<PAGE>
Templeton Income Fund
- --------------------------------------------------------------------------------
Your Fund's Objective:
The Templeton Income Fund seeks current income with capital appreciation and
growth of income through a flexible policy of investing primarily in debt
securities of companies, governments and government agencies of various nations
throughout the world. The Fund also invests in preferred stock, common stocks
which pay dividends, and income-producing securities convertible into common
stock of such companies.
- --------------------------------------------------------------------------------
October 16, 1995
Dear Shareholder:
We are pleased to bring you the ninth annual report of the Templeton Income
Fund, which covers the fiscal year ended August 31, 1995.
As the 12 months under review progressed, it became increasingly evident that
global economic growth was slowing significantly. After increasing at an
annualized rate of 5.1% in the fourth quarter of 1994, U.S. Gross Domestic
Product (GDP) fell to just 2.7% in the first quarter of 1995 and further to 1.1%
in the second quarter.* Concerned that the economy was slowing more than
expected, the Federal Reserve Board lowered short-term interest rates in July.
In Japan, economic growth was essentially flat, as GDP increased at an
annualized rate of only 0.3% for the first quarter of 1995, due to the strong
yen and sluggish consumer spending.** The government implemented a plan to
stimulate consumer spending, but Japan's strong currency and weak banking system
appear to have prevent
* Source: U.S. Commerce Dept.
** Source: Japanese Ministry of International Trade and Industry
1
<PAGE>
ed a resurgence of business activity. We believe that government financing is
likely to increase in an effort to fund this new economic plan, thus keeping
some upward pressure on Japanese interest rates.
During the reporting period, the German economy was adversely affected by the
strong Deutschemark and lower profit margins on foreign trade. At the same time,
the strong currency alleviated pressure on wholesale prices, which helped keep
inflation relatively low. In response, the Bundesbank eased its monetary policy
early in 1995 and again in August.
Within this environment, global bond yields generally rose in the first two
months of the fiscal year, but then declined until the end of June. However, a
surprising reversal took place when 30-year U.S. Treasury bond yields actually
rose following the U.S. Federal Reserve's easing of monetary policy in early
July. This stemmed from U.S. economic reports showing some recovery from weak
second-quarter growth, which led many investors to believe that the lull in
business activity would be shorter than previously expected. Other bond markets
followed the U.S. trend, with prices declining at the beginning of
- --------------------------------------------------------------------------------
Templeton Income Fund
Geographic Distribution on 8/31/95
Based on Total Net Assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Europe 33.3%
Latin America 3.0%
Asia 4.1%
Canada 11.2%
Australia & New Zealand 13.4%
United States 32.6%
Other Net Assets 2.4%
</TABLE>
the fiscal year, then rising for about seven months, before declining again in
July and early August.
Over the course of the fiscal year, we increased our U.S. exposure, from 12.2%
of total net assets on August 31, 1994, to 32.6% on August 31, 1995, because we
believed the U.S. economy was approaching the later stages of its business cycle
and could benefit from possible interest-rate declines. We reduced our European
exposure from 38.7% to 33.3% of total net assets, in the belief that economic
strength there, particularly in Germany, was likely to result in tighter
monetary policies and higher interest
2
<PAGE>
rates. At the same time, we reduced our Australian and New Zealand positions,
from 21.3% to 13.4%, because of stronger economic growth and the possibility of
higher interest rates in these markets. Our current 11.2% position in Canada is
slightly up from last year's 9.7% asset allocation. However, about half of the
position has been hedged into U.S. dollars in light of Canadian federal budget
concerns and to help offset some of the volatility associated with the
provincial elections in Quebec, which are focused on a destabilizing
secessionist movement. In addition, we lengthened the average maturity of the
Fund's portfolio from 7.3 years on August 31, 1994 to 7.8 years on August 31,
1995.
Credit quality remains an important factor in selecting our investments. The
Fund's portfolio consists primarily of investment-grade securities, as rated by
one of the nationally recognized rating services, or of non-rated securities we
judge to be of equal quality. At the end of the fiscal year, about 75% of the
securities in the Fund's portfolio were rated AA or higher, 19% were rated A or
BBB, and 4% were rated below investment grade. The lower-rated bonds represented
obligations of Argentina,
- --------------------------------------------------------------------------------
Templeton Income Fund
Portfolio Breakdown on 8/31/95
Based on Total Net Assets
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Government Bonds 80.4%
- --------------------------------------------------------------------------------
Corporate Bonds 7.5%
- --------------------------------------------------------------------------------
Common Stocks 4.9%
- --------------------------------------------------------------------------------
Preferred Stocks 1.2%
- --------------------------------------------------------------------------------
Short-Term Obligations &
Other Net Assets 6.0%
- --------------------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, see page 9 of this report.
