TEMPLETON INCOME TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995,
AS SUPPLEMENTED JUNE 1, 1995, IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF TEMPLETON INCOME FUND DATED MAY 1, 1995
AND THE PROSPECTUS OF TEMPLETON MONEY FUND DATED JANUARY 1, 1995,
AS SUPPLEMENTED MAY 25, 1995,
WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO THE
PRINCIPAL UNDERWRITER, FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objectives and Policies
-Investment Policies
-Repurchase Agreements
-Debt Securities
-Futures Contracts
-Options on Securities, Indices and Futures
-Foreign Currency Hedging Transactions
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Trust
Trustee Compensation
Principal Shareholders
Investment Management and Other Services
-Investment Management Agreements
-Management Fees
-The Templeton Global Bond Managers Division of Templeton
Investment Counsel, Inc.
Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of Shares
-Ownership and Authority Disputes
-Tax-Deferred Retirement Plans
-Letter of Intent
-Special Net Asset Value Purchases
Tax Status
Principal Underwriter
Yield and Performance Information
Description of Shares
Financial Statements
Appendix
Corporate Bond and Commercial Paper Ratings
GENERAL INFORMATION AND HISTORY
Templeton Income Trust (the "Trust") was organized as a
Massachusetts business trust on June 16, 1986, and is registered
under the Investment Company Act of 1940 (the "1940 Act") as an
open-end management investment company with two series of Shares:
Templeton Income Fund, a non-diversified fund ("Income Fund") and
Templeton Money Fund, a diversified fund ("Money Fund")
(collectively, the "Funds").
INVESTMENT OBJECTIVES AND POLICIES
Investment Policies. The investment objective and policies
of each Fund are described in each Fund's Prospectus under the
heading "General Description--Investment Objective and Policies."
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. The Templeton
Global Bond Managers Division of Templeton Investment Counsel,
Inc. (the "Investment 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 seller, including
possible delays or restrictions upon a Fund's ability to dispose
of the underlying securities. A Fund will enter into repurchase
agreements only with parties who meet creditworthiness standards
approved by the Board of Trustees, i.e., banks or broker-dealers
which have been determined by the Investment Manager to present
no serious risk of becoming involved in bankruptcy proceedings
within the time frame contemplated by the repurchase transaction.
Debt Securities. Income Fund may invest in debt securities
which are rated in any category by Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's"). See the
Appendix for a description of the S&P and Moody's ratings. As an
operating policy, Income Fund will invest no more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. 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 Income Fund's net asset value.
Although they may offer higher yields than do higher rated
securities, high risk, low rated debt securities (commonly
referred to as "junk bonds") and unrated debt securities
generally involve greater volatility of price and risk of
principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the
markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular
securities may diminish Income Fund's ability to sell the
securities at fair value either to meet redemption requests or to
respond to a specific economic event such as a deterioration in
the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may
also make it more difficult for each Fund to obtain accurate
market quotations for the purposes of valuing the Fund's
portfolio. Market quotations are generally available on many low
rated or unrated securities only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of low rated debt securities, especially in a thinly
traded market. Analysis of the creditworthiness of issuers of
low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of Income Fund to
achieve its investment objective may, to the extent of investment
in low rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if Income Fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated
debt securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the
issuer of low rated debt securities defaults, Income Fund may
incur additional expenses seeking recovery.
Income Fund may accrue and report interest income on high
yield bonds, such as zero coupon bonds or pay-in-kind securities,
even though it receives no cash interest until the security's
maturity or payment date. In order to qualify for beneficial tax
treatment afforded regulated investment companies, and to be
relieved of federal tax liabilities, Income Fund must distribute
substantially all of its net income and gains to Shareholders
(see "Tax Status") generally on an annual basis. Income Fund may
have to dispose of portfolio securities under disadvantageous
circumstances to generate cash or leverage itself by borrowing
cash in order to satisfy the distribution requirement.
Recent legislation, which requires federally insured savings
and loan associations to divest their investments in low rated
debt securities, may have a material adverse effect on Income
Fund's net asset value and investment practices.
Futures Contracts. Income Fund may purchase and sell
financial futures contracts. Currently, futures contracts are
available on several types of fixed-income securities including:
U.S. Treasury bonds, notes and bills; commercial paper; and
certificates of deposit.
Although some financial futures contracts call for making or
taking delivery of the underlying securities, in most cases these
obligations are closed out before the settlement date. The
closing of a contractual obligation is accomplished by purchasing
or selling an identical offsetting futures contract. Other
financial futures contracts by their terms call for cash
settlements.
Income Fund may also buy and sell index futures contracts
with respect to any stock or bond index traded on a recognized
stock exchange or board of trade. An index futures contract is a
contract to buy or sell units of an index at a specified future
date at a price agreed upon when the contract is made. The stock
index futures contract specifies that no delivery of the actual
stocks making up the index will take place. Instead, settlement
in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and
the actual level of the stock index at the expiration of the
contract.
At the time Income Fund purchases a futures contract, an
amount of cash, U.S. Government securities, or other highly
liquid debt securities equal to the market value of the contract
will be deposited in a segregated account with Income Fund's
custodian. When selling a stock index futures contract, Income
Fund will maintain with its custodian liquid assets that, when
added to the amounts deposited with a futures commission merchant
or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, Income Fund
may "cover" its position by owning the instruments underlying the
contract or, in the case of a stock index futures contract,
owning a portfolio with a volatility substantially similar to
that of the index on which the futures contract is based, or
holding a call option permitting Income Fund to purchase the same
futures contract at a price no higher than the price of the
contract written by Income Fund (or at a higher price if the
difference is maintained in liquid assets with Income Fund's
custodian).
Options on Securities, Indices and Futures. Income Fund may
write covered put and call options and purchase put and call
options on securities, securities indices and futures contracts
that are traded on United States and foreign exchanges and in the
over-the-counter markets.
An option on a security or a futures contract is a contract
that gives the purchaser of the option, in return for the premium
paid, the right to buy a specified security or futures contract
(in the case of a call option) or to sell a specified security or
futures contract (in the case of a put option) from or to the
writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of
the option, in return for the premium paid, the right to receive
from the seller cash equal to the difference between the closing
price of the index and the exercise price of the option.
Income Fund may write a call or put option only if the
option is "covered." A call option on a security or futures
contract written by Income Fund is "covered" if Income Fund owns
the underlying security or futures contract covered by the call
or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities held in its portfolio.
A call option on a security or futures contract is also covered
if Income Fund holds a call on the same security or futures
contract and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is
maintained by Income Fund in cash or high grade U.S. Government
securities in a segregated account with its custodian. A put
option on a security or futures contract written by Income Fund
is "covered" if Income Fund maintains cash or fixed income
securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the
same security or futures contract and in the same principal
amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put
written.
Income Fund will cover call options on securities indices
that it writes by owning securities whose price changes, in the
opinion of the Investment Manager, are expected to be similar to
those of the index, or in such other manner as may be in
accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Nevertheless, where
Income Fund covers a call option on a securities index through
ownership of securities, such securities may not match the
composition of the index. In that event, Income Fund will not be
fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. Income Fund will
cover put options on securities indices that it writes by
segregating assets equal to the option's exercise price, or in
such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and
regulations.
Income Fund will receive a premium from writing a put or
call option, which increases its gross income in the event the
option expires unexercised or is closed out at a profit. If the
value of a security, index or futures contract on which Income
Fund has written a call option falls or remains the same, Income
Fund will realize a profit in the form of the premium received
(less transaction costs) that could offset all or a portion of
any decline in the value of the portfolio securities being
hedged. If the value of the underlying security, index or
futures contract rises, however, Income Fund will realize a loss
in its call option position, which will reduce the benefit of any
unrealized appreciation in its investments. By writing a put
option, Income Fund assumes the risk of a decline in the
underlying security, index or futures contract. To the extent
that the price changes of the portfolio securities being hedged
correlate with changes in the value of the underlying security,
index or futures contract, writing covered put options will
increase Income Fund's losses in the event of a market decline,
although such losses will be offset in part by the premium
received for writing the option.
Income Fund may also purchase put options to hedge its
investments against a decline in value. By purchasing a put
option, Income Fund will seek to offset a decline in the value of
the portfolio securities being hedged through appreciation of the
put option. If the value of Income Fund's investments does not
decline as anticipated, or if the value of the option does not
increase, its loss will be limited to the premium paid for the
option plus related transaction costs. The success of this
strategy will depend, in part, on the accuracy of the correlation
between the changes in value of the underlying security, index or
futures contract and the changes in value of Income Fund's
security holdings being hedged.
Income Fund may purchase call options on individual
securities or futures contracts to hedge against an increase in
the price of securities or futures contracts that it anticipates
purchasing in the future. Similarly, Income Fund may purchase
call options on a securities index to attempt to reduce the risk
of missing a broad market advance, or an advance in an industry
or market segment, at a time when Income Fund holds uninvested
cash or short-term debt securities awaiting investment. When
purchasing call options, Income Fund will bear the risk of losing
all or a portion of the premium paid if the value of the
underlying security, index or futures contract does not rise.
