As filed with the Securities and Exchange Commission on February 29, 2000.
File No.
811-6242
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
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
Murray L. Simpson, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Please Send Copy of Communications to:
Mark H. Plafker, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19102
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
FORM N-1A, PART A:
Responses to Items 1 through 3 have been omitted pursuant to section 2(b) of
Instruction B of the General Instructions to Form N-1A.
ITEM 4. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED
RISKS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
GOAL AND STRATEGIES
GOAL The fund's investment goal is to seek a high level of current income,
while providing lower volatility of principal than a fund that invests in
fixed-rate securities.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of
its assets in adjustable-rate mortgage securities (ARMS) and other mortgage
securities with interest rates that adjust periodically to reflect prevailing
market interest rates. The fund will only invest in mortgage securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
Mortgage securities represent an ownership in mortgage loans made by banks
and other financial institutions to finance purchases of homes, commercial
buildings and other real estate. The individual loans are packaged or
"pooled" together for sale to investors. As the underlying mortgage loans are
paid off, investors receive principal and interest payments. The mortgage
securities purchased by the fund include bonds and notes issued by the
Federal Home Loan Banks, Federal National Mortgage Association (FNMA),
Government National Mortgage Association (GNMA) and Federal Home Loan
Mortgage Corporation (FHLMC).
Government agency or instrumentality issues have different levels of credit
support. GNMA securities are supported by the full faith and credit of the
U.S. government; FNMA securities are supported by its right to borrow from
the U.S. Treasury under certain circumstances; and FHLMC securities are
supported only by the credit of that instrumentality. The government (or
government agency) guarantee only applies to the timely repayment of
principal and interest and not to the market prices and yields of the
securities or to the net asset value or performance of the fund, which will
vary with changes in interest rates and other market conditions.
Interest rates on adjustable-rate securities generally are reset at intervals
of one year or less so that their rates gradually align themselves with
market interest rates. These periodic adjustments help keep the prices of
these securities relatively stable when compared with the prices of
fixed-rate securities, which generally fall when interest rates rise. As a
result, the fund may participate in increases in interest rates resulting in
higher current yields, but with less fluctuation in net asset value than a
fund invested in comparable fixed-rate securities. Adjustable-rate
securities, however, frequently limit the maximum amount by which the loan
rate may change up or down. The fund, therefore, may not benefit from
increases in interest rates if interest rates exceed a security's maximum
allowable periodic or lifetime limits. During periods of falling interest
rates, the interest rates on these securities may reset downward, resulting
in a lower yield for the fund.
OTHER INVESTMENTS The fund may invest up to 35% of its net assets in other
securities, consistent with its goal, including fixed-rate mortgage
securities. The fund may also invest in direct obligations of the U.S.
government, such as Treasury bills, bonds or notes, and in repurchase
agreements collateralized by U.S. government or government agency securities.
The fund also may purchase collateralized mortgage obligations (CMOs).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal, because
it may not invest or may invest substantially less in ARMS and other
adjustable-rate securities.
MAIN RISKS
INTEREST RATE Because changes in interest rates on ARMS and other
adjustable-rate securities lag behind changes in market rates, the net asset
value of the fund may decline during periods of rising interest rates until
the interest rates on these securities reset to market rates. You could lose
money if you sell your shares of the fund before these rates reset.
If market interest rates increase substantially and the fund's
adjustable-rate securities are not able to reset to market interest rates
during any one adjustment period, the value of the fund's holdings and its
net asset value may decline until the rates are able to reset to market
rates. In the event of a dramatic increase in interest rates, the lifetime
limit on a security's interest rate may prevent the rate from adjusting to
prevailing market rates. In such an event the market value of the security
could decline substantially and affect the fund's net asset value.
To the extent the fund invests in non-mortgage debt securities it will be
subject to additional interest rate risks. When interest rates rise, debt
security prices fall. The opposite is also true: debt security prices rise
when interest rates fall. In general, securities with longer maturities are
more sensitive to these interest rate changes than securities with shorter
maturities.
Because the interest rates on adjustable-rate securities generally reset
downward when interest rates fall, their market value is unlikely to rise to
the same extent as the value of comparable fixed-rate securities during
periods of declining interest rates.