Venezuela, Columbia and Hungary. Approximately 2% of the Fund's portfolio was
held in other net assets.
Looking forward, we believe that the moderate growth and relatively stable
inflation experienced by the U.S. in 1995 may persist into 1996, which should be
a positive influence on interest rates. Monthly indicators of U.S. inflation
continue to show that price pressures are well-contained. In our opinion, the
Federal Reserve may therefore have reason to lower short-term interest rates
again, which could also reverse the latest upward move in longer-term rates.
Consumer prices are increasing moderately in other industrialized countries, but
compared with past business cycles, this upward movement remains subdued. As
always, we remind you that there are special risks involved with global
investing related to
3
<PAGE>
market, currency, economic, political, and other factors. Developing markets
involve heightened risks related to these same factors, in addition to those
associated with the relatively small size and lesser liquidity of these markets.
These risks are discussed in your Fund's prospectus.
In closing, we would like to mention that although Sir John Templeton has not
been involved in investment management of the Templeton Funds since October
1992, we were saddened by his recent decision to step down as Chairman and
Director of the U.S.-registered Templeton funds. The Fund's Board of Trustees
have elected John Wm. Galbraith, former vice chairman of Templeton, Galbraith &
Hansberger, Ltd., to succeed him. The investment manager will continue to use
the investment philosophies and principles established by Sir John.
We thank you for your participation in the Templeton Income Fund and look
forward to serving your investment needs in the years to come.
Sincerely,
/s/ Thomas Latta
Thomas Latta
Portfolio Manager
Templeton Income Fund
4
<PAGE>
Performance Summary
Templeton Income Fund Class I shares provided a total return of 10.43% for the
one-year period ended August 31, 1995. Total return measures the change in value
of an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the current maximum 4.25% initial sales
charge for Class I shares. We have always maintained a long-term perspective
when managing the Fund, and we encourage shareholders to view their investments
in a similar manner. As you can see from the chart on the following page, the
Fund's Class I shares have delivered a cumulative total return of more than 99%
since the Fund's inception on September 18, 1986.
As measured by net asset value, the Fund's Class I share price increased from
$9.05 on August 31, 1994 to $9.32 on August 31, 1995, while the Fund's Class II
share price increased from $9.05 on May 1, 1995 (the inception date for these
shares) to $9.31 on August 31, 1995.
During the one-year reporting period, Class I shareholders received income
dividends totaling 54 cents ($0.54) per share. During the four-month reporting
period for Class II shares, shareholders received dividends of 15 cents ($0.15)
per share. Of course, past performance is not predictive of future results, and
distributions will vary depending on income earned by the Fund.
During the fiscal year, the Fund recognized net foreign currency losses due to
fluctuations in the value of its foreign currency denominated securities and
foreign currency holdings. Under the Internal Revenue Code, these losses reduce
the Fund's regular investment income available for distribution to shareholders.
Therefore, 9 cents ($0.09) per share of the total distributions for Class I
shares and 4 cents ($0.04) per share for Class II shares were characterized as
returns of capital.
In general, return-of-capital distributions are not taxable; rather, they reduce
the cost basis of your shares in the Fund, and affect the computation of a
capital gain or loss when you sell your shares. For more information, please
consult your personal tax advisor, or refer to IRS Publication 550 (Investment
Income and Expenses).
5
<PAGE>
- --------------------------------------------------------------------------------
Templeton Income Fund - Class I
Total Return Index Comparison
$10,000 Investment (9/18/86 - 8/31/95)
[Graph appears here showing comparison between Templeton Income Fund, Salomon
Brothers World Gov't Bond Index and the CPI]
<TABLE>
<CAPTION>
9/86 8/95
<S> <C> <C>
Templeton Income Fund/1/ $10,000 19,064
Salomon Brothers World Gov't Bond Index/2/ $10,000 23,584
CPI/3/ $10,000 13,897
</TABLE>
1. Includes all sales charges and represents the change in value of an
investment over the period shown. Total return assumes reinvestment of
dividends and capital gains. Past performance is not predictive of future
results.