There can be no assurance that a liquid market will exist
when Income Fund seeks to close out an option position. Trading
could be interrupted, for example, because of supply and demand
imbalances arising from a lack of either buyers or sellers, or
the options exchange could suspend trading after the price has
risen or fallen more than the maximum specified by the exchange.
Although Income Fund may be able to offset to some extent any
adverse effects of being unable to liquidate an option position,
it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by
Income Fund, as well as the cover for options written by Income
Fund, are considered not readily marketable and are subject to
the Trust's limitation on investments in securities that are not
readily marketable. See "Investment Objectives and Policies --
Investment Restrictions."
Foreign Currency Hedging Transactions. In order to hedge
against foreign currency exchange rate risks, Income Fund may
enter into forward foreign currency exchange contracts and
foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. Income
Fund may also conduct its foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
Income Fund may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk
to Income Fund from adverse changes in the relationship between
the U.S. dollar and foreign currencies. A forward contract is an
obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and
privately traded by currency traders and their customers. Income
Fund may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when
Income Fund believes that a foreign currency may suffer or enjoy
a substantial movement against another currency, it may enter
into a forward contract to sell an amount of the former foreign
currency approximating the value of some or all of its portfolio
securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging."
Because in connection with Income Fund's forward foreign currency
transactions, an amount of its assets equal to the amount of the
purchase will be held aside or segregated to be used to pay for
the commitment, Income Fund will always have cash, cash
equivalents or high quality debt securities available in an
amount sufficient to cover any commitments under these contracts
or to limit any potential risk. The segregated account will be
marked-to-market on a daily basis. While these contracts are not
presently regulated by the Commodity Futures Trading Commission
("CFTC"), the CFTC may in the future assert authority to regulate
forward contracts. In such event, Income Fund's ability to
utilize forward contracts in the manner set forth above may be
restricted. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for Income Fund than if it
had not engaged in such contracts.
Income Fund may purchase and write put and call options on
foreign currencies for the purpose of protecting against declines
in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be
acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only
a partial hedge up to the amount of the premium received, and
Income Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange
rates, although, in the event of rate movements adverse to its
position, Income Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign
currencies to be written or purchased by Income Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
Income Fund may enter into exchange-traded contracts for the
purchase or sale for future delivery of foreign currencies
("foreign currency futures"). This investment technique will be
used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of Income
Fund's portfolio securities or adversely affect the prices of
securities that Income Fund intends to purchase at a later date.
The successful use of foreign currency futures will usually
depend on the Investment Manager's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in
an unexpected manner, Income Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
Investment Restrictions. The Funds have imposed upon
themselves certain investment restrictions which, together with
their investment objectives, are fundamental policies except as
otherwise indicated. No changes in a Fund's investment
objectives or investment restrictions (except those which are not
fundamental policies) can be made without the approval of the
Shareholders of that Fund. For this purpose, the provisions of
the 1940 Act require the affirmative vote of the lesser of either
(1) 67% or more of that Fund's Shares present at a Shareholders'
meeting at which more than 50% of the outstanding Shares are
present or represented by proxy or (2) more than 50% of the
outstanding Shares of that Fund.
In accordance with these restrictions, each Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Funds may invest in marketable securities
secured by real estate or interests therein); invest in
other open-end investment companies (except in
connection with a merger, consolidation, acquisition or
reorganization); invest in interests (other than
publicly issued debentures or equity stock interests)
in oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts (except
futures contracts as described in Income Fund's
Prospectus); or, as a fundamental principle approved by
the Board of Trustees, invest in closed-end investment
companies.
2. Purchase or retain securities of any company in which
Trustees or officers of the Trust or of the Investment
Manager, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Invest in any company for the purpose of exercising
control or management.
4. Act as an underwriter; issue senior securities; or
purchase on margin or sell short, except that Income
Fund may make margin payments in connection with
futures, options and currency transactions. Money Fund
may not write or buy puts, calls, straddles or spreads.
5. Loan money, except that a Fund may purchase a portion
of an issue of publicly distributed bonds, debentures,
notes and other evidences of indebtedness.
6. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous
operation less than three years.
7. Invest more than 15% of its total assets in securities
of foreign companies that are not listed on a
recognized United States or foreign securities
exchange, including no more than 5% of its total assets
in restricted securities and no more than 10% of its
total assets in restricted securities and other
securities (including repurchase agreements having more
than seven days remaining to maturity) which are not
restricted but which are not readily marketable (i.e.,
trading in the security is suspended or, in the case of
unlisted securities, market makers do not exist or will
not entertain bids or offers).
8. Invest more than 25% of its total assets in a single
industry, except that Money Fund may invest in
obligations issued by domestic banks (including
certificates of deposit, bankers' acceptances and
commercial paper) without regard to this limitation.
9. Borrow money, except that Income Fund may borrow money
in amounts up to 30% of the value of that Fund's net
assets. In addition, neither Fund may pledge, mortgage
or hypothecate its assets for any purpose, except that
Income Fund may do so to secure such borrowings and
then only to an extent not greater than 15% of its
total assets. Arrangements with respect to margin for
futures contracts are not deemed to be a pledge of
assets. As a fundamental principle approved by the
Board of Trustees, Income Fund's borrowing shall not
exceed 10% of Income Fund's net assets.
10. Participate on a joint or a joint and several basis in
any trading account in securities. (See "Investment
Objectives and Policies -- Trading Policies" as to
transactions in the same securities for the Funds and
other Templeton Funds and clients.)
11. Invest more than 5% of its net assets in warrants
whether or not listed on the New York or American Stock
Exchanges, and more than 2% of its net assets in
warrants that are not listed on those exchanges.
Warrants acquired in units or attached to securities
are not included in this restriction.
In addition to the above restrictions, Money Fund will not
invest more than 5% of its total assets in the securities of any
one issuer (exclusive of U.S. Government securities) or purchase
more than 10% of any class of securities of any one company,
including more than 10% of its outstanding voting securities.
Whenever any investment restriction states a maximum
percentage of a Fund's assets which may be invested in any
security or other property, it is intended that such maximum
percentage limitation be determined immediately after and as a
result of a Fund's acquisition of such security or property. The
investment restrictions do not preclude either Fund from
purchasing the securities of any issuer pursuant to the exercise
of subscription rights distributed to a Fund by the issuer,
unless such purchase would result in a violation of restrictions
7 or 8.
Risk Factors. Income Fund has an unlimited right to
purchase securities in any foreign country, developed or
developing, if they are listed on an exchange, as well as a
limited right to purchase such securities if they are unlisted.
Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in
domestic investments.
There may be less publicly available information about
foreign companies comparable to the reports and ratings published
about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies.
Income Fund, therefore, may encounter difficulty in obtaining
market quotations for purposes of valuing its portfolio and
calculating its net asset value. Foreign markets have
substantially less volume than the New York Stock Exchange
("NYSE") and securities of some foreign companies are less liquid
and more volatile than securities of comparable United States
companies. Commission rates in foreign countries, which are
generally fixed rather than subject to negotiation as in the
United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United
States.
Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in
developed countries. These risks include (i) less social,
political and economic stability; (ii) the small current size of
the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict Income Fund's investment
opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed structures governing
private or foreign investment or allowing for judicial redress
for injury to private property; (vi) the absence, until recently
in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility
that recent favorable economic developments in Eastern Europe may
be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which Income Fund may invest
have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the United
States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks
of nationalization, expropriation and confiscatory taxation. The
Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future.
In the event of such expropriation, Income Fund could lose a
substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values
and may be adverse to Income Fund Shareholders.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (a) delays
in settling portfolio transactions and risk of loss arising out
of Russia's system of share registration and custody; (b) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (c) pervasiveness
of corruption and crime in the Russian economic system; (d)
currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local
practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on
Income Fund's ability to exchange local currencies for U.S.
dollars; (g) the risk that the government of Russia or other
executive or legislative bodies may decide not to continue to
support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically
different political and/or economic policies to the detriment of
investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or
investors, or a return to the centrally planned economy that
existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts
of inter-company debt which may create a payments crisis on a
national scale; (i) dependency on exports and the corresponding
importance of international trade; (j) the risk that the Russian
tax system will not be reformed to prevent inconsistent,
retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by
Income Fund due to the underdeveloped nature of the securities
markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for Income Fund
to lose its registration through fraud, negligence or even mere
oversight. While Income Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for Income Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent Income Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by Income Fund if a potential purchaser is
deemed unsuitable, which may expose the Fund to potential loss on
the investment.
Income Fund endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread on
currency exchange (to cover service charges) may be incurred,
particularly when the Fund changes investments from one country
to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent
Income Fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the
possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in
foreign government securities, political or social instability,
or diplomatic developments which could affect investments in
securities of issuers in foreign nations.
Income Fund may be affected either unfavorably or favorably
by fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations
and by indigenous economic and political developments. Some
countries in which a Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which a Fund's portfolio securities are denominated
may have a detrimental impact on that Fund. Through Income
Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in
particular nations where from time to time it places Income
Fund's investments.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The Trustees consider at least annually the likelihood of
the imposition by any foreign government of exchange control
restrictions which would affect the liquidity of Income Fund's
assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. The Trustees also consider
the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services -- Custodian and
Transfer Agent"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Investment Manager, any losses resulting from the holding of
Income Fund's portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the
Shareholders. No assurance can be given that the Trustees'
appraisal of the risks will always be correct or that such
exchange control restrictions or political acts of foreign
governments might not occur.
