
referred to as the "Portfolio(s)."
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"). As permitted by
applicable law, each Portfolio sells its own shares of beneficial interest, par
value of $.01 per share, only to other investment companies.
SHARES OF THE PORTFOLIOS 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 PORTFOLIOS INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE PORTFOLIO INVEST ITS ASSETS?
WHAT ARE THE PORTFOLIO'S GOALS?
The investment goal of each Portfolio is to seek a high level of current income,
consistent with lower volatility of principal. This goal is fundamental, which
means that it may not be changed without shareholder approval.
WHAT KINDS OF SECURITIES DO THE PORTFOLIOS BUY?
The Mortgage Portfolio seeks to achieve its investment goal 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") and having interest rates that reset at
periodic intervals. The Mortgage Portfolio will only invest in mortgage
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
The Securities Portfolio seeks to achieve its investment goal by investing at
least 65% of its total assets in adjustable-rate securities collateralized by or
representing an interest in mortgages, including 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 Securities Portfolio may invest in ARMS issued by private
institutions, such as commercial banks, savings and loan institutions, insurance
companies, private mortgage insurance companies, mortgage bankers, mortgage
conduits of investment banks, finance companies, real estate companies, private
corporations, and others, as long as they are consistent with the Securities
Portfolio's investment goal. Privately issued mortgage securities are generally
structured with one or more types of credit enhancement. The Securities
Portfolio will only invest in securities rated at least AA by Standard & Poor's
Corporation ("S&P") or Aa by Moody's Investors Service, Inc. ("Moody's"), two
nationally recognized statistical rating agencies. The Securities Portfolio may
also invest in unrated securities if Franklin Advisers, Inc. ("Advisers")
determines that they are of comparable quality to the ratings above.
Each Portfolio may also invest up to 35% of its total assets in (a) notes,
bonds, and discount notes of the 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 deposits
("CDs")) in commercial or savings banks or in institutions whose accounts are
insured by the Federal Deposit Insurance Corporation; and (d) with respect to
the Securities Portfolio, asset-backed and mortgage-backed securities issued by
private and government entities. The Securities Portfolio may invest in
fixed-rate or adjustable-rate securities. Each Portfolio's investments in time
deposits will not exceed 10% of its total assets.
For temporary defensive purposes, each Portfolio may invest up to 100% of its
assets in U.S. government securities, CDs 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.
Many mortgage securities 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, 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 they issue 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 Risks of Investing in the
Portfolio?")
The Securities 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
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 Securities Portfolio's quality standards. The
Securities 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 Securities 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 each Portfolio'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. The adjustable interest rate feature of
the mortgages underlying the mortgage securities in which each 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 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 compared to fixed-rate securities. As a result, each
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 extreme fluctuation in interest rates, however, each Portfolio's net
asset value will fluctuate.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, each 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. The Portfolios, 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. Since most mortgage securities held by the Portfolios 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. If prepayments of principal are made on the underlying mortgages
during periods of rising interest rates, the Portfolios generally will be able
to reinvest these amounts in securities with a higher current rate of return.
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,
an investor could suffer some principal loss if shares of the Portfolio are sold
before the interest rates on the underlying mortgages in a Portfolio reset to
market rates. Also, each Portfolio's net asset value could vary to the extent
that current yields on mortgage-backed securities are different from market
yields during interim periods between coupon reset dates. A portion of the ARMS
in which each Portfolio may invest may not reset for up to five years.
During periods of declining interest rates, the interest rates may reset
downward, resulting in lower yields to the Portfolio. As a result, the value of
ARMS is unlikely to rise during periods of declining interest rates to the same
extent as the value of fixed-rate securities. As with other mortgage-backed
securities, declining interest rates may result in accelerated prepayments of
mortgages, and the Portfolios may have to reinvest the proceeds from the
prepayments at the lower prevailing interest rates.
For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change in accordance with movements in a 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.
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 securities are developed and offered to investors, the Securities
Portfolio may invest in them if they are consistent with the Securities
Portfolio's objective, policies, and quality standards.
ADJUSTABLE RATE SECURITIES. The Securities Portfolio will invest
primarily in ARS. ARS are debt securities with interest rates that are
adjusted periodically pursuant to a pre-set formula and interval.
Movements in the relevant index, as well as the applicable spread
relating to the ARS, will affect the interest paid on ARS and,
therefore, the current income earned by the Securities Portfolio by
investing in ARS. (See "Resets.")
The interest rates 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 Securities Portfolio and of the net asset value of
the Securities Portfolio's shares will be a function primarily of the length of
the adjustment period and the degree of volatility in the applicable indices. 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 Securities Portfolio does not seek to
maintain an overall average cap or floor, although Advisers will consider caps
or floors in selecting ARS for the Securities Portfolio.
While the Securities Portfolio does not attempt to maintain a stable net asset
value per share, during periods when short-term interest rates move within the
caps and floors of the securities held by the Securities Portfolio, the
fluctuation in market value of the ARS held by the Securities Portfolio is
expected to be relatively limited, since the interest rates on the ARS generally
adjust to market rates within a short period of time. In periods of substantial
short-term volatility in interest rates, the value of the Securities Portfolio's
holdings may fluctuate more substantially because the caps and floors of its ARS
may not permit the interest rates to adjust to the full extent of the movements
in the market rates during any one adjustment period. In the event of dramatic
increases in interest rates, the lifetime caps on the ARS may prevent the
securities from adjusting to prevailing rates over the term of the loan. In this
case, the market value of the ARS may be substantially reduced, with a
corresponding decline in the Securities Portfolio's net asset value.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"), AND MULTI-CLASS PASS-THROUGHS. Each Portfolio may invest in
CMOs issued and guaranteed by U.S. government agencies or instrumentalities. The
Securities Portfolio may also invest in REMICs issued and guaranteed by U.S.
government agencies and instumentalities, in CMOs and REMICs issued by certain
financial institutions and other mortgage lenders, and in multi-class
pass-through securities. The Mortgage Portfolio will not invest in privately
issued CMOs and REMICs except to the extent that it invests in the securities of
entities that are instrumentalities of the U.S. government.
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 the underlying collateral provides the funds to pay the 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.
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 investors, such as the Portfolios,
to predict more accurately the pace at which principal is returned. The Mortgage
Portfolio may buy CMOs that are:
(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.