2. Index is unmanaged and includes reinvested dividends.
3. Source: U.S. Bureau of Labor Statistics
- --------------------------------------------------------------------------------
The graph above shows how a $10,000 investment in the Fund's Class I shares
since the Fund's inception has kept your purchasing power well-ahead of
inflation, as measured by the Consumer Price Index (CPI). It also compares the
Class I share performance since the Fund's inception with the performance of the
unmanaged Salomon Brothers World Government Bond Index. Class II shares are not
represented as they have not been available for a sufficient period of time.
Please remember that the Fund's performance differs from that of the index
because the index does not contain cash (the Fund generally carries a certain
percentage of cash
- --------------------------------------------------------------------------------
Templeton Income Fund
Periods ended August 31, 1995
<TABLE>
<CAPTION>
Since Since
Inception Inception
One-Year Five-Year (09/18/86) (05/01/95)
<S> <C> <C> <C> <C>
Average Annual
Total Return/1/
Class I Shares 5.74% 6.61% 7.48% --
Aggregate Total
Return/2/
Class II Shares -- -- -- 2.97%
Cumulative
Total Return/3/
Class I Shares 10.43% 43.83% 99.03% --
Class II Shares -- -- -- 5.03%
</TABLE>
1. Average annual total return represents the average annual change in value of
an investment over the specified periods. The figures have been restated to
reflect the current maximum 4.25% initial sales charge for Class I shares. See
note below.
2. Aggregate total return represents the change in value of an investment over
the period indicated and reflects the deduction of the maximum 1.00% initial
sales charge and 1.00% contingent deferred sales charge (CDSC) for Class II
shares, applicable to shares redeemed within the first 18 months of investment.
Since Class II shares have existed for less than one year, average annual total
returns are not provided. See note below.
3. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge for Class I shares, or the maximum 1.00% initial sales charge and 1.00%
CDSC for Class II shares, applicable to shares redeemed within the first 18
months of investment. See note below.
Note: Prior to July 1, 1992, Class I shares were offered at a higher sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been lower than noted above. Class II shares, which the Fund began
offering on May 1, 1995, are subject to different fees and expenses, which will
affect their performance. Please see the prospectus for more details regarding
Class I and Class II shares.
All total return calculations reflect the deduction of a proportional share of
Fund expenses on an annual basis and assume that all dividends and capital gains
distributions were reinvested when paid. Investment return and principal value
will fluctuate with market conditions, currencies and the economic and political
climates where investments are made, so your shares, when redeemed, may be worth
more or less than their initial cost. Past performance is not predictive of
future results.
- --------------------------------------------------------------------------------
at any given time) and includes no sales charges or management expenses. One
cannot invest directly in an index.
6
<PAGE>
Templeton Income Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------
YEAR ENDED AUGUST 31
------------------------------------------------
1995 1994+ 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 9.05 $ 9.96 $ 10.55 $ 9.81 $ 9.95
-------- -------- -------- -------- --------
Income from investment
operations:
Net investment income .73 .72 .82 .83 .91
Net realized and unrealized
gain (loss) .17 (.91) (.35) .75 (.11)
-------- -------- -------- -------- --------
Total from investment
operations .90 (.19) .47 1.58 .80
-------- -------- -------- -------- --------
Distributions:
Dividends from net
investment income (.54) (.53) (.76) (.84) (.91)
Distributions from net
realized gains -- (.07) (.30) -- (.03)
Tax basis return of capital (.09) (.12) -- -- --
-------- -------- -------- -------- --------
Total distributions (.63) (.72) (1.06) (.84) (.94)
-------- -------- -------- -------- --------
Change in net asset value .27 (.91) (.59) .74 (.14)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.32 $ 9.05 $ 9.96 $ 10.55 $ 9.81
======== ======== ======== ======== ========
TOTAL RETURN* 10.43% (2.01)% 5.00% 16.75% 8.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000) $191,301 $205,482 $206,667 $179,799 $127,888
Ratio of expenses to average
net assets 1.18% 1.18% 1.01% .98% 1.05%
Ratio of net investment
income to average net
assets 7.99% 7.50% 8.45% 8.14% 9.23%
Portfolio turnover rate 101.12% 139.23% 266.93% 233.93% 408.39%
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS.
+BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING.