Income Fund's ability to reduce or eliminate its futures and
related options positions will depend upon the liquidity of the
secondary markets for such futures and options. Income Fund
intends to purchase or sell futures and related options only on
exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid
secondary market will exist for any particular contract or at any
particular time. Use of futures and options for hedging may
involve risks because of imperfect correlations between movements
in the prices of the futures or options and movements in the
prices of the securities being hedged. Successful use of futures
and related options by Income Fund for hedging purposes also
depends upon the Investment Manager's ability to predict
correctly movements in the direction of the market, as to which
no assurance can be given.
Additional risks may be involved with Income Fund's special
investment techniques, including loans of portfolio securities
and borrowing for investment purposes. These risks are described
under the heading "Investment Techniques" in the Prospectus.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment adviser to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions are placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions in certain
countries may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other
remuneration in connection therewith, may be effected between any
of these funds, or between funds and private clients, under
procedures adopted pursuant to Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the
Franklin Templeton Group, as defined in SEC Rule 17(j) under the
1940 Act, who are employees of Franklin Resources, Inc. or their
subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
MANAGEMENT OF THE TRUST
The name, address, principal occupation during the past five
years and other information with respect to each of the Trustees
and Principal Executive Officers of the Trust are as follows:
HARRIS J. ASHTON Chairman of the Board, president
Metro Center, 1 Station and chief executive officer of
Place General Host Corporation (nursery
Stamford, Connecticut and craft centers); and a director
Trustee of RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-S
Foods.
NICHOLAS F. BRADY* Chairman of Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman of Templeton Latin America
Easton, Maryland Investment Trust PLC; chairman of
Trustee Darby Overseas Investments, Ltd.
(an investment firm) (1994-
present); director of the Amerada
Hess Corporation, Capital
Cities/ABC, Inc., Christiana
Companies, and the H.J. Heinz
Company; Secretary of the United
States Department of the Treasury
(1988-January 1993); and chairman
of the board of Dillon, Read & Co.
Inc. (investment banking) prior
thereto.
F. BRUCE CLARKE Retired; formerly, credit adviser,
19 Vista View Blvd. National Bank of Canada, Toronto.
Thornhill, Ontario
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; and president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies.
Trustee
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; and a
Florham Park, New Jersey director of General Host
Trustee Corporation.
JOHN Wm. GALBRAITH President of Galbraith Properties,
360 Central Avenue Inc. (personal investment company);
Suite 1300 director of Gulfwest Banks, Inc.
St. Petersburg, Florida (bank holding company) (1995-
Trustee present) and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991).
ANDREW H. HINES, JR. Consultant of the Triangle
150 2nd Avenue N. Consulting Group; chairman of the
St. Petersburg, Florida board and chief executive officer
Trustee of Florida Progress Corporation
(1982-February 1990) and director
of various of its subsidiaries;
chairman and director of Precise
Power Corporation; executive-in-
residence of Eckerd College (1991-
present); and a director of
Checkers Drive-In Restaurants, Inc.
CHARLES B. JOHNSON* President, chief executive officer,
777 Mariners Island Blvd. and director of Franklin Resources,
San Mateo, California Inc.; chairman of the board and
Chairman of the Board director of Franklin Advisers, Inc.
and Vice President and Franklin Templeton
Distributors, Inc.; director of
Franklin Administrative Services,
Inc., General Host Corporation and
Templeton Global Investors, Inc.;
and officer and director, trustee
or managing general partner, as the
case may be, of most other
subsidiaries of Franklin and of 55
of the investment companies in the
Franklin Templeton Group.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; formerly,
Wilmington, Delaware economic analyst, U.S. Government.
Trustee
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland Fund America Enterprises Holdings,
Trustee Inc., Lockheed Martin Corporation,
MCI Communications Corporation,
Fusion Systems Corporation,
Infovest Corporation, and
Medimmune, Inc.; formerly, chairman
of Hambrecht and Quist Group;
director of H&Q Healthcare
Investors; and president of the
National Association of Securities
Dealers, Inc.
FRED R. MILLSAPS Manager of personal investments
2665 NE 37th Drive (1978-present); chairman and chief
Fort Lauderdale, Florida executive officer of Landmark
Trustee Banking Corporation (1969-1978);
financial vice president of Florida
Power and Light (1965-1969); vice
president of The Federal Reserve
Bank of Atlanta (1958-1965); and a
director of various other business
and nonprofit organizations.
SAMUEL J. FORESTER, JR. President of the Templeton Global
500 East Broward Blvd. Bond Managers Division of Templeton
Fort Lauderdale, Florida Investment Counsel, Inc.; president
President or vice president of other
Templeton Funds; founder and
partner of Forester, Hairston
Investment Management (1989-1990);
managing director (Mid-East Region)
of Merrill Lynch, Pierce, Fenner &
Smith Inc. (1987-1988); and an
advisor for Saudi Arabian Monetary
Agency (1982-1987).
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd.; director of global equity
Vice President research for Templeton Worldwide,
Inc.; vice president of the
Templeton Funds; formerly,
investment administrator with Roy
West Trust Corporation (Bahamas)
Limited (1984-1985).
MARTIN L. FLANAGAN Senior vice president, treasurer
777 Mariners Island Blvd. and chief financial officer of
San Mateo, California Franklin Resources, Inc.; director
Vice President and executive vice president of
Templeton Investment Counsel, Inc.;
director, president, and chief
executive officer of Templeton
Global Investors, Inc.; director or
trustee and president or vice
president of the Templeton Funds;
accountant with Arthur Andersen &
Company (1982-1983); and a member
of the International Society of
Financial Analysts and the American
Institute of Certified Public
Accountants.
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and treasurer
Fort Lauderdale, Florida of Templeton Global Investors, Inc.
Vice President and Templeton Worldwide, Inc.;
assistant vice president of
Franklin Templeton Distributors,
Inc.; formerly, vice president and
controller of the Keystone Group,
Inc.
NEIL S. DEVLIN Senior vice president, Portfolio
500 East Broward Blvd. Management/Research, of the
Fort Lauderdale, Florida Templeton Global Bond Managers
Vice President division of Templeton Investment
Counsel, Inc.; formerly, portfolio
manager and bond analyst for
Constitutional Capital Management
(1985-1987); bond trader and
research analyst for Bank of New
England (1982-1985).
THOMAS M. MISTELE Senior vice president of Templeton
700 Central Avenue Global Investors, Inc.; vice
St. Petersburg, Florida president of Franklin Templeton
Secretary Distributors, Inc.; secretary of
the Templeton Funds; formerly,
attorney, Dechert Price & Rhoads
(1985-1988) and Freehill,
Hollingdale & Page (1988); and
judicial clerk, U.S. District Court
(Eastern District of Virginia)
(1984-1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of Templeton
Treasurer Worldwide, Inc., Templeton Global
Investors, Inc., and Templeton
Funds Trust Company; formerly,
senior tax manager with Ernst &
Young (certified public
accountants) (1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Investor Services, Inc.; formerly,
partner with Grant Thornton,
independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
____________________
* These are Trustees who are "interested persons" of the Trust
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the
Trustees.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions
with other investment companies in the Franklin Templeton Group.
No compensation is paid by the Trust to any officer or Trustee
who is an officer, trustee or employee of the Investment Manager
or its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount
of which is based on the level of assets in each fund.
Accordingly, the Trust currently pays the independent Trustees
and Mr. Brady an annual retainer of $2,500 and a fee of $200 per
meeting attended of the Board and its Committees. The
independent Trustees and Mr. Brady are reimbursed for any
expenses incurred in attending meetings, paid pro rata by each
Franklin Templeton Fund in which they serve. No pension or
retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the
Trustees by the Trust and by all investment companies in the
Franklin Templeton Group:
Number of Total
Franklin Compensation
Aggregate Templeton Fund from All Funds
Compensation Boards on in Franklin
from the Which Director Templeton
Name of Director Fund* Serves Group**
Harris J. Ashton $2,000 54 $319,925
Nicholas F. Brady 1,000 23 86,125
F. Bruce Clarke 3,000 19 95,275
Hasso-G von 2,000 19 75,275
Diergardt-Naglo
S. Joseph Fortunato 2,000 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 3,500 23 106,125
Betty P. Krahmer 2,000 23 75,275
Gordon S. Macklin 2,000 51 303,685
Fred R. Millsaps 3,500 23 106,125
_______________
* For the fiscal year ended August 31, 1994.