MORTGAGE SECURITIES Mortgage securities differ from conventional debt
securities because principal is paid back over the life of the security
rather than at maturity. The fund may receive unscheduled prepayments of
principal before the security's maturity date due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. To the fund this
means a loss of anticipated interest, and a portion of its principal
investment represented by any premium the fund may have paid. Mortgage
prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities
and extend their life. This could cause the price of the mortgage securities
and the fund's share price to fall and would make the mortgage securities
more sensitive to interest rate changes.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
YEAR 2000 At this date, it appears neither the fund's operations nor those
of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested may be adversely affected by Year 2000 problems until
all of their various data processing activities for the year have been
completed.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
Mutual fund shares 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
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
The response to Item 5 has been omitted pursuant to section 2(b) of
Instruction B of the General Instructions to Form N-1A.
ITEM 6. MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE
(A) MANAGEMENT
(1) INVESTMENT ADVISER
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $235 billion in assets.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.40% of its average daily net
assets to the manager for its services.
(2) PORTFOLIO MANAGER
The team responsible for the fund's management is:
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1991 and has more than 30
years' experience in the securities industry.
ITEM 7. SHAREHOLDER INFORMATION
(A) PRICING OF FUND SHARES
The fund calculates the net asset value per share (NAV) each business day at
the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). The fund's NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
Requests to buy and sell shares are processed at the NAV next calculated
after the fund receives a request in proper form.
(B) PURCHASE OF FUND SHARES
The fund's shares have not been registered under the Securities Act of 1933
(1933 Act), which means they may not be sold publicly. The fund's shares may,
however, be sold through private placements pursuant to available exemptions
from the 1933 Act.
Shares of the fund are sold only to other investment companies. Funds should
be wired to the fund's bank account at Bank of America, for credit to the
fund's account. All investments in the fund are credited to the shareholder's
account in the form of full and fractional shares of the fund (rounded to the
nearest 1/1000 of a share). The funds do not issue share certificates.
Shares of the fund generally may be purchased on any day the fund is open for
business. Wire purchase orders in federal funds are not accepted on days when
the Federal Reserve Bank system and the fund's custodian are closed.
(C) REDEMPTION OF FUND SHARES
As stated above, the fund's shares are restricted securities, which may not
be sold unless registered or pursuant to an available exemption from the 1933
Act.
Redemptions are processed on any day the funds are open for business and are
effected at the NAV next calculated after the fund 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. In unusual circumstances, the fund may temporarily
suspend redemptions or postpone the payment of proceeds as allowed 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 fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
(D) DIVIDENDS AND DISTRIBUTIONS
The fund's shares have not been registered under 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.
The fund declares dividends daily from its net investment income and
reinvests them monthly generally at the close of business on the last
business day of the month. The daily allocation of net investment income
begins on the day funds are wired to the fund. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the funds will pay dividends. The fund does not pay
"interest" or guarantee any return on an investment in its shares.
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.
(E) TAX CONSEQUENCES
In general, fund distributions are taxable to shareholders as either ordinary
income or capital gains. This is true whether a shareholder reinvests its
distributions in additional fund shares or receives them in cash. Any capital
gains the fund distributes are taxable to shareholders as long-term capital
gains no matter how long a shareholder has owned fund shares.
By law, the fund must withhold 31% of taxable distributions or redemption
proceeds if the shareholder does not provide its correct taxpayer
identification number and certify that it is not subject to backup
withholding, or if the IRS instructs the fund to do so.
Every January, shareholders will receive a statement that shows the tax
status of distributions received for the previous year. Distributions
declared in December but paid in January are taxable as if they were paid in
December.
When a shareholder sells or exchanges shares of the fund, the shareholder may
have a capital gain or loss.
Fund distributions and gains from the sale or exchange of fund shares will
generally be subject to state and local income tax. States grant tax-free
status to dividends paid from interest on U.S. government obligations.
However, investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities
generally do not qualify for tax-free treatment, and investment companies
that invest in the fund may not be able to pass through to their shareholders
the exempt character of interest earned by the fund on its U.S. government
obligations.
ITEM 8. DISTRIBUTION ARRANGEMENTS
Not Applicable
The response to Item 9 has been omitted pursuant to section 2(b) of
Instruction B of the General Instructions to Form N-1A.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
FORM N-1A, PART B:
ITEM 10. COVER PAGE AND TABLE OF CONTENTS
Not Applicable
ITEM 11. FUND HISTORY
The Adjustable Rate Securities Portfolios (trust), formerly named the
Franklin Institutional U.S. Government ARM Fund, is an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Delaware business trust on February 15, 1991, and is registered with the
U.S. Securities and Exchange Commission (SEC) under the Investment Company
Act of 1940, as amended (1940 Act). On October 18, 1991, the board of
trustees approved a change in the trust's name and the addition of the series
of the trust, the U.S. Government Adjustable Rate Mortgage Portfolio (fund),
the shares of beneficial interest of which are available only to other
investment companies.