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 CMOs may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or accrues
on all classes of a CMO on a monthly, quarterly, or semiannual basis. The
principal and interest on the mortgages underlying CMOs may be allocated among
the several classes in many ways. In a common structure, payments of principal
on the underlying mortgages, including any principal prepayments, 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 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 treated as ARMS by the Securities Portfolio. Floating-rate CMOs may be backed
by fixed- or adjustable- rate mortgages. To date, fixed-rate mortgages have been
more commonly used 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 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 and guaranteed by U.S. government agencies or instrumentalities. The
risk of loss due to default on privately issued CMOs, however, is higher since
they are not guaranteed by the U.S. government. The Board of Trustees of the
Trust (the "Board") believes that the risk of loss to the Securities Portfolio
relating to its investments in privately issued CMOs is justified by the higher
yield the Securities Portfolio will earn in light of the historic loss
experience on these instruments. The Securities Portfolio will 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 not guaranteed by any government agency or
instrumentality.
Advisers currently intends to limit the Securities Portfolio's 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 Securities 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 Securities 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 Securities
Portfolio invests are considered by the SEC to be investment companies, the
Securities Portfolio will limit its investments in those securities in a manner
consistent with the 1940 Act.
RESETS. The interest rates paid on 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 Portfolios may invest
may have intervals as long as five years. There are three main categories of
indices: those based on 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 used 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 Federal Home Loan Bank
Cost of Funds, tend to lag behind changes in market interest rate levels and
tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages that collateralize ARMS and CMOs will
frequently have caps and floors that limit the maximum amount by which the loan
rate to the borrower may change up or down (a) per reset or adjustment interval
and (b) 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 Securities Portfolio may invest in stripped
mortgage securities, which are derivative multi-class mortgage securities. The
stripped mortgage securities in which the Securities Portfolio may invest will
only be issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Stripped mortgage securities have greater market volatility
than other types of mortgage securities in which the Securities Portfolio
invests.
Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class that receives 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
underlying mortgage assets. A rapid rate of principal payments may have a
material adverse effect on the yield to maturity of any IO class held by the
Securities Portfolio. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Securities Portfolio may fail to
recoup its initial investment fully, 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 Securities 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 be illiquid. The
staff of the SEC has indicated that only government-issued IO or PO securities
that 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 Board may, in the future, adopt procedures that would permit the
Securities 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 Securities Portfolio's net assets. This
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.
FLOATERS. Up to 5% of the Securities Portfolio's assets may be invested in
inverse floaters and super floaters. Please see Part B of this registration
statement for more information about these investments.
ASSET-BACKED SECURITIES. The Securities 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, may include
receivables on home equity and credit card loans, and automobile, mobile home,
and recreational vehicle loans and leases. Asset-backed securities are issued in
either a pass-through structure (similar to a mortgage pass-through structure)
or a pay-through structure (similar to a CMO structure). There may be other
types of asset-backed securities that are developed in the future in which the
Securities Portfolio may invest. In general, collateral supporting asset-backed
securities has shorter maturities than mortgage loans and historically has been
less likely to experience substantial prepayment.
DERIVATIVES. Some of the types of investments discussed in this item 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, each Portfolio may invest in
CMOs and uncovered mortgage dollar rolls, and the Securities Portfolio may also
invest in REMICs, 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. Each Portfolio may use these
instruments to help manage risks relating to interest rates and other market
factors, to increase liquidity, and/or to invest in a particular instrument in a
more efficient or less expensive way. The Portfolios will not necessarily use
these instruments or investment strategies to the full extent permitted unless
Advisers believes that doing so will help the Portfolios achieve their
investment goal, and the Portfolios will not use all instruments or strategies
at all times.
WHAT ARE SOME OF THE PORTFOLIOS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
MORTGAGE DOLLAR ROLLS. Each 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 sale price and the lower forward price for the future
purchase (often referred to as the "drop"), as well as 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. In a repurchase agreement, the Portfolio buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the Portfolio by a
custodian bank approved by the Board. The bank or broker-dealer must transfer to
the custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked-to-market daily to maintain coverage
of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, the Portfolio may experience a loss or delay in the
liquidation of the securities underlying the repurchase agreement and may also
incur liquidation costs. Each Portfolio, however, intends to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy by Advisers.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Portfolio may buy U.S.
government obligations (or any securities in the case of the Securities
Portfolio) on a "when-issued" or "delayed-delivery" basis. These transactions
are arrangements under which the Portfolio buys securities with payment and
delivery scheduled for a future time, generally within 30 to 60 days. Purchases
of securities on a when-issued or delayed-delivery basis are subject to market
fluctuation and the risk that the value or yield at delivery may be more or less
than the purchase price or the yield available when the transaction was entered
into. Although each Portfolio will generally buy securities on a when-issued
basis with the intention of acquiring the securities, it may sell the securities
before the settlement date if the Portfolio deems it to be 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 does so only for the purpose of acquiring portfolio securities
consistent with its investment goal 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 seller'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
generally do not earn interest until their scheduled delivery date. The
Portfolios are not subject to any percentage limit on the amount of their assets
that may be invested in when-issued purchase obligations.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, each Portfolio may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
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
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. Each
Portfolio may engage in security loan arrangements with the primary objective of
increasing the Portfolio's income either through investing 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 Securities Portfolio may borrow from banks from time to time to
increase its investments. Borrowings may be secured or unsecured and at fixed or
variable interest rates. The Securities 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 Securities 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 the test. This may require the Securities
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 Securities Portfolio leverages its assets, the Securities
Portfolio's net asset value may increase or decrease at a greater rate than if
the Securities Portfolio were not leveraged. The interest payable on the amount
borrowed increases the Securities Portfolio's expenses, and if the appreciation
and income produced by the investments purchased with the borrowings do not
exceed the cost of the borrowing, leveraging may reduce the investment
performance of the Securities Portfolio.
ILLIQUID INVESTMENTS. Each Portfolio's policy is not to invest more than 10% of
its net assets 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.
OTHER POLICIES AND RESTRICTIONS. Each Portfolio has a number of additional
investment restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about each Portfolio's investment policies,
please see Part B of this registration statement.