** For the calendar year ended December 31, 1994.
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, there were 21,786,365 Shares of Income
Fund outstanding, of which 4,370 Shares (0.0002%) were owned
beneficially by all the Trustees and officers of the Trust as a
group. As of March 31, 1995, there were 218,573,777 Shares of
Money Fund outstanding, of which 67,905 Shares (0.031%) were
owned beneficially by all the Trustees and officers of the Trust
as a group. As of March 31, 1995, to the knowledge of
management, no person owned beneficially, directly or indirectly,
5% or more of either Fund's outstanding Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreements. The Investment Manager of
each Fund is the Templeton Global Bond Managers division of
Templeton Investment Counsel, Inc., a Florida corporation with
offices located at Broward Financial Centre, Fort Lauderdale,
Florida 33394-3091. The Investment Management Agreements, dated
October 30, 1992, relating to Income Fund and Money Fund were
approved by the Shareholders of each Fund on October 30, 1992,
were last approved by the Board of Trustees, including a majority
of the Trustees who were not parties to the Agreements or
interested persons of any such party, at a meeting on December 6,
1994, and will run through December 31, 1995. The Investment
Management Agreements continues from year to year subject to
approval annually by the Board of Trustees or by vote of a
majority of the outstanding Shares of each Fund (as defined in
the 1940 Act) and also, in either event, with the approval of a
majority of those Trustees who are not parties to the Agreements
or interested persons of any such party in person at a meeting
called for the purpose of voting on such approval.
Each Investment Management Agreement requires the Investment
Manager to manage the investment and reinvestment of each Fund's
assets. The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Funds, including
daily pricing or trading desk facilities, although such expenses
are paid by investment advisers of some other investment
companies.
Each Investment Management Agreement provides that the
Investment Manager will select brokers and dealers for execution
of each Fund's portfolio transactions consistent with the Trust's
brokerage policies (see "Brokerage Allocation"). Although the
services provided by broker-dealers in accordance with the
brokerage policies incidentally may help reduce the expenses of
or otherwise benefit the Investment Manager and other investment
advisory clients of the Investment Manager and of its affiliates,
as well as the Funds, the value of such services is
indeterminable and the Investment Manager's fee is not reduced by
any offset arrangement by reason thereof.
When the Investment Manager determines to buy or sell the
same security for a Fund that the Investment Manager or one or
more of its affiliates has selected for one or more of its other
clients or for clients of its affiliates, the orders for all such
securities transactions are placed for execution by methods
determined by the Investment Manager, with approval by the Board
of Trustees, to be impartial and fair, in order to seek good
results for all parties. See "Investment Objectives and Policies
-- Trading Policies." Records of securities transactions of
persons who know when orders are placed by a Fund are available
for inspection at least four times annually by the Compliance
Officer of the Trust so that the non-interested Trustees (as
defined in the 1940 Act) can be satisfied that the procedures are
generally fair and equitable to all parties.
Each Investment Management Agreement provides that the
Investment Manager shall have no liability to the Trust, a Fund
or any Shareholder of a Fund for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its
duties under the Agreement, except liability resulting from
willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties
under the Agreement. Each Investment Management Agreement will
terminate automatically in the event of its assignment, and may
be terminated by the Trust on behalf of a Fund at any time
without payment of any penalty on 60 days' written notice, with
the approval of a majority of the Trustees in office at the time
or by vote of a majority of the outstanding voting securities of
that Fund (as defined in the 1940 Act).
Management Fees. For its services, Income Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.50% of its average daily net assets, reduced to 0.45% of such
net assets in excess of $200,000,000 and further reduced to 0.40%
of such net assets in excess of $1,300,000,000. Money Fund pays
the Investment Manager a monthly fee equal on an annual basis to
0.35% of its average daily net assets, reduced to 0.30% of such
net assets in excess of $200,000,000 and further reduced to 0.25%
of such net assets in excess of $1,300,000,000. Each class of
Shares pays a portion of the fee, determined by the proportion of
the Fund that it represents.
The Investment Manager will comply with any applicable state
regulations which may require the Investment Manager to make
reimbursements to either Fund in the event that a Fund's
aggregate operating expenses, including the advisory fee, but
generally excluding interest, taxes, brokerage commissions and
extraordinary expenses, are in excess of specific applicable
limitations. The strictest rule currently applicable to a Fund
is 2.5% of the first $30,000,000 of net assets, 2% of the next
$70,000,000 of net assets and 1.5% of the remainder.
During the fiscal years ended August 31, 1994, 1993, and
1992, the Investment Manager (and, prior to April 1, 1993,
Templeton Global Bond Managers, Inc., the Trust's previous
investment manager) received fees from Income Fund of $1,040,324,
$950,197, and $736,511, respectively. During the fiscal years
ended August 31, 1994, 1993, and 1992, the Investment Manager
(and, prior to April 1, 1993, Templeton Global Bond Managers,
Inc.) received fees from Money Fund of $486,625, $346,737, and
$538,444, respectively.
The Templeton Global Bond Managers Division of Templeton
Investment Counsel, Inc. The Investment Manager is an indirect
wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"),
a publicly traded company whose shares are listed on the New York
Stock Exchange. Charles B. Johnson (a Trustee and officer of the
Trust) and Rupert H. Johnson, Jr. are principal shareholders of
Franklin and own, respectively, approximately 20% and 16% of its
outstanding shares. Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
Business Manager. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Funds, including:
- providing office space, telephone, office equipment and
supplies for the Trust;
- paying compensation of the Trust's officers for
services rendered as such;
- authorizing expenditures and approving bills for
payment on behalf of the Funds;
- supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gain distributions and tax credits, and attending to
correspondence and other special communications with
individual Shareholders;
- daily pricing of each Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of each Fund's
Shares, earnings reports and other financial data;
- monitoring relationships with organizations serving the
Funds, including the custodian and printers;
- providing trading desk facilities for the Funds;
- supervising compliance by the Funds with recordkeeping
requirements under the 1940 Act and regulations
thereunder, with state regulatory requirements,
maintaining books and records for the Funds (other than
those maintained by the custodian and transfer agent),
and preparing and filing tax reports other than the
Funds' income tax returns;
- monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Funds; and
- providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Trust's aggregate average daily net assets (i.e., total of
both Funds), reduced to 0.135% annually of the Trust's aggregate
net assets in excess of $200,000,000, further reduced to 0.1%
annually of such net assets in excess of $700,000,000, and
further reduced to 0.075% annually of such net assets in excess
of $1,200,000,000. Each class of Shares pays a portion of the
fee, determined by the proportion of the Fund that it represents.
The fee is allocated between the Funds according to their
respective average daily net assets. Since the Business
Manager's fee covers services often provided by investment
advisors to other funds, each Fund's combined expenses for
advisory and administrative services together may be higher than
those of some other investment companies.
During the fiscal years ended August 31, 1994, 1993, and
1992, the Business Manager (and, prior to April 1, 1993,
Templeton Funds Management, Inc., the previous business manager)
received business management fees of $499,794, $420,292, and
$436,594, respectively.
The Business Manager is relieved of liability to the Trust
for any act or omission in the course of its performance under
the Business Management Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under the Agreement. The Business
Management Agreement may be terminated by a Fund at any time on
60 days' written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by
vote of a majority of the Trustees of the Trust in office at the
time or by vote of a majority of the outstanding voting
securities of that Fund, and shall terminate automatically and
immediately in the event of its assignment.
Templeton Global Investors, Inc. is a wholly owned
subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank,
N.A. serves as Custodian of the Trust's assets, which are
maintained at the Custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its
branches and sub-custodians generally domestically, and
frequently abroad, do not actually hold certificates for the
securities in their custody, but instead have book records with
domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed on from time to time.
Franklin Templeton Investor Services, Inc. serves as the
Funds' Transfer Agent. Services performed by the Transfer Agent
include processing purchase, transfer and redemption orders;
making dividend payments, capital gain distributions and
reinvestments; and handling routine communications with
Shareholders. The Transfer Agent receives from Income Fund an
annual fee of $14.77 per Shareholder account plus out-of-pocket
expenses and from Money Fund an annual fee of $22.91 per
Shareholder account plus out-of-pocket expenses. These fees are
adjusted each year to reflect changes in the Department of Labor
Consumer Price Index.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Trust.
Independent Accountants. The firm of McGladrey & Pullen,
LLP, 555 Fifth Avenue, New York, New York 10017, serves as
independent accountants for the Trust. Its audit services
comprise examination of the Funds' financial statements and
review of the Funds' filings with the Securities and Exchange
Commission ("SEC") and the Internal Revenue Service ("IRS").
Reports to Shareholders. The Funds' fiscal years end on
August 31. Shareholders are provided at least semiannually with
reports showing the Funds' portfolios and other information,
including an annual report with financial statements audited by
the independent accountants. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at
1-800-292-9293.