ITEM 12. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
GOAL AND STRATEGIES
The fund's investment goal is to seek a high level of current income, while
providing lower volatility of principal than a fund that invests in
fixed-rate securities. The investment objective of the fund is fundamental,
which means that it may not be changed without shareholder approval. The fund
maintains a "diversified" portfolio of investments, as defined in the 1940
Act.
The fund 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 fund will only invest in mortgage securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
The fund may also invest up to 35% of its total assets in (a) fixed-rate
notes, bonds, and discount notes of the Federal Home Loan Banks, Federal
National Mortgage Association, Government National Mortgage Association,
Federal Home Loan Mortgage Corporation, 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; and
(c) time and savings deposits (including CDs) in commercial or savings banks
or in institutions whose accounts are insured by the Federal Deposit
Insurance Corporation, although time deposits will not exceed 10% of its
total assets.
The following describes the various types of securities the fund may buy.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits;
bankers' acceptances. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
U.S. GOVERNMENT SECURITIES The fund may invest without limit in obligations
of the U.S. government or of corporations chartered by Congress as federal
government instrumentalities. The fund 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 fund 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 fund, are major buyers
of government securities. The manager 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.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS Mortgage securities represent
an ownership interest in mortgage loans made by banks and other financial
institutions to finance purchases of homes, commercial buildings or other
real estate. These mortgage loans may have either fixed or adjustable
interest rates. The individual mortgage loans are packaged or "pooled"
together for sale to investors. As the underlying mortgage loans are paid
off, investors receive principal and interest payments.
The fund may invest in mortgage-backed securities issued or guaranteed by
GNMA, the Federal National Mortgage Association (FNMA) and the Federal Home
Loan Mortgage Corporation (FHLMC).
The primary issuers or guarantors of mortgage securities are GNMA, FNMA and
FHLMC. GNMA creates mortgage-backed securities from pools of government
guaranteed or insured (Federal Housing Authority or Veterans Administration)
mortgages originated by mortgage bankers, commercial banks and savings and
loan associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations,
savings banks, commercial banks, credit unions and mortgage bankers. The
principal and interest on GNMA securities are guaranteed by GNMA and backed
by the full faith and credit of the U.S. government. Mortgage securities from
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 would 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, these securities 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.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly 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 (less GNMA's, FHLMC's or FNMA's
fees and any applicable loan servicing fees).
Guarantees as to the timely payment of principal and interest do not extend
to the value or yield of mortgage-backed securities nor do they extend to the
value of the fund's shares. In general, the value of fixed-income securities
varies with changes in market interest rates. Fixed-rate mortgage securities
generally decline in value during periods of rising interest rates, whereas
coupon rates of adjustable rate mortgage securities move with market interest
rates, and thus their value tends to fluctuate to a lesser degree. In view of
these factors, the ability of the fund to obtain a high level of total return
may be limited under varying market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (REMICS) The fund may invest in certain debt obligations that are
collateralized by mortgage loans or mortgage pass-through securities such as
CMOs or 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 FHLMC, FNMA 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 fund will only invest in CMOs or REMICs that are issued and guaranteed by
U.S. government agencies or instrumentalities. The fund 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.
Unless the context indicates otherwise, the discussion of CMOs below may also
apply to REMICs.
A CMO is a mortgage-backed security that separates mortgage pools into
short-, medium-, and long-term components. Each component pays a fixed rate
of interest at regular intervals. These components enable an investor, such
as the fund, to predict more accurately the pace at which principal is
returned. The fund 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 fund. 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.
Timely payment of interest and principal (but not the market value and yield)
of some of these pools is supported by various forms of insurance or
guarantees issued by private issuers, those who pool the mortgage assets and,
in some cases, by U.S. government agencies. Prepayments of the mortgages
underlying a CMO, which usually increase when interest rates decrease, will
generally reduce the life of the mortgage pool, thus impacting the CMO's
yield. Under these circumstances, the reinvestment of prepayments will
generally be at a rate lower than the rate applicable to the original CMO.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs
could result in the inability to dispose of such securities at an
advantageous price under certain circumstances.