Each of the Portfolio's policies and restrictions is considered at the time the
Portfolio makes an investment. The Portfolio is generally not required to sell a
security because of a change in circumstances.
THE ADVANTAGES OF INVESTING IN THE PORTFOLIO
The Mortgage Portfolio enables its shareholders to invest easily in mortgage
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Similarly, the Securities Portfolio enables you to invest
easily in adjustable rate securities rated in the top two rating categories by
nationally recognized statistical rating agencies or 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. Each
Portfolio invests primarily in securities that provide for variable interest
rates that will achieve a more consistent and less volatile net asset value than
is characteristic of mutual funds that invest primarily in similar securities
paying a fixed interest rate. 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 also provides liquidity since an investor may
redeem shares of the Portfolio at any time at the current net asset value.
Please see Item 8 below.
WHAT ARE THE RISKS OF INVESTING IN THE PORTFOLIO?
There is no assurance that a Portfolio will meet its investment goal. The value
of each Portfolio'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, an investor participates 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 a Portfolio owns, the value of
Portfolio shares may also change with movements in the bond market as a whole.
INTEREST RATE RISK. Changes in interest rates will affect the value of each
Portfolio's investments and its 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 each Portfolio's shares. Interest rates have
increased and decreased in the past. These changes are unpredictable.
MORTGAGE SECURITIES. The mortgage securities in which each Portfolio invests
differ from conventional bonds in that principal is paid 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. 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. An expected
rise in interest rates could extend the life of a mortgage security because of a
lower than expected level of prepayments potentially reducing the security's
value and increasing its volatility. ARMS, however, have less risk of a decline
in value 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 applicable caps or maximum rates 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
that, when distributed to shareholders, will be taxable as ordinary income.
Some of the CMOs in which each Portfolio may invest have less liquidity than
other types of mortgage securities. As a result, it may be difficult or
impossible to sell the securities at an advantageous price or time under certain
circumstances.
With respect to pass-through mortgage pools issued by private issuers, there is
no assurance that private insurers of the securities will be able to meet their
obligations. Although the market for privately issued mortgage securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. These securities are subject to the Securities
Portfolio's limit with respect to illiquid investments.
ADJUSTABLE RATE SECURITIES. ARS have several characteristics that an investor
should consider before investing in the Securities Portfolio. As indicated
above, the interest rate reset features of ARS held by the Securities Portfolio
will reduce the effect on the Securities Portfolio's net asset value per share
caused by changes in market interest rates. The market value of ARS and,
therefore, the Securities Portfolio's net asset value may vary, however, to the
extent that the current interest rate on ARS differs from market interest rates
during periods between the interest rate reset dates. 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, and if market interest rates fall below the current
rate on the securities, the value of the securities will rise. The longer the
adjustment intervals on ARS held by the Securities Portfolio, the greater the
potential for fluctuations in the Securities Portfolio's net asset value.
An investor in the Securities Portfolio will receive increased income as a
result of upward adjustments of the interest rates on ARS held by the Securities
Portfolio in response to market interest rates. The Securities Portfolio and its
shareholders, however, will not benefit from increases in market interest rates
once the rates rise to the point where they cause the rates on ARS to reach
their maximum adjustment rate 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
ARMS are often qualified for the loans on the basis of the original payment
amounts. The mortgagor's income may not be sufficient to enable the mortgagor to
continue making loan payments as the payments increase, resulting in a greater
likelihood of default. Conversely, any benefits from an increase in the
Securities 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 Securities Portfolio. The Securities 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, because 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 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 the 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 securities backed
by these receivables. For more information about the risks of investing in
asset-backed securities, please see Part B of this registration statement.
Investments in fixed-rate securities generally decline in value during periods
of rising interest rates and increase in value when interest rates fall. To the
extent the Securities Portfolio invests in fixed-rate securities, the value of
the Securities Portfolio's shares will be more sensitive to interest rate
changes than if the Securities Portfolio were fully invested in adjustable-rate
securities.
5. MANAGEMENT OF THE FUND
WHO MANAGES THE PORTFOLIO?
THE BOARD. The Board oversees the management of each Portfolio and elects its
officers. The officers are responsible for the Portfolio's day-to-day
operations.
INVESTMENT MANAGER. Advisers, manages each Portfolio's assets, makes its
investment decisions, and provides certain administrative services and
facilities for each Portfolio. 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
$221 billion in assets. Advisers is located at 777 Mariners Island Blvd., San
Mateo, California 94404. For information on securities transactions and a
summary of each Portfolio's Code of Ethics, please see Item 16 of Part B of this
registration statement.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
Portfolio since 1991 is: T. Anthony Coffey, Roger Bayston and Jack Lemein.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a 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.
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 1991.
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.
MANAGEMENT FEES. During the fiscal year ended October 31, 1997, management fees,
before any advance waiver, totaled 0.40% of the average daily net assets of each
Portfolio. Total operating expenses were 0.43% for the Mortgage Portfolio and
0.44% for the Securities Portfolio. Under an agreement by Advisers to limit its
fees, the Mortgage Portfolio paid management fees totaling 0.24% and operating
expenses totaling 0.26%. The Securities Portfolio paid management fees totaling
0.21% and operating expenses totaling 0.25%. Advisers may end this arrangement
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, it may consider research and related services, as well as
shares of funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer.
For more information, see Item 17 in Part B.
The response to Item 5A has been omitted pursuant to paragraph 3 of Instruction
F of the General Instructions to Form N-1A.
6. CAPITAL STOCK AND OTHER SECURITIES
HOW IS THE TRUST ORGANIZED?
The Trust was organized as a Delaware business trust. Under the Agreement and
Declaration of Trust, the Board may issue an unlimited number of full and
fractional shares of beneficial interest, with a par value of $.01 per share.
When issued for payment, shares are validly issued, fully paid, and
non-assessable and have no preemptive, conversion, or sinking rights.
Currently the Trust has two series: one series representing interests in the
Securities Portfolio and the other series representing interests in the Mortgage
Portfolio. Shares of each series of the Trust have equal and exclusive rights to
dividends and distributions declared by that series and the net assets of the
series in the event of liquidation or dissolution. Additional series may be
offered in the future.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of January 31, 1998, the Franklin Adjustable U.S. Government Securities Fund
owned of record and beneficially more than 25% of the outstanding shares of the
Mortgage Portfolio. The Franklin Adjustable Rate Securities Fund owned of record
and beneficially more than 25% of the outstanding shares of the Securities
Portfolio.