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Templeton Income Fund
Financial Highlights (cont.)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
CLASS II
---------------
FOR THE PERIOD
MAY 1, 1995+
THROUGH
AUGUST 31, 1995
---------------
<S> <C>
Net asset value, beginning of period $ 9.05
------
Income from investment operations:
Net investment income .21
Net realized and unrealized gain .24
------
Total from investment operations .45
------
Distributions:
Dividends from net investment income (.15)
Tax basis return of capital (.04)
------
Total distributions (.19)
------
Change in net asset value .26
------
Net asset value, end of period $ 9.31
======
TOTAL RETURN* 5.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $2,043
Ratio of expenses to average net assets 1.57%**
Ratio of net investment income to average net assets 7.47%**
</TABLE>
* TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE DEFERRED CONTINGENT
SALES CHARGE. NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
**ANNUALIZED.
+COMMENCEMENT OF OFFERING OF SALES.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Templeton Income Fund
Investment Portfolio, August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* COUNTRY ISSUE VALUE
- -------------------------------------------------------------------------------
BONDS--CORPORATE: 7.5%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
2,000,000 Banco de Galicia y Buenos Aires SA,
U.S. 9.00%, $ 1,510,000
4,000,000 Compania Sud Americana de Vapores SA,
U.S. 7.375%, 12/08/03 3,840,000
3,000,000 Henderson Capital International Ltd.,
U.S. 4.25%, 10/27/96 3,030,000
2,200,000 U.S. News America Holdings, 8.625%, 02/07/14 1,355,750
2,250,000 PIV Investment Finance (Cayman) Ltd.,
U.S. 4.50%, conv., 12/01/00 1,839,375
1,000,000 U.S. Pohang Iron & Steel, 6.625%, 7/01/03 973,720
2,000,000 U.S. Quantas Airways Ltd., 7.50%, 6/30/03 2,013,060
------------
TOTAL BONDS--CORPORATE (cost $15,094,604) 14,561,905
<CAPTION>
- -------------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES: 80.4%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
4,900,000 Ger. Deutsche Bundespost, 7.75%, 10/01/04 3,512,112
1,973,000 Ind. Essar Gujarat Ltd., 9.40%, FRN, 7/15/99 1,963,135
1,900,000 Aus. Eurofima, 9.875%, 1/17/07 1,456,694
12,350,000 Federal Republic Germany, Unity, 8.75%,
Ger. 8/20/01 9,434,962
4,220,000 Federal Republic Germany, Bundes,
Ger. 8.00%, 1/21/02 3,110,094
3,920,000 Federal Republic Germany, Bundesobl,
Ger. 5.375%, 1/21/02 2,674,572
8,100,000 Federal Republic Germany,
Ger. Bundeschatweis, 6.875%, 12/2/02 5,756,076
Government of Canada:
6,350,000 Can. 8.50%, 4/01/02 4,910,225
4,000,000 Can. 8.00%, 6/01/23 2,862,186
Government of Denmark:
10,238,000 Dem. 9.00%, 11/15/98 1,909,476
20,769,000 Dem. 8.00%, 5/15/03 3,673,064
Government of France:
22,334,000 Fra. 8.50%, 3/28/00 4,760,151
21,052,000 Fra. 9.50%, 1/25/01 4,678,315
Government of Italy:
7,000,000,000 Itl. 12.00%, 10/01/95 4,276,144
3,265,000,000 Itl. 12.00%, 1/01/97 2,032,895
4,000,000,000 Itl. 12.00%, 1/20/98 2,507,270
3,005,000,000 Itl. 11.6%, 8/01/99 1,859,730
Government of New Zealand:
3,035,000 N.Z. 6.50%, 2/15/00 1,856,635
2,770,000 N.Z. 8.00%, 4/15/04 1,808,852
Government of Spain:
300,000,000 Sp. 11.90%, 7/15/96 2,424,290
400,000,000 Sp. 11.60%,1/15/97 3,247,648
International Bank Reconstruction &
Development
5,375,000 Ger. 7.125%, 4/12/05 3,713,986
21,472,000 Dem. Kingdom of Denmark, 8.00%, 11/15/01 3,857,704
1,000,000 National Bank of Hungary, 7.95%,
Hun. 11/01/03 887,500
</TABLE>
9
<PAGE>
Templeton Income Fund
Investment Portfolio, August 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY* COUNTRY ISSUE VALUE
- -------------------------------------------------------------------------------
BONDS--GOVERNMENT & GOVERNMENT AGENCIES (CONT.)
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
New South Wales Treasury Corp.