BROKERAGE ALLOCATION
The Investment Management Agreements provide that the
Investment Manager is responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the
execution of a Fund's portfolio transactions and, when
applicable, the negotiation of commissions in connection
therewith. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable securities price, taking into account
the other provisions hereinafter set forth. The
determination of what may constitute best execution and
price in the execution of a securities transaction by a
broker involves a number of considerations, including,
without limitation, the overall direct net economic
result to a Fund (involving both price paid or received
and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the
broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any
foreign securities held by Income Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for a Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions to
which fixed minimum commission rates are not
applicable, to cause a Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager in making
the selection in question determines in good faith that
such amount of commission is reasonable in relation to
the value of the brokerage and research services
provided by such broker, viewed in terms of either that
particular transaction or the Investment Manager's
overall responsibilities with respect to the Funds and
the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination,
the Investment Manager is not required to place or
attempt to place a specific dollar value on the
research or execution services of a broker or on the
portion of any commission reflecting either of said
services. In demonstrating that such determinations
were made in good faith, the Investment Manager shall
be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Trust's
brokerage policy; that the research services provide
lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-
making responsibilities; and that the commissions paid
were within a reasonable range. The determination that
commissions were within a reasonable range shall be
based on any available information as to the level of
commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into
account the Trust's policies that (i) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually
it is more beneficial to a Fund to obtain a favorable
price than to pay the lowest commission; and (ii) the
quality, comprehensiveness and frequency of research
studies which are provided for the Investment Manager
are useful to the Investment Manager in performing its
advisory services under its Investment Management
Agreements with the Funds. Research services provided
by brokers to the Investment Manager are considered to
be in addition to, and not in lieu of, services
required to be performed by the Investment Manager
under its Investment Management Agreements with the
Funds. Research furnished by brokers through whom a
Fund effects securities transactions may be used by the
Investment Manager for any of its accounts, and not all
such research may be used by the Investment Manager for
that Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of
various services provided by the broker, including
quotations outside the United States for daily pricing
of foreign securities held in a Fund's portfolio.
4. Purchases and sales of portfolio securities within the
United States other than on a securities exchange are
executed with primary market makers acting as
principal, except where, in the judgment of the
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
5. Sales of the Funds' Shares (which shall be deemed to
include also shares of other companies registered under
the 1940 Act which have either the same investment
adviser or an investment adviser affiliated with the
Investment Manager) made by a broker are one factor
among others to be taken into account in deciding to
allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers)
for the account of a Fund to that broker; provided that
the broker shall furnish "best execution," as defined
in paragraph 1 above, and that such allocation shall be
within the scope of that Fund's other policies as
stated above; and provided further, that in every
allocation made to a broker in which the sale of Shares
is taken into account there shall be no increase in the
amount of the commissions or other compensation paid to
such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3
above, on the basis of best execution alone or best
execution plus research services, without taking
account of or placing any value upon such sale of
Shares.
Insofar as known to management, no Trustee or officer of the
Trust, nor the Investment Manager or Principal Underwriter or any
person affiliated with either of them, has any material direct or
indirect interest in any broker employed by or on behalf of the
Trust. Franklin Templeton Distributors, Inc., the Trust's
Principal Underwriter, is a registered broker-dealer, but it has
never executed any purchase or sale transactions for the Funds'
portfolios or participated in any commissions on any such
transactions, and has no intention of doing so in the future.
During the fiscal years ended August 31, 1994, 1993, and 1992,
Income Fund paid total brokerage commissions of $32,000, $5,363,
and $16,578, respectively. Money Fund paid no brokerage
commissions during those years. All portfolio transactions are
allocated to broker-dealers only when their prices and execution,
in the judgment of the Investment Manager, are equal to the best
available within the scope of the Trust's policies. There is no
fixed method used in determining which broker-dealers receive
which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Each Fund's Prospectus describes the manner in which a
Fund's Shares may be purchased and redeemed. See "How to Buy
Shares of the Fund" and "How to Sell Shares of the Fund."
Net asset value per Share is calculated separately for each
Fund. Net asset value per Share is determined as of the
scheduled closing of the NYSE (generally 4:00 p.m., New York
time), every Monday through Friday (exclusive of national
business holidays). The Trust's offices will be closed, and net
asset value will not be calculated, on those days on which the
NYSE is closed, which currently are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business in New York on each day on which the
NYSE is open. Trading of European or Far Eastern securities
generally, or in a particular country or countries, may not take
place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business
days in New York and on which each Fund's net asset value is not
calculated. Income Fund calculates net asset value per Share,
and therefore effects sales, redemptions and repurchases of its
Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of many of
the portfolio securities used in such calculation and if events
occur which materially affect the value of those foreign
securities, they will be valued at fair market value as
determined by the management and approved in good faith by the
Board of Trustees.
Money Fund uses the amortized cost method to determine the
value of its portfolio securities pursuant to Rule 2a-7 under the
1940 Act. The amortized cost method involves valuing a security
at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating
interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods
during which the value, as determined by amortized cost, is
higher or lower than the price which Money Fund would receive if
the security were sold. During these periods the yield to a
Shareholder may differ somewhat from that which could be obtained
from a similar fund which utilizes a method of valuation based
upon market prices. Thus, during periods of declining interest
rates, if the use of the amortized cost method resulted in a
lower value of Money Fund's portfolio on a particular day, a
prospective investor in Money Fund would be able to obtain a
somewhat higher yield than would result from investment in a fund
utilizing solely market values, and existing Money Fund
Shareholders would receive correspondingly less income. The
converse would apply during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio
using the amortized cost method, Money Fund must (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less;
(ii) purchase securities having remaining maturities of 397 days
or less; and (iii) invest only in U.S. dollar denominated
securities determined in accordance with procedures established
by the Board of Trustees to present minimal credit risks and
which are rated in one of the two highest rating categories for
debt obligations by at least two nationally recognized
statistical rating organizations (or one rating organization if
the instrument is rated by only one such organization, subject to
ratification of the investment by the Board of Trustees). If a
security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board
of Trustees, including approval or ratification of the security
by the Board except in the case of U.S. Government securities.
Pursuant to Rule 2a-7, the Board is required to establish
procedures designed to stabilize, to the extent reasonably
possible, Money Fund's price per Share as computed for the
purpose of sales and redemptions at $1.00. Such procedures will
include review of Money Fund's portfolio holdings by the Board of
Trustees, at such intervals as it may deem appropriate, to
determine whether Money Fund's net asset value calculated by
using available market quotations deviates from $1.00 per Share
based on amortized cost. The extent of any deviation will be
examined by the Board of Trustees. If such deviation exceeds 1/2
of 1%, the Board will promptly consider what action, if any, will
be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair
results to investors or existing Shareholders, the Board will
take such corrective action as it regards as necessary and
appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends or establishing a net
asset value per Share by using available market quotations.
The Board of Trustees may establish procedures under which a
Fund may suspend the determination of net asset value for the
whole or any part of any period during which (1) the NYSE is
closed other than for customary weekend and holiday closings, (2)
trading on the NYSE is restricted, (3) an emergency exists as a
result of which disposal of securities owned by a Fund is not
reasonably practicable or it is not reasonably practicable for a
Fund fairly to determine the value of its net assets, or (4) for
such other period as the SEC may by order permit for the
protection of the holders of a Fund's Shares.
Ownership and Authority Disputes. In the event of disputes
involving multiple claims of ownership or authority to control a
Shareholder's account, each Fund has the right (but has no
obligation) to: (1) freeze the account and require the written
agreement of all persons deemed by the Fund to have a potential
property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or
accounts with a court of competent jurisdiction. Moreover, a
Fund may surrender ownership of all or a portion of an account to
the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the
Prospectus, the following special purchase plans also are
available:
Tax-Deferred Retirement Plans. The Trust offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
- For individuals whether or not covered by other
qualified plans;
- For simplified employee pensions;
- For employees of tax-exempt organizations; and
- For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans
generally are exempt from taxation until distribution from the
plans. Investors considering participation in any such plan
should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional
information, including the fees and charges with respect to all
of these plans, is available upon request to the Principal
Underwriter. No distribution under a retirement plan will be
made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request
from FTTC) and such other documentation as it deems necessary, as
to whether or not U.S. income tax is to be withheld from such
distribution.
Individual Retirement Account (IRA). All individuals
(whether or not covered by qualified private or governmental
retirement plans) may purchase Shares of a Fund pursuant to an
IRAs. However, contributions to an IRA by an individual who is
covered by a qualified private or governmental plan may not be
tax-deductible depending on the individual's income. Custodial
services for IRAs are available through FTTC. Disclosure
statements summarizing certain aspects of IRAs are furnished to
all persons investing in such accounts, in accordance with IRS
regulations.
Simplified Employee Pensions (SEP-IRA). For employers who
wish to establish a simplified form of employee retirement
program investing in Shares of a Fund, there are available
Simplified Employee Pensions invested in IRA Plans. Details and
materials relating to these plans will be furnished upon request
to the Principal Underwriter.
Retirement Plan for Employees of Tax-Exempt Organizations
(403(b)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
compensation arrangement for the purchase of Shares of a Fund
without being taxed currently on the investment. Contributions
which are made by the employer through salary reduction are
excludable from the gross income of the employee. Such deferred
compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), are available through the Principal Underwriter.
Custodial services are provided by FTTC.
Qualified Plan for Corporations, Self-Employed Individuals
and Partnerships. For employers who wish to purchase Shares of a
Fund in conjunction with employee retirement plans, there is a
prototype master plan which has been approved by the IRS. A
"Section 401(k) plan" is also available. FTTC furnishes
custodial services for these plans. For further details,
including custodian fees and plan administration services, see
the master plan and related material which is available from the
Principal Underwriter.