WHAT DISTRIBUTIONS MIGHT AN INVESTOR RECEIVE FROM THE PORTFOLIO?
The Portfolios' shares have not been registered under the Securities Act of 1933
(the "1933 Act"). This means their shares are restricted securities, which may
not be sold, redeemed or reinvested unless registered or pursuant to an
available exemption from the 1933 Act. 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.
Each Portfolio declares dividends from its net investment income each day that
its net asset value is calculated and reinvests them monthly. The daily
allocation of net investment income begins on the day funds are wired to the
Portfolio.
Capital gains, if any, may be distributed annually, usually in December.
Dividends payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Portfolios' do not pay "interest" or guarantee
any amount of dividends or return on an investment in their shares. Dividends
will automatically be 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.
HOW TAXATION AFFECTS THE PORTFOLIO AND ITS SHAREHOLDERS
TAXATION OF THE PORTFOLIO'S INVESTMENTS. Special tax rules may apply when
determining the income and gains that each Portfolio earns on its investments.
These rules may, in turn, affect the amount of distributions that the Portfolio
pays to a shareholder. These special tax rules are discussed in Item 20 in Part
B.
TAXATION OF THE PORTFOLIO. As a regulated investment company, the Portfolios
generally pay no federal income tax on the income and gains that they distribute
to shareholders.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. For federal income tax purposes, any income dividends received
from a 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. If a Portfolio pays a shareholder an amount in excess of its
income and gains this excess will generally be treated as a non-taxable
distribution.
Each Portfolio will send shareholders a statement in January of the current year
that reflects the amount of ordinary dividends, capital gain distributions and
non-taxable distributions received from the Portfolio in the prior year. This
statement will include distributions declared in December and paid to
shareholders in January of the current year, but which are taxable as if paid on
December 31 of the prior year. The IRS requires a shareholder to report these
amounts on the shareholder's income tax return for the prior year. The
Portfolio's statement for the prior year will tell a shareholder how much of the
shareholder's capital gain distribution represents 28% rate gain property. The
remainder of the capital gain distribution represents 20% rate gain.
DIVIDENDS RECEIVED DEDUCTION. It is anticipated that no portion of either
Portfolio's distributions will qualify for the corporate dividends-received
deduction.
REDEMPTIONS. If a shareholder redeems shares in the Portfolio, the shareholder
will generally have a gain or loss that the IRS requires the shareholder to
report on the shareholder's income tax return. If a shareholder holds shares for
six months or less, any loss the shareholder has will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder from the Portfolio. All or a portion of any loss on the redemption
of a shareholder's shares will be disallowed by the IRS if a shareholder
purchases other shares in the Portfolio within 30 days before or after the
redemption.
STATE TAXES. Ordinary dividends and capital gain distributions that a
shareholder receives from a Portfolio, and gains arising from redemptions of a
shareholder's Portfolio shares, will generally be subject to state and local
income tax. Many states grant tax-free status to dividends paid from interest
earned on direct obligations of the U.S. Government, subject to certain
restrictions. Investments in mortgaged-backed securities (including GNMA, FNMA,
and FHLMC securities), bankers' acceptances, commercial paper and repurchase
agreements collateralized by U.S. government securities do not qualify as direct
federal obligations in most states. The Portfolio will provide shareholders with
information at the end of each calendar year on the amounts of such dividends
that may qualify for exemption from reporting on a shareholder's income tax
return. The holding of Portfolio shares may also be subject to state and local
intangibles taxes.
7. PURCHASE OF SECURITIES BEING OFFERED
HOW DOES AN INVESTOR BUY SHARES?
The Portfolios' shares have not been registered under the 1933 Act, which means
they may not be sold publicly. The Portfolios' shares may, however, be sold
through private placements pursuant to available exemptions from the 1933 Act.
Shares of each Portfolio are sold only to other investment companies. An
investor may buy shares at the net asset value next calculated after the
Portfolio receives the transaction request in proper form. Funds should be wired
to the Portfolio's bank account at Bank of America, 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 any day the Portfolio is open for business.
Federal Funds wire purchase orders are not accepted on days when the Federal
Reserve Bank system and the Portfolio's custodian are closed.
HOW AND WHEN SHARES ARE PRICED
Each Portfolio is open for business each day the New York Stock Exchange (the
"NYSE") is open. The Portfolios determine the net asset value per share as of
the close of the NYSE, normally 1:00 p.m. Pacific time.
To calculate net asset value per share, each Portfolio'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 Item 19
in Part B.
8. REDEMPTION OR REPURCHASE
HOW DOES AN INVESTOR SELL SHARES?
As stated above, the Portfolios' 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 the Portfolio is open for business and are
effected at the net asset value next calculated after the Portfolio receives a
redemption request in proper form.
Redemption payments will be made within seven days after receipt of the
redemption request in proper form. Proceeds for redemption orders cannot be
wired on those business days when the Federal Reserve Bank System and the
custodian bank are closed. Under unusual circumstances, the Portfolio may
suspend redemptions or postpone payment for more than seven days as permitted by
federal securities law.
Redemptions are taxable events. The amount received upon redemption may be more
or less than the amount paid for the shares, depending on 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
ADJUSTABLE RATE SECURITIES PORTFOLIO
FORM N-1A, PART B:
ITEM
10. COVER PAGE
Not Applicable
11. TABLE OF CONTENTS
Not Applicable
12. GENERAL INFORMATION AND HISTORY
The Adjustable Rate Securities Portfolios ("The Trust") 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 two series of the
Trust, the U.S. Government Adjustable Rate Mortgage Portfolio (the "Mortgage
Portfolio") and the Adjustable Rate Securities Portfolio (the "Securities
Portfolio"), the shares of beneficial interest of which are available only to
other investment companies. 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.
13. INVESTMENT OBJECTIVES AND POLICIES
HOW DOES THE PORTFOLIO INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
each Portfolio may buy and its investment policies.