11,600,000 Aus. 12.00%, 12/01/01 $ 10,054,301
2,600,000 Aus. 7.00%, 4/01/04 1,711,051
Province of British Colombia:
3,000,000 Can. 7.75%, 6/16/03 2,181,717
5,000,000 Can. 8.50%, 8/23/13 3,719,419
3,150,000 Can. Province of Nova Scotia, 8.75%, 4/01/22 3,510,549
3,000,000 Can. Province of Ontario, 8.00%, 3/11/03 2,211,879
3,000,000 Can. Province of Quebec, 9.25%, 4/01/02 2,334,761
2,000,000 Idn. PT Astra International, 9.75%, 4/29/01 2,065,000
3,900,000 Queensland Treasury Corp., 8.00%,
Aus. 5/14/03 2,766,769
8,710,000 Treasury Corp. of Victoria, 8.25%,
Aus. 10/15/03 6,267,303
3,000,000 Arg. Republic of Argentina, 8.375%, 12/20/03 2,250,000
2,500,000 Col. Republic of Colombia, 7.25%, 2/23/04 2,287,500
Thailand Military Bank:
25,000,000 Thai. 7.50%, 10/02/95 994,613
40,000,000 Thai. 11.125%, 6/03/96 1,596,169
13,000,000 Thai. 11.00%, 6/05/96 518,288
U.S. Treasury Bonds:
2,277,000 U.S. 6.25%, 8/15/23 2,131,841
7,689,000 U.S. 7.625%, 2/15/25 8,567,238
U.S. Treasury Notes:
5,650,000 U.S. 8.75%, 8/15/00 6,284,721
7,000,000 U.S. 6.50%, 5/15/05 7,088,620
2,450,000 U.S. 7.25%, 5/15/04 2,598,152
2,880,000 U.S. 11.625%, 11/15/04 3,923,107
2,500,000 Venezuela Front Load Interest Reduction
Vez. Bond, 6.00%, 3/31/07 1,262,500
------------
TOTAL BONDS--GOVERNMENT & GOVERNMENT AGENCIES (cost
$163,346,237) 155,499,214
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER OF
SHARES**
- -------------------------------------------------------------------------------
COMMON STOCKS: 4.9%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
999,667 U.S. +Acadia Partners LP 968,477
96,000 U.S. American Health Properties Inc. 2,088,000
108,000 U.S. Long Island Lighting Co. 1,836,000
68,000 U.S. Meditrust Inc. 2,235,500
333 U.S. +Penobscot Partners LP 1,431
70,000 U.S. Texas Utilities Electric Co. 2,432,500
------------
TOTAL COMMON STOCKS (cost $10,338,825) 9,561,908
- -------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Templeton Income Fund
Investment Portfolio, August 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES** COUNTRY ISSUE VALUE
- -------------------------------------------------------------------------------
PREFERRED STOCKS: 1.2%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
9,600 American Health Properties Psychiatric
U.S. Group., pfd. $ 156,000
91,700 U.S. Santander Finance Ltd., pfd. 2,154,950
------------
TOTAL PREFERRED STOCKS (cost $2,233,139) 2,310,950
- -------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY*
- -------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 3.6%
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
20,000,000 Thai. Bangkok Bank, 11.50%, 5/16/96 800,484
2,320,000 Federal Home Loan Mortgage Corp, 5.64%,
U.S. 9/25/95 2,311,207
390,000 Federal National Mortgage Association,
U.S. 5.69%, 9/14/95 389,204
3,390,000 U.S. U.S. Treasury Bills, 5.33% to 5.43%
with
maturities to 11/02/95 3,369,666
------------
TOTAL SHORT TERM OBLIGATIONS (cost $6,878,810) 6,870,561
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 97.6% (cost $197,891,615) 188,804,538
UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS: 0.1% 35,148
OTHER ASSETS, LESS LIABILITIES: 2.3% 4,504,051
------------
TOTAL NET ASSETS: 100.0% $193,343,737
============
</TABLE>
*CURRENCY OF COUNTRIES INDICATED.