To the extent any privately issued CMOs in which the fund invests are
considered by the SEC to be an investment company, the fund will limit its
investments in such securities in a manner consistent with the provisions of
the 1940 Act.
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 mortgages that
collateralize the REMICs in which the fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency or
instrumentality.
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS) ARMS, like traditional mortgage
securities, are interests in pools of mortgage loans and are issued or
guaranteed by a federal agency or by private issuers. The interest rates on
the mortgages underlying ARMS are reset periodically. The adjustable interest
rate feature of the mortgages underlying these mortgage securities generally
will act as a buffer to reduce sharp changes in the ARMS' 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, the fund's net asset value
should fluctuate less significantly than if the fund invested in more
traditional long-term, fixed-rate securities. During periods of extreme
fluctuation in interest rates, however, the value of the ARMS will fluctuate
affecting the fund's net asset value.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, the fund 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 fund, 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 fund
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 fund
generally will be able to reinvest these amounts in securities with a higher
current rate of return.
Please keep in mind that during periods of rising interest rates, changes in
the interest rates on mortgages underlying ARMS lag behind changes in the
market rate. This may result in a lower net asset value until the interest
rate resets to market rates. Thus, you could suffer some principal loss if
you sell your shares before the interest rates on the underlying mortgages
reset to market rates. Also, the fund'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 the fund 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 fund. 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 fund 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. There are several categories of indices,
including those based on U.S. Treasury securities, those derived from a
calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. 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.
The interest rates paid on the ARMs are generally readjusted at intervals of
one year or less, although instruments with longer resets such as three,
five, seven and ten years are also permissible investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes
in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization, which can extend the average life of the securities. Since most
ARMs in the fund's portfolio will generally have annual reset limits or caps
of 100 to 200 basis points, fluctuations in interest rates above these levels
could cause the mortgage securities to "cap out" and to behave more like
long-term, fixed-rate debt securities.
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 fund
may invest in them if they are consistent with the fund's goal, policies and
quality standards.
RESETS The interest rates paid on ARMS 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 fund 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.
DERIVATIVE SECURITIES Some types of investments discussed in the prospectus
and this SAI may be considered "derivative securities." Derivatives are
broadly defined as financial instruments whose performance is derived, at
least in part, from the performance of an underlying asset. To the extent
indicated, the fund may invest in CMOs and REMICs. Some, all or the component
parts of these instruments may be considered derivatives.
Derivative securities may be used 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 fund
will not necessarily use these instruments or investment strategies to the
full extent permitted unless the manager believes that doing so will help the
fund achieve its goal, and the fund will not use all instruments or
strategies at all times.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS The fund may buy U.S.
government obligations and other securities on a "when-issued" or
"delayed-delivery" basis. These transactions are arrangements under which the
fund 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 the fund
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 fund deems it to be advisable. When the fund 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
fund 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 fund relies on the
seller to complete the transaction. The seller's failure to do so may cause
the fund 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 fund is not subject to any
percentage limit on the amount of its assets that may be invested in
when-issued purchase obligations. Entering into a when issued or delayed
delivery transaction is a form of leverage that may affect changes in net
asset value to a greater extent.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
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.
CASH AND CASH EQUIVALENTS The fund may retain its underlying assets in cash
and cash equivalents, including Treasury bills, commercial paper, and
short-term bank obligations such as CDs, bankers' acceptances, and repurchase
agreements. The fund intends, however, to retain in cash only as much of its
underlying assets as is considered desirable or expedient under existing
market conditions.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the
bank or broker-dealer after a short period of time (generally, less than
seven days) at a higher price. The bank or broker-dealer must transfer to the
fund's custodian, securities with an initial value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. The manager
will monitor the value of such securities daily to determine that the value
equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed 10% of the value of the fund's
total assets, measured at the time of the most recent loan. For each loan,
the borrower must maintain with the fund's custodian collateral (consisting
of any combination of cash, securities issued by the U.S. government and its
agencies and instrumentalities or irrevocable letters of credit) with a value
at least equal to the current market value of the loaned securities. The fund
retains all or a portion of the interest received on the investment of the
cash collateral or receives a fee from the borrower. The fund also continues
to receive any distributions paid on the loaned securities and will continue
to have voting rights with respect to the securities. The fund may terminate
a loan at any time and obtain the return of the securities loaned within the
normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The fund will loan its
securities only to parties who meet creditworthiness standards approved by
the trust's board of trustees, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
BORROWING The fund may not 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 the fund's total asset value.