Each Portfolio may invest without limit in obligations of the U.S. government
or of corporations chartered by Congress as federal government
instrumentalities. Each Portfolio may buy securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, such as those issued
by the Government National Mortgage Association ("GNMA"). GNMA guarantees are
backed by the full faith and credit of the U.S. Treasury. No assurances,
however, can be given that the U.S. government will provide financial support
to the obligations of other U.S. government agencies or instrumentalities in
which the Portfolio may invest. Securities issued by these agencies and
instrumentalities are supported by 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 buy certain obligations of
an agency or instrumentality, or the credit of the agency or instrumentality.
Several of the Franklin Templeton Funds, including the Portfolios, are major
buyers of government securities. Franklin Advisers, Inc. ("Advisers") will seek
to negotiate attractive prices for government securities and pass on any savings
from these negotiations to shareholders in the form of higher current yields.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"). To the extent indicated in Part A, each Portfolio may
invest in CMOs, and the Securities Portfolio may also invest in REMICs. CMOs and
REMICs may be issued by governmental or government-related entities or by
private entities such as banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers and
are secured by pools of mortgages backed by residential or various types of
commercial properties. Privately issued CMOs and REMICs include obligations
issued by private entities that are collateralized by (a) mortgage securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association, or GNMA, (b) pools of mortgages that are
guaranteed by an agency or instrumentality of the U.S. government, or (c) pools
of mortgages that are not guaranteed by an agency or instrumentality of the U.S.
government and that may or may not be guaranteed by the private issuer. The
Mortgage Portfolio will not invest in privately issued CMOs or REMICs.
ASSET-BACKED SECURITIES. The Securities Portfolio may invest 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
payment rate may be affected by various economic and 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 underlying assets, how well the issuers of the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities.
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 the underlying assets to make payments, asset-backed securities
may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses from the
default by an obligor on the underlying assets. Liquidity protection refers to
advances, generally provided 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 from the default by an obligor 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 Securities Portfolio will not pay any additional fees for 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 that are subordinate to the other classes with respect 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 on the securities and pay any servicing or other fees). The degree of
credit support provided 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 securities.
FLOATERS. The Securities 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 of short-term interest rates
and move at an accelerated speed. The Securities Portfolio may also invest up to
5% of its total assets in super floaters. Super floaters 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.
CASH AND CASH EQUIVALENTS. Each Portfolio may retain its underlying assets in
cash and cash equivalents, including Treasury bills, commercial paper, and
short-term bank obligations such as Certificates of deposit ("CDs"), bankers'
acceptances, and repurchase agreements. Each Portfolio intends, however, to
retain in cash only as much of its underlying assets as is considered desirable
or expedient under existing market conditions.
INVESTMENT RESTRICTIONS
Each 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. Each Portfolio MAY NOT:
1. In the case of the Mortgage Portfolio, 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 Mortgage Portfolio will not purchase additional
investment securities while borrowings in excess of 5% of total assets are
outstanding. The Securities Portfolio may not 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) 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 advisor, 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 in the case of the Securities Portfolio, 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, each Portfolio may invest in shares of one or more money market
funds managed by 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 bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Portfolio, the Portfolio may receive stock, real estate,
or other investments that the Portfolio would not, or could not, buy. In this
case, each Portfolio intends to dispose of the investment as soon as practicable
while maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
14. MANAGEMENT OF THE REGISTRANT
OFFICERS AND TRUSTEES
The Board of Trustees of the Trust (the "Board") has the responsibility for the
overall management of each 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 each 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 THE PAST FIVE
YEARS
- -----------------------------------------------------------------------------
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65)
191 Clapboard Ridge
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 52 of the
investment companies in the Franklin Templeton Group of Funds; and formerly
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (65)
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 or trustee, as
the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds; and formerly Director, General Host Corporation (nursery and
craft centers).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and formerly, Director, General Host Corporation (nursery and craft
centers)
*Charles E. Johnson (41)
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.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 37 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57)
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 or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 56 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); 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 (73)
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, as the case may be, of six of the investment companies in
the Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 51 of the investment companies in
the Franklin Templeton Group of Funds; FORMERLY Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, 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. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 56 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 56 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 56 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
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, the nonaffiliated Board members also serve as
directors or trustees 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 TOTAL FEES RECEIVED IN THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH
NAME TRUST** FUNDS** EACH SERVES***
------------------------------------------------------------------------
Frank H. Abbott, III $1,150 $165,937 28
Harris J. Ashton 1,150 344,642 52
S. Joseph Fortunato 1,150 361,562 54
David Garbellano**** 900 91,317 N/A
Frank W.T. LaHaye 1,100 141,433 27
Gordon S. Macklin 1,150 337,292 51
*For the fiscal year ended October 31, 1997.
**For the calendar year ended December 31, 1997.
***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 57 registered investment companies, with approximately 170 U.S. based
funds or series.
****Deceased, September 27, 1997.
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 or trustee.
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 January 31, 1998, the Franklin Adjustable Rate Securities Fund, a
series of the Franklin Investors Securities Trust ("FIST"), owned of record and
beneficially 94.1% of the outstanding voting securities of the Securities
Portfolio. The Franklin Adjustable U.S. Government Securities Fund, also a
series of FIST, owned of record and beneficially 98.48% of the outstanding
voting securities of the Mortgage Portfolio. These two series of FIST could each
be deemed to control the respective Portfolio or Trust, 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. As of January 31, 1998, the Franklin Institutional Adjustable Rate Securities
Fund owned of record or beneficially 5.83% of the outstanding shares of the
Securities Portfolio. Except for the companies referred to in this item, no
other person was known to hold beneficially or of record more than 5% of either
Portfolio's outstanding shares.
c. As of January 31, 1998, the officers and Board members did not own of record
or beneficially any shares of either Portfolio.
16. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Each Portfolio's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for each 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. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of 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 "Summary of Code of Ethics" below.
Advisers also provides certain administrative services and facilities for each
Portfolio. These include preparing and maintaining books, records, and tax and
financial reports, and monitoring compliance with regulatory requirements.
MANAGEMENT FEES. Under their management agreements, each Portfolio pays Advisers
a management fee equal to an annual rate of 40/100 of 1% of the value of its net
assets up to and including $5 billion; 35/100 of 1% of the value of its net
assets in excess of $5 billion up to and including $10 billion; 33/100 of 1% of
the value of its net assets in excess of $10 billion up to and including $15
billion; and 30/100 of 1% of net assets in excess of $15 billion. The fee is
computed at the close of business on the last business day of each month.