**COUNTRY OF ORIGIN INDICATED.
+NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Income Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost
$197,891,615) $188,804,538
Cash 29,208
Receivables:
Investment securities sold 434,311
Fund shares sold 562,755
Interest and dividends 4,521,547
Unrealized gains on forward exchange contracts (Note 5) 492,142
------------
Total assets 194,844,501
------------
Liabilities:
Payables:
Investment securities purchased 389,137
Fund shares redeemed 309,916
Unrealized loss on forward exchange contracts (Note 5) 456,994
Accrued expenses 344,717
------------
Total liabilities 1,500,764
------------
Net assets, at value $193,343,737
============
Net assets consist of:
Net unrealized depreciation $ (9,097,385)
Accumulated net realized loss (5,288,377)
Net capital paid in on shares of beneficial interest 207,729,499
------------
Net assets, at value $193,343,737
============
Class I
Net asset value per share ($191,300,978 / 20,536,570) $ 9.32
============
Maximum offering price ($9.32 / 95.75%) $ 9.73
============
Class II
Net asset value per share ($2,042,759 / 219,355) $ 9.31
============
Maximum offering price ($9.31 / 99.00%) $ 9.40
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
for the year ended August 31, 1995
<TABLE>
<S> <C> <C>
Investment Income
(net of $205,844 foreign
taxes withheld):
Interest $17,171,047
Dividends 988,506
-----------
Total income $18,159,553
Expenses:
Management fees (Note 3) 989,493
Administrative fees (Note 3) 282,007
Distribution fees (Note 3)
Class I shares 455,669
Class II shares 1,893
Transfer agent fees (Note 3) 265,600
Custodian fees 77,500
Reports to shareholders 160,500
Audit fees 34,500
Legal fees (Note 3) 12,200
Registration and filing fees 43,200
Trustees' fees and expenses 14,000
Other 7,267
-----------
Total expenses 2,343,829
-----------
Net investment income 15,815,724
Realized and unrealized gain (loss):
Net realized loss on:
Investments (1,493,686)
Foreign currency transactions including currency
options (4,795,078)
-----------
(6,288,764)
-----------
Net unrealized appreciation (depreciation) on:
Investments 10,493,797
Foreign currency
translations of other
assets and liabilities (594,737)
-----------
9,899,060
-----------
Net realized and unrealized gain 3,610,296
-----------
Net increase in net assets resulting from operations $19,426,020
===========
</TABLE>
12
<PAGE>
Templeton Income Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 15,815,724 $ 15,674,014
Net realized loss on investment and foreign
currency transactions (6,288,764) (9,687,143)
Net unrealized appreciation (depreciation) 9,899,060 (10,250,363)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 19,426,020 (4,263,492)
Distributions to shareholders:
From net investment income
Class I (11,763,904) (11,711,485)
Class II (15,280) --
From net realized gain
Class I -- (1,432,822)
Tax basis return of capital
Class I (1,970,755) (2,602,410)
Class II (4,562) --
Fund share transactions (Note 2) (17,810,276) 18,825,809
------------ ------------
Net decrease in net assets (12,138,757) (1,184,400)
Net assets:
Beginning of year 205,482,494 206,666,894
------------ ------------
End of year $193,343,737 $205,482,494
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Templeton Income Fund
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Income Fund (the Fund) is a separate series of Templeton Income Trust
(the Trust), a Massachusetts Business Trust, which is an open-end, non-diversi-
fied management investment company, registered under the Investment Company Act
of 1940. The following summarizes the Fund's significant accounting policies.
a. Securities Valuations:
Securities, including options, listed or traded on a recognized national or
foreign stock exchange or NASDAQ are valued at the last reported sales prices
on the principal exchange on which the securities are traded. Over-the-counter
securities and listed securities for which no sale is reported are valued at
the mean between the last current bid and asked prices. Securities for which
market quotations are not readily available are valued at fair value as deter-
mined by management and approved in good faith by the Board of Trustees.
b. Foreign Exchange Contracts:
The Fund enters into forward exchange contracts and currency option contracts
in order to hedge against foreign exchange risks.
(i) Forward Exchange Contracts: These contracts are valued daily and the Fund's
equity therein, representing unrealized gain or loss on the contracts, is in-
cluded in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
(ii) Currency Option Contracts: Premiums paid for options purchased are re-
corded as an investment and subsequently marked on a daily basis. Premiums re-
ceived for options written are recorded as a liability and subsequently marked
to market daily to reflect the current value of the option written. If the
written option expires unexercised, the premium received is treated as a real-
ized gain. If the written option is exercised, the premium is added to the
sales proceeds of the currency delivered.
c. Indexed Securities:
The Fund may invest in debt instruments in which the principal and/or interest
is dependent on another factor such as a yield curve, currency exchange rates
or commodity prices. The Fund's objective in holding these securities, commonly
called structured notes, is to tailor the Fund's investments to the specific
risk and returns it wishes to assume while avoiding unwanted risk or change the
Fund's exposure to a particular foreign exchange rate or the spread between two
foreign exchange rates.
d. Foreign Currency Transactions:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customar-
ily enters into a foreign exchange contract to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities resulting
from changes in the exchange rates.