Letter of Intent. Purchasers who intend to invest $100,000
or more in Class I Shares of Templeton Income Fund or Class I
Shares of any other fund in the Franklin Group of Funds and the
Templeton Family of Funds, except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable
Products Series Fund, Franklin Valuemark Funds and Franklin
Government Securities Trust (the "Franklin Templeton Funds")
within 13 months (whether in one lump sum or in installments, the
first of which may not be less than 5% of the total intended
amount and each subsequent installment not less than $25 unless
the investor is a qualifying employee benefit plan (the "Benefit
Plan"), including automatic investment and payroll deduction
plans), and to beneficially hold the total amount of such Class I
Shares fully paid for and outstanding simultaneously for at least
one full business day before the expiration of that period,
should execute a Letter of Intent ("LOI") on the form provided in
the Shareholder Application in the Prospectus. Payment for not
less than 5% of the total intended amount must accompany the
executed LOI unless the investor is a Benefit Plan. Except for
purchases of Shares by a Benefit Plan, those Class I Shares
purchased with the first 5% of the intended amount stated in the
LOI will be held as "Escrowed Shares" for as long as the LOI
remains unfulfilled. Although the Escrowed Shares are registered
in the investor's name, his full ownership of them is conditional
upon fulfillment of the LOI. No Escrowed Shares can be redeemed
by the investor for any purpose until the LOI is fulfilled or
terminated. If the LOI is terminated for any reason other than
fulfillment, the Transfer Agent will redeem that portion of the
Escrowed Shares required and apply the proceeds to pay any
adjustment that may be appropriate to the sales commission on all
Class I Shares (including the Escrowed Shares) already purchased
under the LOI and apply any unused balance to the investor's
account. The LOI is not a binding obligation to purchase any
amount of Shares, but its execution will result in the purchaser
paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to an LOI may be
included under a subsequent LOI executed within 90 days of such
purchase. In this case, an adjustment will be made at the end of
13 months from the effective date of the LOI at the net asset
value per Share then in effect, unless the investor makes an
earlier written request to the Principal Underwriter upon
fulfilling the purchase of Shares under the LOI. In addition,
the aggregate value of any Shares, including Class II Shares,
purchased prior to the 90-day period referred to above may be
applied to purchases under a current LOI in fulfilling the total
intended purchases under the LOI. However, no adjustment of
sales charges previously paid on purchases prior to the 90-day
period will be made.
If an LOI is executed on behalf of a benefit plan (such
plans are described under "How to Buy Shares of the Fund -- Net
Asset Value Purchases (Both Classes)" in the Templeton Income
Fund Prospectus), the level and any reduction in sales charge for
these employee benefit plans will be based on actual plan
participation and the projected investments in the Franklin
Templeton Funds under the LOI. Benefit Plans are not subject to
the requirement to reserve 5% of the total intended purchase, or
to any penalty as a result of the early termination of a plan,
nor are Benefit Plans entitled to receive retroactive adjustments
in price for investments made before executing LOIs.
Special Net Asset Value Purchases. As discussed in the
Prospectus under "How to Buy Shares of the Fund - Description of
Special Net Asset Value Purchases," certain categories of
investors may purchase Class I Shares of Income Fund at net asset
value (without a front-end or contingent deferred sales charge).
FTD or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible
for such purchases, as indicated below. FTD may make these
payments in the form of contingent advance payments, which may
require reimbursement from the securities dealers with respect to
certain redemptions made within 12 months of the calendar month
following purchase, as well as other conditions, all of which may
be imposed by an agreement between FTD, or its affiliates, and
the securities dealer.
Except for Money Fund, the following amounts will be paid by
FTD or one of its affiliates, out of its own resources, to
securities dealers who initiate and are responsible for (i)
purchases of most equity and fixed-income Franklin Templeton
Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1
million but less than $2 millon, plus 0.80% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100
million or more; and (ii) purchases of most fixed-income Franklin
Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2
million, plus 0.60% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50
million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. These
payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net
asset value by certain trust companies and trust departments of
banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, FTD, or
one of its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
Under agreements with certain banks in Taiwan, Republic of
China, the Funds' Shares are available to such banks'
discretionary trust funds at net asset value. The banks may
charge service fees to their customers who participate in the
discretionary trusts. Pursuant to agreements, a portion of such
service fees may be paid to FTD, or an affiliate of FTD to help
defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and
communication facilities.
TAX STATUS
Income Fund intends normally to pay a monthly dividend
representing its net investment income and to distribute at least
annually any net realized capital gains. Money Fund intends to
declare dividends daily and to pay dividends monthly. By so
doing and meeting certain diversification of assets and other
requirements of the Code, each Fund intends to qualify as a
regulated investment company under the Code. The status of a
Fund as a regulated investment company does not involve
government supervision of management or of its investment
practices or policies. As a regulated investment company, a Fund
generally will be relieved of liability for U.S. federal income
tax on that portion of its net investment income and net realized
capital gains which it distributes to its Shareholders. Amounts
not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible
4% excise tax. To avoid application of the excise tax, each Fund
intends to distribute in accordance with the calendar year
distribution requirement.
Dividends from net investment income and distributions from
short-term capital gains (the excess of net short-term capital
gains over net long-term capital losses) are taxable to
Shareholders as ordinary income. Distributions from net
investment income may be eligible for the corporate dividends
received deduction to the extent attributable to Income Fund's
qualifying dividend income. However, the alternative minimum tax
applicable to corporations may reduce the benefit of the
dividends received deduction. Distributions from net long-term
capital gains (the excess of net long-term capital gains over net
short-term capital losses) designated by a Fund as capital gain
dividends are taxable to Shareholders as long-term capital gains,
regardless of the length of time a Fund's Shares have been held
by a Shareholder, and are not eligible for the dividends received
deduction. Generally, dividends and distributions are taxable to
Shareholders, whether received in cash or reinvested in Shares of
either Fund. Any distributions that are not from a Fund's
investment company taxable income or net capital gain may be
characterized as a return of capital to Shareholders or, in some
cases, as capital gain. Shareholders will be notified annually
as to the Federal tax status of dividends and distributions they
received and any tax withheld thereon.
Debt securities purchased by a Fund may be treated for
federal income tax purposes as having original issue discount.
Original issue discount essentially represents interest for
federal tax purposes and can be defined generally as the excess
of the stated redemption price at maturity over the issue price.
Original issue discount, whether or not any income is actually
received by a Fund, is treated for U.S. federal income tax
purposes as income earned by the Fund, and therefore is subject
to the distribution requirements of the Code. Generally, the
amount of original issue discount included in the income of a
Fund each year is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued but
unpaid interest.
In addition, debt securities may be purchased by a Fund at a
discount which exceeds the original issue discount remaining on
the securities, if any, at the time the Fund purchased the
securities. This additional discount represents market discount
for federal income tax purposes. In the case of any debt
security having a fixed maturity date of more than one year from
the date of issue and having market discount, the gain realized
on disposition will be treated as interest for most purposes of
the Code to the extent it does not exceed the accrued market
discount on the security (unless a Fund elects for all its debt
securities having a fixed maturity date of more than one year
from the date of issue to include market discount in income in
tax years to which it is attributable). Generally, market
discount accrues on a daily basis. In the case of any debt
security having a fixed maturity date of not more than one year
from the date of issue, the gain realized on disposition will be
treated as short-term capital gain. Market discount on
securities with a fixed maturity date not exceeding one year from
the date of issue generally is included in income on a ratable
basis.
Income Fund may invest in shares of foreign corporations
which may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or
75% or more of its gross income is investment-type income. If
Income Fund receives a so-called "excess distribution" with
respect to PFIC stock, Income Fund itself may be subject to a tax
on a portion of the excess distribution, whether or not the
corresponding income is distributed by Income Fund to
Shareholders. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the
period during which Income Fund held the PFIC shares. Income
Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable
years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions
are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
Income Fund may be eligible to elect alternative tax
treatment with respect to PFIC shares. Under an election that
currently is available in some circumstances, the Fund generally
would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In
addition, another election may be available that would involve
marking to market Income Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they
were realized. If this election were made, tax at the fund level
under the PFIC rules would generally be eliminated, but Income
Fund could, in limited circumstances, incur nondeductible
interest charges. Income Fund's intention to qualify annually as
a regulated investment company may limit its elections with
respect to PFIC shares.
Certain of the options, futures contracts and forward
contracts in which Income Fund may invest are "section 1256
contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may
be treated as ordinary income or loss. Also, section 1256
contracts held by Income Fund at the end of each taxable year
(and, with certain exceptions, for purposes of the 4% excise tax,
on October 31 of each year) are "marked-to-market" with the
result that unrealized gains or losses are treated as though they
were realized.
Generally, the hedging transactions undertaken by Income
Fund may result in "straddles" for U.S. federal income tax
purposes. The straddle rules may affect the character of gains
(or losses) realized by Income Fund. In addition, losses
realized by Income Fund on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable
year in which the losses are realized. Because only a few
regulations implementing the straddle rules have been
promulgated, the tax consequences to Income Fund of hedging
transactions are not entirely clear. The hedging transactions
may increase the amount of short-term capital gain realized by
Income Fund which is taxed as ordinary income when distributed to
Shareholders.