ILLIQUID INVESTMENTS The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are securities that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which the fund has valued the securities and
include, among other things, repurchase agreements of more than seven days
duration and other securities which are not readily marketable.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 20% of total asset value.
The fund also will not purchase additional investment securities while
borrowings in excess of 5% of total assets are outstanding.
2. Buy any securities on "margin" or sell any securities "short," except for
any delayed delivery or when-issued securities as described in the
registration statement as amended.
3. Lend any funds or other assets, except by the purchase of bonds,
debentures, notes or other debt securities as described in the registration
statement as amended, and except that securities of the fund 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 fund'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 fund 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 fund 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
fund, 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. To the extent permitted by exemptions which may be
granted under the 1940 Act, the fund may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates.
13. Issue senior securities as defined in the 1940 Act except that this
restriction will not prevent the fund 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
- -------------------------------------------------------------------------------
There is no assurance that the fund will meet its investment goal.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock market as a whole.
INTEREST RATE Changes in interest rates will affect the value of the fund's
portfolio 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 the fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable. To the extent the
fund invests in fixed-rate securities, the value of the fund's shares will be
more sensitive to interest rate changes than if the fund were fully invested
in adjustable-rate securities.
MORTGAGE SECURITIES The mortgage securities in which the fund 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 fund) 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 unexpected 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 the fund may invest may 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.
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.
REPURCHASE AGREEMENT The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation
to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the fund not within the control of the fund, and therefore the realization by
the fund on the collateral may be automatically stayed. Finally, it is
possible that the fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
fund, these risks can be controlled through careful monitoring procedures.
13. MANAGEMENT OF THE REGISTRANT
(A) BOARD OF TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations.
(B) MANAGEMENT INFORMATION
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 49 of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
Chairman of the Board and Trustee
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services,
Inc.; Vice President, 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 48 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the
other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 33 of the investment companies in the
Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; 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 51 of the investment companies in the
Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director,
The California Center for Land Reclamation (redevelopment); director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, General Partner, Miller &
LaHaye and Peregrine Associates, the general partners of Peregrine Venture
funds.
*William J. Lippman (75)
One Parker Plaza, 9th Floor, Fort Lee, NJ 07024
TRUSTEE
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President, Franklin Advisory Services, LLC; 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 (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee,
as the case may be, of 47 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, White River Corporation
(financial services) (until 1998) and Hambrecht and Quist Group (investment
banking) (until 1992), President, National Association of Securities Dealers,
Inc. (until 1987).
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton
Services, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director,
Franklin Investment Advisory Services, Inc. and 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 51 of
the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial
Officer and Director, Templeton Worldwide, Inc.; Executive Vice President,
Chief Operating Officer and Director, Templeton Investment Counsel, Inc.;
Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, LLC and Franklin
Investment Advisory Services, Inc.; Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be,
of 51 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Senior Vice President and General Counsel, Franklin Resources, Inc., Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc., Executive Vice President, Franklin Advisers, Inc., Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer
and Director, Franklin Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 51 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor
to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and
Exchange Commission (1986-1995), Attorney, Rogers & Wells, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Chief Executive Officer and Managing Director, Templeton
Franklin Investment Services (Asia) Limited (until January 2000) and
Director, Templeton Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $160 per month plus $155 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON GROUP
RECEIVED THE FRANKLIN OF FUNDS ON
FROM THE TEMPLETON GROUP WHICH EACH
NAME TRUST1 ($) OF FUNDS2 ($) SERVES3
- ---- ---------- ------------- -------
Frank H. Abbott, III 2,625 156,060 27
Harris J. Ashton 2,885 363,165 47
S. Joseph Fortunato 2,689 363,238 49
Frank W.T. LaHaye 2,625 156,060 27
Gordon S. Macklin 2,885 363,165 47
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. 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 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members 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
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
(a) As of January 31, 2000, the Franklin Adjustable U.S. Government
Securities Fund, a series of the Franklin Investors Securities Trust (FIST),
owned of record and beneficially 100% of the outstanding voting securities of
the fund. This series of FIST could be deemed to control the fund or trust,
as that term is defined under the Investment Company Act of 1940 Act. FIST
was organized as a Massachusetts business trust and is located at the address
of the registrant set forth on the cover of this amendment to the
registration statement.