14
<PAGE>
Templeton Income Fund
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
e. Futures Contracts:
The Fund may enter into futures contracts and options written on futures con-
tracts in order to hedge against risks from changes in interest rates. These
futures contracts and options written on futures contracts are valued daily and
the Fund's equity therein, representing unrealized gain or loss on the con-
tract, is included in the Statement of Assets and Liabilities. Realized and
unrealized gains and losses are included in the Statement of Operations. Margin
deposits of cash or securities required with respect to contracts traded on ex-
changes are maintained by the Fund's custodian in segregated accounts. Varia-
tion margin payments are made or received on futures on a weekly basis as ap-
preciation or depreciation in the contracts occurs.
f. Income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
g. Security Transactions, Investment Income, Distributions and Expenses:
Security transactions are accounted for on trade date basis. Dividend income is
recorded on the ex-dividend date. Certain dividend income from foreign securi-
ties is recorded as soon as information is available to the Fund. Interest in-
come and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Effective May 1, 1995, the Fund offered two classes of shares: Class I and
Class II. Shares of each class are identical except for their initial sales
load, a contingent deferred sales charge on Class II shares, distribution fees,
and voting rights on matters affecting a single class. All Fund shares out-
standing before May 1, 1995 were designated as Class I shares. At August 31,
1995, there were an unlimited number of shares of beneficial interest autho-
rized ($.01 par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------
YEAR ENDED YEAR ENDED
AUGUST 31, 1995 AUGUST 31, 1994
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 3,800,472 $ 34,199,533 8,882,250 $ 85,550,991
Shares issued on
reinvestment of
distributions 1,045,727 9,400,075 1,129,745 10,728,845
Shares redeemed (7,025,706) (63,454,336) (8,055,682) (77,454,027)
---------- ------------ ---------- ------------
Net increase (decrease) (2,179,507) $(19,854,728) 1,956,313 $ 18,825,809
========== ============ ========== ============
<CAPTION>
CLASS II
------------------------
FOR THE PERIOD
MAY 1, 1995
THROUGH
AUGUST 31, 1995
------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
Shares sold 243,599 $ 2,270,114
Shares issued on
reinvestment of
distributions 1,611 14,937
Shares redeemed (25,855) (240,599)
---------- ------------
Net increase 219,355 $ 2,044,452
========== ============
</TABLE>
15
<PAGE>
Templeton Income Fund
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also officers of Templeton Investment Counsel,
Inc. (TICI), Templeton Global Investors, Inc. (TGII), Franklin Templeton Dis-
tributors, Inc. (FTD), and Franklin Templeton Investor Services, Inc. (FTIS),
the Fund's investment manager, administrative manager, principal underwriter
and transfer agent, respectively. The Fund pays monthly an investment manage-
ment fee to TICI equal, on annual basis, to 0.50% of the average daily net as-
sets of the Fund up to $200 million, reduced to 0.45% of such average daily net
assets in excess of $200 million and further reduced to 0.40% of such average
net assets in excess of $1.3 billion. The Fund pays TGII monthly its allocated
share of an administrative fee of 0.15% per annum on the first $200 million of
the Trust's average daily net assets, 0.135% of the next $500 million, 0.10% of
the next $500 million and 0.075% per annum of such average net assets in excess
of $1.2 billion. For the year ended August 31, 1995, FTIS received fees of
$265,600.
Under the distribution plans for Class I and II shares, the Fund reimburses FTD
monthly, for FTD's costs and expenses in connection with any activity which is
primarily intended to result in sales of Fund shares, subject to a maximum of
0.25% and 0.65% per annum of the average daily net assets of Class I and Class
II shares, respectively . Under the Class I distribution plan, costs and ex-
penses exceeding the maximum may be reimbursed in subsequent periods. At August
31, 1995, there were no unreimbursed expenses. Class II shares redeemed within
18 months are subject to a contingent deferred sales charge. Contingent de-
ferred sales charges of $1,313 were paid during the year ended August 31, 1995.
An officer of the Trust is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $12,200 for the year ended August 31,
1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended August 31, 1995 aggregated $177,617,164 and $184,559,559, respec-
tively. The cost of securities for federal income tax purposes is the same as
that shown in the investment portfolio. Realized gains and losses are reported
on an identified cost basis.