For the fiscal years ended October 31, 1997, 1996 and 1995 management fees for
the Mortgage Portfolio, before any advance waiver, totaled $1,487,256,
$1,891,159 and $2,456,413, respectively, and management fees for the Securities
Portfolio, before any advance waiver, totaled $96,727, $89,969 and $119,324,
respectively. Under an agreement by Advisers to limit its fees, the Mortgage
Portfolio paid management fees totaling $880,981, $1,090,876 and $68,077, and
the Securities Portfolio paid management fees totaling $51,453, $41,378 and
$55,384, for the same periods.
MANAGEMENT AGREEMENTS. The management agreements are in effect until February
28, 1998. They may continue in effect for successive annual periods if their
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 agreements 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 agreements may each 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 on 60 days' written notice to
Advisers, or by Advisers on 60 days' written notice to the Portfolio, 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. The Portfolio may also reimburse Investor Services for certain
out-of-pocket expenses, which may include payments by Investor Services to
entities, including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
Portfolio. The amount of reimbursements for these services per benefit plan
participant Portfolio account per year may not exceed the per account fee
payable by the Portfolio to Investor Services in connection with maintaining
shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Portfolio. The custodian does 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, 1997, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1997.
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 by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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 AND OTHER POLICIES
HOW DOES THE PORTFOLIO BUY SECURITIES FOR ITS PORTFOLIO?
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 Advisers receives from 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 staffs 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, the sale of shares
of 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 NASD, 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 of 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, 1997, 1996 and 1995, the Portfolio
paid no brokerage commissions.
As of October 31, 1997, 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 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 Federal Deposit
Insurance Corporation, and is not an obligation of, or guaranteed by, any bank.
Shares have no preemptive, subscription or conversion rights.
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 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 Portfolio's
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, an investor may not be able to recover an
investment in a timely manner.
HOW ARE FUND SHARES VALUED?
Each Portfolio calculates its net asset value per share as of the close of the
New York Stock Exchange ("NYSE"), normally 1:00 p.m. Pacific time, each day that
the NYSE is open for trading. As of the date of this registration statement, the
Portfolio is informed that the NYSE observes the following holidays: New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of each 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 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 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 Part A.
DISTRIBUTIONS OF NET INVESTMENT INCOME. Each Portfolio receives income generally
in the form of interest, original issue, market and acquisition discount, and
other income derived from its investments. This income, less expenses incurred
in the operation of the Portfolio, constitutes its net investment income from
which dividends may be paid to shareholders. Any distributions by the Portfolio
from such income will be taxable to the shareholder as ordinary income, whether
the shareholder takes them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Portfolio may derive capital gains and
losses in connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to the shareholder as ordinary
income. Distributions paid from long-term capital gains realized by the
Portfolio will be taxable to the shareholder as long-term capital gain,
regardless of how long the shareholder has held shares in the Portfolio. Any net
short-term or long-term capital gains realized by the Portfolio (net of any
capital loss carryovers) generally will be distributed once each year, and may
be distributed more frequently, if necessary, in order to reduce or eliminate
federal excise or income taxes on the Portfolio.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Portfolio will inform
shareholders of the amount and character of distributions at the time they are
paid, and will advise them of the tax status for federal income tax purposes of
such distributions shortly after the close of each calendar year. If the
shareholder has not held Portfolio shares for a full year, the shareholder may
have designated and distributed as ordinary income or capital gain a percentage
of income that is not equal to the actual amount of such income earned during
the period of the shareholder's investment in the Portfolio.
ELECTION TO BE TAXED AS REGULATED INVESTMENT COMPANY. 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.
In order to qualify as a regulated investment company for tax purposes, the
Portfolio must meet certain specific requirements, including:
o The Portfolio must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Portfolio's total
assets, and, with respect to 50% of the Portfolio's total assets, no
investment (other than cash and cash items, U.S. government securities and
securities of other regulated investment companies) can exceed 5% of the
Portfolio's total assets;
o The Portfolio must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The Portfolio must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. 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 January of the following year, 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 will report this income
to the shareholder on Form 1099-DIV for the year in which these distributions
were 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
eliminate any or all federal excise taxes.
REDEMPTION OF FUND SHARES. Redemptions 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
disallowed under these rules will be added to the shareholder's tax basis in the
new shares purchased.
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.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to shareholders from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by the Portfolio. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by U.S.
government securities do not generally qualify for tax-free treatment. At the
end of each calendar year, the Portfolio will provide shareholders with the
percentage of any dividends paid that may qualify for tax-free treatment on
their income tax return. Because the rules on exclusion of this income are
different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Portfolio's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the Portfolio for the most recent
fiscal year qualified for the dividends-received deduction, and it is
anticipated that none of the current year's dividends will so qualify.
CONVERSION TRANSACTIONS. Gains realized by the Portfolio from transactions that
are deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to the
extent that such gain does not exceed an amount defined as the "applicable
imputed income amount". A conversion transaction is any transaction in which
substantially all of the Portfolio's expected return is attributable to the time
value of the Portfolio's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future; 2)
the transaction is an applicable straddle; 3) the transaction was marketed or
sold to the Portfolio on the basis that it would have the economic
characteristics of a loan but would be taxed as capital gain; or 4) the
transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. To
the extent the Portfolio invests in zero coupon bonds, bonds issued or acquired
at a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the Portfolio may have to recognize income and make
distributions to shareholders before its receipt of cash payments. Zero coupon
and delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The Portfolio is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in order
to maintain its qualification as a regulated investment company and to avoid
income reporting and excise taxes at the Portfolio level. PIK bonds are subject
to similar tax rules concerning the amount, character and timing of income
required to be accrued by the Portfolio. Bonds acquired in the secondary market
for a price less than their stated redemption price, or revised issue price in
the case of a bond having OID, are said to have been acquired with market
discount. For these bonds, the Portfolio may elect to accrue market discount on
a current basis, in which case the Portfolio will be required to distribute any
such accrued discount. If the Portfolio does not elect to accrue market discount
into income currently, gain recognized on sale will be recharacterized as
ordinary income instead of capital gain to the extent of any accumulated market
discount on the obligation.