Income Fund may make one or more of the elections available
under the Code which are applicable to straddles. If Income Fund
makes any of the elections, the amount, character, and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the elections made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Requirements relating to Income Fund's tax status as a
regulated investment company may limit the extent to which Income
Fund will be able to engage in such transactions in options,
futures and forward contracts.
Under the Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time a Fund accrues
income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time a Fund
actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain financial
contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of
acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988"
gains and losses, may increase or decrease the amount of a Fund's
net investment income to be distributed to its Shareholders as
ordinary income. For example, fluctuations in exchange rates may
increase the amount of income that a Fund must distribute in
order to qualify for treatment as a regulated investment company
and to prevent application of an excise tax on undistributed
income. Alternatively, fluctuations in exchange rates may
decrease or eliminate income available for distribution. If
section 988 losses exceed other net investment income during a
taxable year, a Fund would not be able to make ordinary dividend
distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to
Shareholders for federal income tax purposes, rather than as an
ordinary dividend, reducing each Shareholder's basis in his Fund
Shares, or as a capital gain.
Income received by the Funds from sources within foreign
countries may be subject to withholding and other income or
similar taxes imposed by such countries. If more than 50% of the
value of Income Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, Income Fund
will be eligible and intends to elect to "pass through" to Income
Fund's Shareholders the amount of foreign taxes paid by Income
Fund. Pursuant to this election, a Shareholder will be required
to include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid
by Income Fund, and will be entitled either to deduct (as an
itemized deduction) his pro rata share of foreign income and
similar taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. federal income tax liability,
subject to limitations. No deduction for foreign taxes may be
claimed by a Shareholder who does not itemize deductions, but
such a Shareholder may be eligible to claim the foreign tax
credit (see below). Each Shareholder will be notified within 60
days after the close of Income Fund's taxable year whether the
foreign taxes paid by Income Fund will "pass through" for that
year.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed the Shareholder's U.S. tax
attributable to his foreign source taxable income. For this
purpose, if the pass-through election is made, the source of
Income Fund's income flows through to its Shareholders. With
respect to Income Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign
currency denominated debt securities, receivables and payables,
will be treated as ordinary income derived from U.S. sources.
The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the
foreign tax credit), including the foreign source passive income
passed through by Income Fund. Shareholders may be unable to
claim a credit for the full amount of their proportionate share
of the foreign taxes paid by Income Fund. Foreign taxes may not
be deducted in computing alternative minimum taxable income and
the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes
of this limitation) imposed on corporations and individuals. If
Income Fund is not eligible to make the election to "pass
through" to its Shareholders its foreign taxes, the foreign
income taxes it pays generally will reduce investment company
taxable income and the distributions by Income Fund will be
treated as United States source income.
Upon the sale or exchange of Income Fund Shares, a
Shareholder will realize a taxable gain or loss depending upon
his basis in the Shares. Such gain or loss generally will be
treated as capital gain or loss if the Shares are capital assets
in the Shareholder's hands, and will be long-term if the
Shareholder's holding period for the Shares is more than one year
and generally otherwise will be short-term. Any loss realized on
a sale or exchange will be disallowed to the extent that the
Shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in
Income Fund) within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the Shares. In such
a case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of Income Fund Shares held by the Shareholder for 6
months or less will be treated for federal income tax purposes as
a long-term capital loss to the extent of any distributions of
capital gain dividends received by the Shareholder with respect
to such Shares. It is not anticipated that gain or loss will be
realized from a disposition of Money Fund Shares since that Fund
intends to maintain a share price of $1.
In some cases, Shareholders will not be permitted to take
sales charges into account for purposes of determining the
amount of gain or loss realized on the disposition of their
Shares. This prohibition generally applies where (1) the
Shareholder incurs a sales charge in acquiring the stock of a
regulated investment company, (2) the stock is disposed of before
the 91st day after the date on which it was acquired, and (3) the
Shareholder subsequently acquires shares of the same or another
regulated investment company and the otherwise applicable sales
charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of stock. Sales charges
affected by this rule are treated as if they were incurred with
respect to the stock acquired under the reinvestment right. This
provision may be applied to successive acquisitions of stock.
The Funds generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends
paid, capital gain distributions and redemption proceeds (except
redemptions from Money Fund), to a Shareholder if (1) the
Shareholder fails to furnish a Fund with the Shareholder's
correct taxpayer identification number or social security number,
(2) the IRS notifies the Shareholder or a Fund that the
Shareholder has failed to report properly certain interest and
dividend income to the IRS and to respond to notices to that
effect, or (3) when required to do so, the Shareholder fails to
certify that he is not subject to backup withholding.
Ordinary dividends and taxable capital gain distributions
declared in October, November, or December with a record date in
such a month and paid during the following January will be
treated as having been paid by a Fund and received by
Shareholders on December 31 of the calendar year in which
declared, rather than the calendar year in which the dividends
are actually received.
U.S. tax rules applicable to foreign investors may differ
significantly from those outlined above. Distributions also may
be subject to state, local and foreign taxes. Shareholders
should consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of each Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
Each Fund, pursuant to Rule 12b-1 under the 1940 Act, has
adopted a Distribution Plan with respect to each class of Shares
(the "Plans"). Under the Plans adopted with respect to Class I
Shares (including all Shares issued by Money Fund), each Fund may
reimburse FTD or others quarterly (subject to a limit of 0.15%
per annum of Money Fund's average daily net assets and 0.25% per
annum of Income Fund's average daily net assets attributable to
Class I Shares) for costs and expenses incurred by FTD or others
in connection with any activity which is primarily intended to
result in the sale of the Funds' Shares. Income Fund also has a
second class of Shares, designated Class II Shares. Under the
Plan adopted with respect to Class II Shares, Income Fund will
pay FTD or others quarterly (subject to a limit of 0.65% per
annum of the Fund's average daily assets attributable to Class II
Shares of which up to 0.15% of such net assets may be paid to
dealers for personal service and/or maintenance of Shareholder
accounts) for costs and expenses incurred by FTD or others in
connection with any activity which is primarily intended to
result in the sale of the Fund's Shares. Payments to FTD or
others could be for various types of activities, including (1)
payments to broker-dealers who provide certain services of value
to each Fund's Shareholders (sometimes referred to as a "trail
fee"); (2) reimbursement of expenses relating to selling and
servicing efforts or of organizing and conducting sales seminars;
(3) payments to employees or agents of the Principal Underwriter
who engage in or support distribution of Shares; (4) payments of
the costs of preparing, printing and distributing Prospectuses
and reports to prospective investors and of printing and
advertising expenses; (5) payment of dealer commissions and
wholesaler compensation in connection with sales of the Funds'
Shares exceeding $1 million (on which Income Fund imposes no
initial sales charge) and interest or carrying charges in
connection therewith; and (6) such other similar services as the
Trust's Board of Trustees determines to be reasonably calculated
to result in the sale of Shares. Under the Plans, the costs and
expenses not reimbursed in any one given quarter (including costs
and expenses not reimbursed because they exceed the percentage
limit applicable to either class of Shares) may be reimbursed in
subsequent quarters or years.
During the fiscal year ended August 31, 1994, FTD incurred
costs and expenses of $469,730 in connection with distribution of
Class I Shares of Income Fund and $213,238 in connection with
distribution of Class I Shares of Money Fund. During the same
period, the Trust made reimbursements pursuant to the Plans in
the amount of $469,730 on behalf of Income Fund and $208,553 on
behalf of Money Fund. As indicated above, unreimbursed expenses,
which amount to $16,230 for Class I Shares of Money Fund, may be
reimbursed by the Trust during the fiscal year ending August 31,
1995 or in subsequent years. In the event that a Plan is
terminated, the Trust will not be liable to FTD for any
unreimbursed expenses that had been carried forward from previous
months or years. During the fiscal year ended August 31, 1994,
FTD spent, with respect to Income Fund, the following amounts on:
compensation to dealers, $368,478; sales promotion, $6,940;
wholesale costs and expenses, $14,317; advertising, $397; and
printing, $79,598; and, with respect to Money Fund, the following
amounts on: compensation to dealers, $181,970; printing,
$16,263; wholesale costs and expenses, $14,609; and advertising,
$396.
The Underwriting Agreement provides that the Principal
Underwriter will use its best efforts to maintain a broad and
continuous distribution of each Fund's Shares among bona fide
investors and may sign selling agreements with responsible
dealers, as well as sell to individual investors. The Shares are
sold only at the Offering Price in effect at the time of sale,
and each Fund receives not less than the full net asset value of
the Shares sold. The discount between the Offering Price and the
net asset value of Income Fund Shares may be retained by the
Principal Underwriter or it may reallow all or any part of such
discount to dealers. During the fiscal years ended August 31,
1994, 1993, and 1992, FTD (and, prior to June 1, 1993, Templeton
Funds Distributor, Inc.) retained of such discount $277,670,
$326,584, and $144,697, or approximately 18.16%, 19.54%, and
10.88%, of the gross commissions on sales of Income Fund Shares,
respectively. The Principal Underwriter in all cases buys Shares
from a Fund acting as principal for its own account. Dealers
generally act as principal for their own account in buying Shares
from the Principal Underwriter. No agency relationship exists
between any dealer and a Fund or the Principal Underwriter.