(b) Except for the companies referred to above, no other person was known to
hold beneficially or of record more than 5% of either fund's outstanding
shares.
(c) As of January 31, 2000, the officers and board members did not own of
record or beneficially any shares of the fund. The board members may own
shares in other funds in the Franklin Templeton Group of Funds.
ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of 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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The manager also provides certain administrative services and facilities for
the fund. These include preparing and maintaining books, records, and tax and
financial reports, and monitoring compliance with regulatory requirements.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 40/100 of 1% of the value of its net assets up to and including $5
billion;
o 35/100 of 1% of the value of its net assets in excess of $5 billion up
to and including $10 billion;
o 33/100 of 1% of the value of its net assets in excess of $10 billion up
to and including $15 billion;
o and 30/100 of 1% of net assets in excess of $15 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT FEES PAID
($)
- ----------------------------------
1999 1,150,240
1998 758,425
1997 830,598
1. For the fiscal years ended 1998 and 1997, management fees, before any
advance waiver, totaled $1,272,933 and $1,487,256, respectively. Under an
agreement by the manager to limit its fees, the fund paid the management
fees shown.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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
fund. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
16. BROKERAGE ALLOCATION AND OTHER POLICIES
Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund 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 fund 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager 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, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the fund's officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as of other funds in the Franklin Templeton
Group of Funds also may be considered a factor in the selection of
broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager 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 fund and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended October 31, 1999, 1998 and 1997, the funds did
not pay any brokerage commissions.
As of October 31, 1999, the fund did not own securities of its regular
broker-dealers.
17. CAPITAL STOCK AND OTHER SECURITIES
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
18. PURCHASE, REDEMPTION, AND PRICING OF SHARES
PRICING SHARES The value of a mutual fund is determined by deducting the
fund's liabilities from the total assets of the portfolio. The net asset
value (NAV) per share is determined by dividing the net asset value of the
fund by the number of shares outstanding.
The fund calculates the NAV per share each business day at the close of
trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The
fund does not calculate the NAV on days the New York Stock Exchange (NYSE) is
closed for trading, which include New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
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 NAV 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 NAV. 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 fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
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 the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (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 fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund 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.
ITEM 19. TAXATION OF THE FUND
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to shareholders. Any distributions by the
fund from such income will be taxable to shareholders as ordinary income,
whether shareholders take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to
shareholders as ordinary income. Distributions from net long-term capital
gains will be taxable to shareholders as long-term capital gain, regardless
of how long a shareholder has held shares in the fund. Any net capital gains
realized by the fund generally will be distributed once each year, and may be
distributed more frequently, if necessary, to reduce or eliminate excise or
income taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform
shareholders of the amount of their ordinary income dividends and capital
gains distributions at the time they are paid, and will advise shareholders
of their tax status for federal income tax purposes shortly after the close
of each calendar year. If a shareholder has not held fund shares for a full
year, the fund may designate and distribute to the shareholder, 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 fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to shareholders. The board reserves the right
not to maintain the qualification of the fund as a regulated investment
company if it determines such course of action to be beneficial to
shareholders. In such case, the fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxed as ordinary dividend income to the extent of the
fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to its shareholders by
December 31 of each year, at a minimum, the following amounts: 98% of its
taxable ordinary income earned during the calendar year; 98% of its capital
gain net income earned during the twelve month period ending October 31; and
100% of any undistributed amounts from the prior year. The fund intends to
declare and pay these distributions in December (or to pay them in January,
in which case shareholders must treat them as received in December) but can
give no assurances that its distributions will be sufficient to eliminate all
taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state
income tax purposes. If a shareholder redeems or exchanges fund shares the
IRS will require that the shareholder report any gain or loss on the
redemption. If a shareholder holds fund shares as a capital asset, the gain
or loss that the shareholder realizes will be capital gain or loss and will
be long-term or short-term, generally depending on how long the shareholder
holds fund shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
Any loss incurred on the redemption of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to a shareholder by the fund on those shares. All
or a portion of any loss that a shareholder realizes upon the redemption of
its fund shares will be disallowed to the extent that the shareholder buys
other shares in the fund (through reinvestment of dividends or otherwise)
within 30 days before or after the shareholder's share redemption. Any loss
disallowed under these rules will be added to the shareholder's tax basis in
the new shares the shareholder buys.