DEFAULTED OBLIGATIONS. The Portfolio may be required to accrue income on
defaulted obligations and to distribute such income to shareholders even though
it is not currently receiving interest or principal payments on such
obligations. In order to generate cash to satisfy these distribution
requirements, the Portfolio may be required to dispose of portfolio securities
that it otherwise would have continued to hold or to use cash flows from other
sources such as the sale of Portfolio 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, 1997, including the
auditors' report, are incorporated herein by reference.
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, 1997, as filed with the
SEC electronically on form type N-30D on January 9, 1998.
(i) Financial Highlights
(ii) Statement of Investments in Securities and Net Assets - October 31,
1997
(iii) Statements of Assets and Liabilities - October 31, 1997
(iv) Statements of Operations - for the year ended October 31, 1997
(v) Statements of Changes in Net Assets - for the years ended October
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(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,
Inc., dated August 1, 1995
Filing: Amendment No. 10 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1997
(iv) Amendment to Management Agreement (dated November 5, 1991)
between Registrant and Franklin Advisers, Inc., dated August
1, 1995
Filing: Amendment No. 10 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 27, 1997
(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) Amendment to Master Custody Agreement between Registrant and
Bank of New York dated October 15, 1997
(ii) Amendment to Master Custody Agreement between Registrant and
Bank of New York dated May 7, 1997
(iii) 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
(iv) 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 January 31, 1998
- ----------------------------------------------------------------------
Shares of Beneficial Interest
of:
Adjustable Rate Securities
Portfolio Three
U.S. Government Adjustable
Rate Mortgage Portfolio Two
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 xxth day
of February 1998.
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) Management 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 *
(dated June 3, 1991) between
Registrant and Franklin Advisers, Inc.
dated August 1, 1995
EX-99.B5(iv) Amendment to Management Agreement *
(dated November 5, 1991) between
Registrant and Franklin Advisers, Inc.
dated August 1, 1995
EX-99.B8(i) Amendment to Master Custody Agreement Attached
between Registrant and Bank of New
York dated May 7, 1997
EX-99.B8(ii) Amendment to Master Custody Agreement Attached
between Registrant and Bank of New
York dated October 15, 1997
EX-99.B8(iii) Mater Custody Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B8(iv) 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, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 Additional Duties With Respect to Russian Securities.
(a) Upon [2] business days prior notice from a Fund that it will invest in
any security issued by a Russian issuer ("Russian Security"), the Custodian
shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) Regular Share Confirmations. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular share confirmations
on behalf of the Foreign Custodian's customers.
(2) Prompt Re-registrations. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) Use of Nominee Name. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) Auditor Verification. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) Specification of Registrar's Responsibilities and
Liabilities. The
contract must set forth: (1) the Registrar's responsibilities with regard to
corporate actions and other distributions; (ii) the Registrar's liabilities as
established under the regulations applicable to the Russian share registration
- -system and (iii) the procedures for making a claim against and receiving
compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and
delivery of Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /s/Stephen E. Grunston
Name: Stephen E. Grunston
Title:Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /s/Deborah R. Gatzek
Name: Deborah r. Gatzek
Title: Vice President
By: /s/Karen L. Skidmore
Name: Karen L. Skidmore
Title: Assistant Vice President
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon [2] business days prior notice from a Fund that it will
invest in any security issued by a Russian issuer ("Russian Security"), the
Custodian shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular share confirmations
on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the
Registrar's responsibilities with regard to corporate actions and other
distributions; (ii) the Registrar's liabilities as established under the
regulations applicable to the Russian share registration -system and (iii) the
procedures for making a claim against and receiving compensation from the
registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and
delivery of Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /S/STEPHEN E. GRUNSTON
Name: Stephen E. Grunston
Title:Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /S/DEBORAH R. GATZEK
Name: Deborah r. Gatzek
Title: Vice President
By: /s/KAREN L. SKIDMORE
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /S/ DEBORAH R. GATZEK
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
Stephen E. Grunston
Title: Vice President
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------
Adjustable Rate Delaware Business Trust U.S. Government
Securities Portfolios Adjustable Rate Mortgage
Portfolio
Adjustable Rate
Securities Portfolio
Franklin Asset
Allocation Fund Delaware Business Trust
Franklin California Tax-Free Maryland Corporation
Income Fund, Inc.
Franklin California Massachusetts Business Franklin California Insured
Tax-Free Trust Trust Tax-Free Income Fund
Franklin California Tax-
Exempt Money Fund
Franklin California
Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Maryland Corporation Growth Series
Funds, Inc. Utilities Series
Dynatech Series
Income Series
U.S. Government Securities
Series
Franklin Equity Fund California Corporation
Franklin Federal California Corporation
Money Fund
Franklin Federal
Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Massachusetts Business
Securities Trust Trust
Franklin High Delaware Business AGE High Income Fund
Income Fund Trust
Franklin Investors Massachusetts Business Franklin Global
Securities Trust Trust Government Income Fund
Franklin Short-
Intermediate U.S. Gov't
Securities Fund
Franklin Convertible
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin Equity Income
Fund
Franklin Adjustable Rate
Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate
Trust Qualified Dividend Fund
Franklin Rising Dividends
Fund
Franklin Investment Grade
Income Fund
Franklin Institutional
Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Delaware Business Trust Franklin Hawaii Municipal
Securities Trust Bond Fund
Franklin California High
Yield Municipal Fund
Franklin Washington
Municipal Bond Fund
Franklin Tennessee
Municipal Bond Fund
Franklin Arkansas
Municipal Bond Fund