The Underwriting Agreement provides that each Fund shall pay
the costs and expenses incident to registering and qualifying its
Shares for sale under the Securities Act of 1933 and under the
applicable blue sky laws of the jurisdictions in which the
Principal Underwriter desires to distribute such Shares, and for
preparing, printing and distributing Prospectuses and reports to
Shareholders. The Principal Underwriter pays the cost of
printing additional copies of Prospectuses and reports to
Shareholders used for selling purposes. (The Funds pay costs of
preparation, set-up and initial supply of the Funds' Prospectuses
for existing Shareholders.)
The Underwriting Agreement is subject to renewal from year
to year in accordance with the provisions of the 1940 Act and
terminates automatically in the event of its assignment. The
Underwriting Agreement may be terminated without penalty by
either party upon 60 days' written notice to the other, provided
termination by the Trust shall be approved by the Board of
Trustees or a majority (as defined in the 1940 Act) of the
Shareholders. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the
Underwriting Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the principal underwriter for the other Templeton
Funds.
YIELD AND PERFORMANCE INFORMATION
Money Fund may, from time to time, include its yield and
effective yield in advertisements or reports to Shareholders or
prospective investors. Current yield for Money Fund will be
based on the change in the value of a hypothetical investment
(exclusive of capital changes) over a particular seven-day
period, less a pro-rata share of Money Fund expenses accrued over
that period (the "base period"), and stated as a percentage of
the investment at the start of the base period (the "base period
return"). The base period return is then annualized by
multiplying by 365/7, with the resulting yield figure carried to
at least the nearest hundredth of one percent. "Effective Yield"
for Money Fund assumes that all dividends received during an
annual period have been reinvested. Calculation of "effective
yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return)365/7 - 1
YIELD = 2[((1 + a-b) cd)6 - 1]
where a = dividend and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of Shares outstanding
during the period that were entitled to receive
dividends, and
d = the maximum offering price per Share on the last
day of the period.
For the seven-day period ending August 31, 1994, the yield
of Money Fund was 3.08% and the effective yield of Money Fund was
3.11%.
The Funds may, from time to time, include their total return
in advertisements or reports to Shareholders or prospective
investors. Quotations of average annual total return for the
Funds will be expressed in terms of the average annual compounded
rate of return for periods in excess of one year or the total
return for periods less than one year of a hypothetical
investment in the Funds over periods of one, five, or ten years
(up to the life of a Fund) calculated pursuant to the following
formula: P(1 + T)n = ERV (where P = a hypothetical initial
payment of $1,000, T = the average annual total return for
periods of one year or more or the total return for periods of
less than one year, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the
deduction of the maximum initial sales charge and deduction of a
proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when
paid. Income Fund's average annual total return for the one- and
five-year periods ended August 31, 1994 and from inception on
September 24, 1986 through August 31, 1994, was -6.17%, 6.23%,
and 7.09%, respectively. Money Fund's average annual total
return for the one- and five-year periods ended August 31, 1994
and from inception on October 3, 1987 through August 31, 1994,
was 2.66%, 4.50% and 5.36%, respectively.
Performance information for either Fund may be compared, in
reports and promotional literature, to: (i) unmanaged indices so
that investors may compare the Fund's results with those of a
group of unmanaged securities widely regarded by investors as
representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services,
Inc., a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives and assets,
or tracked by other services, companies, publications, or persons
who rank mutual funds on overall performance or other criteria;
and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in a Fund.
Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for a Fund reflects only the
performance of a hypothetical investment in a Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of a Fund's
investment objective and policies, characteristics and quality of
the portfolio and the market conditions during the given time
period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, each Fund and the Investment Manager may
also refer to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and
a reduction of foreign exchange controls, and improving
communication technology, of various countries as published
by various statistical organizations.
(6) To assist investors in understanding the different returns
and risk characteristics of various investments, the Fund
may show historical returns of various investments and
published indices (e.g., Ibbotson Associates, Inc. Charts
and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) Quotations from the Templeton organization's founder, Sir
John Templeton, advocating the virtues of diversification
and long-term investing, including the following:
_______________
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Trust's Board on April 16, 1995. He is no longer
involved with the investment management process.
- "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
- "Diversify by company, by industry and by country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of
investment."
- "Buy low."
- "When buying stocks, search for bargains among quality
stocks."
- "Buy value, not market trends or the economic outlook."
- "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
- "Do your homework or hire wise experts to help you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even
understand all the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or
negative too often."
In addition, each Fund and the Investment Manager may also
refer to the number of Shareholders in the Fund or the aggregate
number of shareholders of the Franklin Templeton Funds or the
dollar amount of fund and private account assets under management
in advertising materials.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences,
conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and
conditions of redemption, except as follows: all consideration
received from the sale of Shares of a Fund, together with all
income, earnings, profits and proceeds thereof, belongs to that
Fund and is charged with liabilities in respect to that Fund and
of that Fund's part of general liabilities of the Trust in the
proportion that the total net assets of the Fund bear to the
total net assets of both Funds. The net asset value of a Share
of a Fund is based on the assets belonging to that Fund less the
liabilities charged to that Fund, and dividends are paid on
Shares of a Fund only out of lawfully available assets belonging
to that Fund. In the event of liquidation or dissolution of the
Trust, the Shareholders of each Fund will be entitled, out of
assets of the Trust available for distribution, to the assets
belonging to that particular Fund.
The Declaration of Trust provides that the holders of not
less than two-thirds of the outstanding Shares of the Funds may
remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee if requested in writing to
do so by the holders of not less than 10% of the outstanding
Shares of the Trust.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Trust. However, the Declaration of Trust disclaims liability
of the Shareholders, Trustees or officers of the Trust for acts
or obligations of the Trust, which are binding only on the assets
and property of the Trust. The Declaration of Trust provides for
indemnification out of Trust property for all loss and expenses
of any Shareholder held personally liable for the obligations of
the Trust. The risk of a Shareholder incurring financial loss on
account of Shareholder liability is limited to circumstances in
which the Trust itself would be unable to meet its obligations
and, thus, should be considered remote.
The Shares have non-cumulative voting rights so that the
holders of a plurality of the Shares voting for the election of
Trustees at a meeting at which 50% of the outstanding Shares are
present can elect all the Trustees and in such event, the holders
of the remaining Shares voting for the election of Trustees will
not be able to elect any person or persons to the Board of
Trustees.
FINANCIAL STATEMENTS
The financial statements contained in the 1994 Annual
Reports to Shareholders of Templeton Income Fund and Templeton
Money Fund are incorporated herein by reference.
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
Corporate Bonds. Bonds rated Aa by Moody's Investors
Service, Inc. ("Moody's") are judged by Moody's to be of high
quality by all standards. Together with bonds rated Aaa (Moody's
highest rating), they comprise what are generally known as high-
grade bonds. Aa bonds are rated lower than Aaa bonds because
margins of protection may not be as large as those of Aaa bonds,
or fluctuations of protective elements may be of greater
amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to
Aaa securities. Bonds which are rated A by Moody's possess many
favorable investment attributes and are to be considered as upper
medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the
future.
Moody's Baa rated bonds are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate
for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative
elements because their future cannot be considered as well
assured. Uncertainty of position characterizes bonds in this
class, because the protection of interest and principal payments
often may be very moderate and not well safeguarded.
Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the security over
any long period of time may be small. Bonds which are rated Caa
are of poor standing. Such securities may be in default or there
may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
Bonds rated AAA by Standard & Poor's Corporation ("S&P") are
considered by S&P to be the highest grade obligations and possess
the ultimate degree of protection as to principal and interest.
Bonds rated AA are judged by S&P to be high-grade obligations and
in the majority of instances differ only in small degree from
issues rated AAA (S&P's highest rating). Bonds rated A by S&P
have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are
between sound obligations and those where the speculative
elements begin to predominate. Although these bonds have
adequate asset coverage and normally are protected by
satisfactory earnings, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to
pay interest and principal.
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity
to pay interest and principal in accordance with the terms of the
obligation. While such bonds may have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Commercial Paper. The Prime rating is the highest
commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity;
(5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and
(8) recognition by management of obligations which may be present
or may arise as a result of public interest questions and
preparations to meet such obligations. Issuers within this Prime
category may be given ratings 1, 2 or 3, depending on the
relative strengths of these factors.
Commercial paper rated A by S&P has the following
characteristics: (i) liquidity ratios are adequate to meet cash
requirements; (ii) long-term senior debt rating should be A or
better, although in some cases BBB credits may be allowed if
other factors outweigh the BBB; (iii) the issuer should have
access to at least two additional channels of borrowing;
(iv) basic earnings and cash flow should have an upward trend
with allowances made for unusual circumstances; and (v) typically
the issuer's industry should be well established and the issuer
should have a strong position within its industry and the
reliability and quality of management should be unquestioned.
Issuers rated A are further referred to by use of numbers 1, 2
and 3 to denote relative strength within this highest
classification.