U.S. GOVERNMENT OBLIGATIONS States grant tax-free status to dividends paid
to shareholders from interest earned on obligations of the U.S. government,
subject in some states to minimum investment or reporting requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
Investment companies that invest in the fund may not be able to pass through
to their shareholders the exempt character of interest earned by the fund on
its U.S. government obligations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received
deduction.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund (possibly causing the fund to sell securities to raise the
cash for necessary distributions) and/or defer the fund's ability to
recognize losses. In turn, these rules may affect the amount, timing or
character of the income distributed to shareholders by the fund.
ITEM 20. UNDERWRITERS
Not Applicable
ITEM 21. CALCULATION OF PERFORMANCE DATA
Not Applicable
ITEM 22. FINANCIAL STATEMENTS
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated herein by reference.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FORM N-1A
PART C - OTHER INFORMATION
ITEM 23. EXHIBITS.
The following exhibits are incorporated by reference to the previous filed
document indicated below, except as noted:
(A) AGREEMENT AND DECLARATION OF TRUST
(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 Amendment of Agreement and Declaration of
Trust of Adjustable Rate Securities Portfolios dated April
18, 1995
(B) BY-LAWS
(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
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISOR CONTRACTS
(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) 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
(E) UNDERWITING CONTRACTS
Not Applicable
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) 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
(ii) 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
(iii)Amendment dated February 27, 1998 to Exhibit A in the Master
Custody Agreement between the Registrant and Bank of New York
dated February
16, 1996, revised September 16, 1999
(iv) Amendment to Master Custody Agreement between Registrant and
Bank of New York dated May 7, 1997
Filing: Amendment No. 11 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 26, 1998
(H) OTHER MATERIAL CONTRACTS
Not Applicable.
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated February 5, 1999
Filing: Amendment No. 13 to the Registration
Statement on Form N-1A
File No. 811-6242
Filing Date: February 26, 1999
(J) OTHER OPINIONS
Not Applicable
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
Not Applicable
(M) RULE 12B-1 PLAN
Not Applicable
(P) POWER OF ATTORNEY
(i) Power of Attorney dated February 15, 2000
(ii) Certificate of Secretary dated February 15, 2000
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 25 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 26 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 Fund's investment manager (SEC File
801-26292), incorporated herein by reference, which sets forth the officers
and directors of the investment manager and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
ITEM 27 PRINCIPAL UNDERWRITERS
Not Applicable
ITEM 28 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 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part
A or Part B.
ITEM 30 UNDERTAKING
Not Applicable
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Mateo, the State of California, on the 28th day
of February 2000.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
By CHARLES E. JOHNSON*
Charles E. Johnson,
President
*By /s/ David P. Goss
Attorney-in-Fact (pursuant to Power of Attorney filed herewith)
ADJUSTABLE RATE SECURITIES PORTFOLIOS
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of *
Trust of Franklin Institutional
U.S. Government ARM Fund dated
February 12, 1991
EX-99.(a)(ii) Certificate of amendment of Attached
agreement and declaration of
trust of Adjustable Rate
Securities Portfolios
EX-99.(b)(i) By-Laws of Franklin Institutional *
U.S. Government ARM Fund
EX-99.(d)(i) Management Agreement between *
Franklin Institutional U.S.
Government ARM Fund and Franklin
Advisers, Inc. dated June 3, 1991
EX-99.(d)(ii) Amendment to Management Agreement *
(dated November 5, 1991) between
Registrant and Franklin Advisers,
Inc. dated August 1, 1995
EX-99.(g)(i) Mater Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iii) Amendment dated February 27, 1998 Attached
to Exhibit A in the Master
Custody Agreement between the
Registrant and Bank of New York
dated February 16, 1996, revised
September 16, 1999
EX-99.(g)(iv) Amendment to Master Custody *
Agreement between Registrant and
Bank of New York dated May 7, 1997
EX-99.(i)(i) Opinion and Consent of Counsel *
dated February 5, 1999
EX-99.(p)(i) Power of Attorney dated February Attached
15, 2000
EX-99.(p)(ii) Certificate of Secretary dated Attached
February 15, 2000
*Incorporated by Reference
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
ADJUSTABLE RATE SECURITIES PORTFOLIOS
The undersigned certify that:
1. They constitute a majority of the Board of Trustees of ADJUSTABLE RATE
SECURITIES PORTFOLIOS, a Delaware business trust (the "Trust")
2. They hereby adopt the following amendment to the Agreement and
Declaration of Trust of the Trust (the "Declaration of Trust")
Article I, Section 1 is hereby amended to read as follows:
Section 1. Name. This Trust shall be knows as the ADJUSTABLE RATE
SECURITIES PORTFOLIOS and the Trustees shall conduct the business of the
Trust under that name or any other name as they may from time to time
determine.