Franklin New York Delaware Business Trust
Tax-Free Income Fund
Franklin New York Massachusetts Business Franklin New York Tax-Exempt
Tax-Free Trust Trust Money Fund
Franklin New York Intermediate-
Term Tax-Free Income Fund
Franklin New York Insured Tax-
Free Income Fund
Franklin Real Estate Delaware Business Trust Franklin Real Estate Securities
Securiteis Trust Fund
Franklin Strategic Delaware Business Trust
Mortgage Portfolio
Franklin Strategic Delaware Business Trust Franklin California Growth Fund
Series Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery
Fund
Franklin Tax-Exempt California Corporation
Money Fund
Franklin Tax-Free Massachusetts Business Franklin Massachusetts Insured
Trust Trust Tax-Free Income Fund
Franklin Michigan Insured Tax-Free
Income Fund
Franklin Minnesota Insured Tax-Free
Income Fund
Franklin InsuredTax-Free Income Fund
Franklin Ohio Insured Tax-Free
Income Fund Franklin Puerto Rico
Tax-Free Income Fund Franklin
Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income
Fund Franklin Georgia Tax-Free
Income Fund Franklin Pennsylvania
Tax-Free Income Fund Franklin High
Yield Tax-Free Income Fund Franklin
Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin virginia Tax-Free Income
Fund Franklin Alabama Tax-Free
Income Fund Franklin Florida
Tax-Free Income Fund Franklin
Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income
Fund Franklin Louisiana Tax-Free
Income Fund Franklin Maryland
Tax-Free Income Fund Franklin North
Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income
Fund Franklin Kentucky Tax-Free
Income Fund Franklin Federal
Intermediate-Term Tax-Free Income
Fund Franklin Arizona Insured
Tax-Free Income Fund Franklin
Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income
Fund
Franklin Templeton Delaware Business Trust Franklin Templeton Conservative
Fund Allocator Series Target Fund
Franklin Templeton Moderate Target
Fund
Franklin Templeton Growth Target
Fund
Franklin Templeton Delaware Business Trust Franklin Templeton German
Global Trust Government Bond Fund
Franklin Templeton Global Currency
Fund
Franklin Templeton Hard Currency
Fund
Franklin Templeton High Income
Currency Fund
Franklin Templeton Delaware Business Trust Templeton Pacific Growth Fund
International Trust Templeton Foreign Smaller Companies
Fund
Franklin Templeton Delaware Business Trust Franklin Templeton Money Fund II
Money Fund Trust
Franklin Value Massachusetts Business Franklin Balance Sheet Investment Fund
Investors Trust Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Massachusetts Business Money Market Fund
Funds Trust Growth and Income Fund
Natural Resources Securiteis Real
Estate Securities Fund Utility Equity
Fund High Income Fund Templeton Global
Income Securities Fund Income
Securities Fund U.S. Government
Securities Fund Zero Coupon Fund -
2000 Zero Coupon Fund - 2005 Zero
Coupon Fund - 2010 Rising Dividends
Fund
Fund
Franklin Valuemark Massachusetts Business Templeton Pacific Growth Fund
Funds Trust Templeton International Equity Fund
Templeton Developing Markets
Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation
Fund
Small Cap Fund
Capital Growth
Templeton International Smaller
Companies Fund
Institutional Massachusetts Business Money Market Portfolio
Fiduciary Trust Trust Franklin U.S. Government Securities
Money Market Portfolio
Franklin U.S. Treasury Money Market
Portfolio
Franklin Institutional Adjustable
Franklin Institutional Adjustable
Rate Securities Fund
Franklin U.S. Government Agency
Money Market Fund
Franklin Cash Reserves Fund
The Money Market Delaware Business Trust The Money Market Portfolio
Portfolios The U.S. Government Securities Money
Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Massachusetts Business Trust
Trust
Franklin Principal Maturity Massachusetts Business Trust
Trust
Franklin Universal Trust Massachusetts Business Trust
Franklin Floating Rate Trust Delaware Business Trust
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ADJUSTABLE RATE SECURITIES PORTFOLIOS OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 330,058,485
<INVESTMENTS-AT-VALUE> 333,124,720
<RECEIVABLES> 30,574,869
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 363,699,589
<PAYABLE-FOR-SECURITIES> 19,129,729
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,028,770
<TOTAL-LIABILITIES> 21,158,499
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 476,601,736
<SHARES-COMMON-STOCK> 36,140,971
<SHARES-COMMON-PRIOR> 43,397,073
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (137,126,881)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,066,235
<NET-ASSETS> 342,541,090
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 24,396,969
<OTHER-INCOME> 0
<EXPENSES-NET> (932,545)
<NET-INVESTMENT-INCOME> 23,464,424
<REALIZED-GAINS-CURRENT> 693,708
<APPREC-INCREASE-CURRENT> 3,675,679
<NET-CHANGE-FROM-OPS> 27,833,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23,464,424)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,468,647
<NUMBER-OF-SHARES-REDEEMED> (24,217,403)
<SHARES-REINVESTED> 2,492,654
<NET-CHANGE-IN-ASSETS> (63,889,907)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (137,820,589)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,487,256
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,589,203
<AVERAGE-NET-ASSETS> 371,722,372
<PER-SHARE-NAV-BEGIN> 9.370
<PER-SHARE-NII> .593
<PER-SHARE-GAIN-APPREC> .110
<PER-SHARE-DIVIDEND> (.593)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.480
<EXPENSE-RATIO> .250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMAY FINANCIAL INFORMATION EXTRACTED FROM THE
ADJUSTABLE RATE SECURITIES PORTFOLIOS OCTOBER 31, 1997 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> ADJUSTABLE RATE SECURITIES PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 22,096,464
<INVESTMENTS-AT-VALUE> 21,952,919
<RECEIVABLES> 1,683,204
<ASSETS-OTHER> 7,274
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,643,397
<PAYABLE-FOR-SECURITIES> 999,924
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 103,611
<TOTAL-LIABILITIES> 1,103,535
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,412,654
<SHARES-COMMON-STOCK> 2,265,903
<SHARES-COMMON-PRIOR> 2,083,336
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,729,247)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (143,545)
<NET-ASSETS> 22,539,862
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,562,033
<OTHER-INCOME> 0
<EXPENSES-NET> (61,422)
<NET-INVESTMENT-INCOME> 1,500,611
<REALIZED-GAINS-CURRENT> 14,469
<APPREC-INCREASE-CURRENT> 260,606
<NET-CHANGE-FROM-OPS> 1,775,686
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,500,611)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,195,631
<NUMBER-OF-SHARES-REDEEMED> (2,164,571)
<SHARES-REINVESTED> 151,507
<NET-CHANGE-IN-ASSETS> 2,005,615
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,743,716)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 96,727
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 106,696
<AVERAGE-NET-ASSETS> 24,198,429
<PER-SHARE-NAV-BEGIN> 9.860
<PER-SHARE-NII> .616
<PER-SHARE-GAIN-APPREC> .090
<PER-SHARE-DIVIDEND> (.616)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.950
<EXPENSE-RATIO> .250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