At August 31, 1995, the aggregate gross unrealized appreciation and deprecia-
tion of portfolio securities, based on cost for federal income tax purposes,
was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 1,355,994
Unrealized depreciation (10,443,071)
------------
Net unrealized depreciation $ (9,087,077)
============
</TABLE>
16
<PAGE>
Templeton Income Fund
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
5. FINANCIAL INSTRUMENTS
During the year ended August 31, 1995, the Fund has been a party to financial
instruments with off-balance sheet risks, primarily forward exchange contracts,
future contracts, and written currency options, in order to minimize the risk
to the Fund, with respect to its portfolio transactions, from adverse changes
in the relationship between the U.S. dollar and foreign currencies and interest
rates. These instruments involve market risk in excess of the amount recognized
on the Statement of Assets and Liabilities. Some of these risks have been mini-
mized by offsetting contracts. Risks arise from the possible inability of
counterparties to meet the terms of their contracts, future movement in cur-
rency values and interest rates and contract positions that are not exact off-
sets. The contract amount indicates the extent of the Fund's involvement in
such contracts.
Forwards: A forward exchange contract is an agreement between two parties to
exchange different currencies at a specific rate at an agreed future date.
At August 31, 1995, the Fund had outstanding forward exchange contracts for the
purchase and sale of currencies as set out below. These contracts are reported
in the financial statements at the Fund's net equity, as measured by the dif-
ference between the forward exchange rates at the reporting date and the for-
ward exchange rates at the date of entry into the contract:
<TABLE>
<S> <C>
Contracts to sell:
5,600,000 Canadian dollars for 4,110,092 U.S. dollars,
September 11, 1995 $ (59,896)
12,800,000 Canadian dollars for 9,414,534 U.S. dollars,
September 22, 1995 (115,591)
9,900,000 Deutschemarks for 6,641,354 U.S. dollars,
September 28, 1995 (110,715)
19,000,000 Deutschemarks for 12,787,724 U.S. dollars,
September 28, 1995 (170,792)
---------
(456,994)
Unrealized gain on offsetting forward exchange contracts 492,142
---------
Net unrealized gain on forward exchange contracts $ 35,148
=========
</TABLE>
Written Options: A written currency option obligates the Fund to deliver (a
call), or receive (a put) the contracted amount of currency or securities upon
exercise by the holder of the option. The value of the option contract is re-
corded as a liability and unrealized gain or loss is measured by the difference
between the current value and the premium received.
The following table summarizes the Fund's written options transactions for the
year ended August 31, 1995:
<TABLE>
<CAPTION>
OPTIONS TERMINATED
----------------------
NUMBER OF PREMIUM REALIZED
CONTRACTS RECEIVED COST LOSS
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Contracts outstanding,
beginning of year 1 $244,000 -- --
Contracts exercised 1 244,000 $1,516,911 $(1,272,911)
--- -------- ========== ===========
Contracts outstanding, end of
year -- --
=== ========
</TABLE>
6. TAX LOSS CARRYOVERS
At August 31, 1995 the Fund had tax basis capital losses of $3,500,000 which
may be carried over to offset future capital gains. Such losses expire in 2003.
In addition as required by the tax rules the Fund has deferred currency losses
occurring subsequent to October 31, 1994 of $1,800,000 to the year ending Au-
gust 31, 1996.
17
<PAGE>
Templeton Income Fund
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders Templeton Income Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Income Fund, a series of Templeton In-
come Trust, as of August 31, 1995, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for the periods
indicated in the accompanying financial statements. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and fi-
nancial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of Au-
gust 31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Tem-
pleton Income Fund as of August 31, 1995, the results of its operations, the
changes in its net assets and the financial highlights for the periods indicat-
ed, in conformity with generally accepted accounting principles.
[SIGNATURE OF MCGLADREY & PULLEN, LLP APPEARS HERE]
New York, New York
September 29, 1995
18
<PAGE>
Notes
-----
<PAGE>
- --------------------------------
TEMPLETON INCOME FUND
Auditors
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
PRINCIPAL UNDERWRITER:
Franklin Templeton
Distributors, Inc.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Account Services
1-800-354-9191
Sales Information
1-800-292-9293
This report must be preceded or accompanied by a current prospectus of the
Templeton Income Fund, which contains more complete information including
charges and expenses. Like any investment in securities, the value of the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political, and other factors, as well as investment decisions by the
investment manager which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the investment manager.
Therefore, investors who cannot accept this risk should not invest in shares of
the Fund.
To ensure the highest quality of service, telephone calls to or from our
service departments may be monitored, recorded, and accessed. These calls can
be determined by the presence of a regular beeping tone.
- --------------------------------
[LOGO OF RECYCLED PAPER APPEARS HERE]
TL406 A95 10/95
TEMPLETON
INCOME
FUND
Annual Report
August 31, 1995
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