3. This amendment is made pursuant to Article VIII, Section 4 of the
Declaration of Trust which empowers the Trustees to restate and/or amend
such Declaration of Trust at any time by an instrument in writing signed
by a majority of the then Trustees.
IN WITNESS WHEREOF, the Trustees named below do hereby set their hands as
of the 18th day of April, 1995.
/s/ Frank H. Abbott /s/ Charles E. Johnson
Frank H. Abbott Charles E. Johnson
/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
/s/ S. Joseph Fortunato /s/ Frank W.T. LaHaye
S. Joseph Fortunato Frank W.T. LaHaye
/s/ David W. Garbellano /s/ William J. Lippman
David W. Garbellano William J. Lippman
/s/ Charles B. Johnson /s/ Gordon S. Macklin
Charles B. Johnson Gordon S. Macklin
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective
Series for which the Custodian shall serve under the Master Custody Agreement
dated as of February 16, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term
Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California
Corporation
Franklin Federal Money Fund California
Corporation
Franklin Federal Tax- Free California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust 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 U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust Income Fund
Franklin Michigan Insured Tax-Free
Income Fund
Franklin Minnesota Insured Tax-Free
Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income
Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income
Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin 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
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities
Fund
Franklin Real Estate Fund
Franklin Global Communications
Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller
Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities
Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities
Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
Revised: 9/16/99
</TABLE>
POWER OF ATTORNEY
The undersigned officers and trustees of ADJUSTABLE RATE SECURITIES
PORTFOLIOS (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E.
BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson,
Barbara J. Green and David P. Goss (with full power to each of them to act
alone) his/her attorney-in-fact and agent, in all capacities, to execute,
deliver and file in the names of the undersigned, any and all instruments
that said attorneys and agents may deem necessary or advisable to enable the
Registrant to comply with or register any security issued by the Registrant
under the Securities Act of 1933, as amended, and/or the Investment Company
Act of 1940, as amended, and the rules, regulations and interpretations
thereunder, including but not limited to, any registration statement,
including any and all pre- and post-effective amendments thereto, any other
document to be filed with the U.S. Securities and Exchange Commission and any
and all documents required to be filed with respect thereto with any other
regulatory authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes, as he/she could do
if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each
of which shall be deemed to be an original, and all of which shall be deemed
to be a single document.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 15th day of February , 2000.
/S/ CHARLES E. JOHNSON /S/ Frank H. Abbott, III
Charles E. Johnson, Frank H. Abbott, III,
Principal Executive Officer and Trustee Trustee
/S/ HARRIS J. ASHTON /S/ S. JOSEPH FORTUNATO
Harris J. Ashton, S. Joseph Fortunato,
Trustee Trustee
/S/ CHARLES B. JOHNSON /S/ RUPERT H. JOHNSON, JR.
Charles B. Johnson, Rupert H. Johnson, Jr.,
Trustee Trustee
/S/ FRANK W.T. LAHAYE /S/ WILLIAM J. LIPPMAN
Frank W.T. LaHaye, William J. Lippman,
Trustee Trustee
/S/ GORDON S. MACKLIN /s/ Martin L. Flanagan
Gordon S. Macklin, Martin L. Flanagan,
Trustee Principal Financial Officer
/S/ KIMBERLEY H. MONASTERIO
Kimberley H. Monasterio,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of ADJUSTABLE RATE
SECURITIES PORTFOLIOS (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at
a meeting held at 777 Mariners Island Boulevard, San Mateo, California
94404, on February 15, 2000.
RESOLVED, that a Power of Attorney, substantially in the form
of the Power of Attorney presented to this Board, appointing
Harmon E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L.
Skidmore, Leiann Nuzum, Murray L. Simpson, Barbara J. Green
and David P. Goss as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission,
be executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/ David P. Goss
Dated: February 28, 2000 David P. Goss
Assistant Secretary
