TEMPLETON INCOME TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1995,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS OF TEMPLETON INCOME FUND DATED JANUARY 1, 1995,
AND THE PROSPECTUS OF TEMPLETON MONEY FUND DATED JANUARY 1, 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 1 -Business Manager . . . 23
Investment Objectives and Policies -Custodian and Transfer Agent 24
. . . . . . . . . . . . . . . 2 -Legal Counsel . . . . . 25
-Investment Policies . . . . 2 -Independent Accountants 25
-Repurchase Agreements . . . 2 -Reports to Shareholders 25
-Debt Securities . . . . . . 2 Brokerage Allocation . . 25
-Futures Contracts . . . . . 4Purchase, Redemption and Pricing of
-Options on Securities, Indices Shares . . . . . . . . 28
and Futures . . . . . . . 5 -Ownership and Authority
-Foreign Currency Hedging Disputes . . . . . . 30
Transactions . . . . . . . . 7 -Tax Deferred Retirement Plans 31
-Investment Restrictions . . 9 -Letter of Intent . . . 32
-Risk Factors . . . . . . 11 Tax Status . . . . . . . 33
-Trading Policies . . . . 14 Principal Underwriter . . 39
-Personal Securities Transactions Yield and Performance Information
. . . . . . . . . . . . . . 14 . . . . . . . . . . . . . 41
Management of the Trust . . 14 Description of Shares . . 45
Principal Shareholders . . 20 Financial Statements . . 46
Investment Management and Other Appendix
Services . . . . . . . . 21 Corporate Bond and Commercial
-Investment Management Agreements Paper Ratings . . . . i
. . . . . . . . . . . . . . 21
-Management Fees . . . . . 22
-Templeton Global Bond Managers
Division of Templeton Investment
Counsel, Inc. . . . . . . 23
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
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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 Baa or lower by Moody's or
BBB or lower 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
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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.
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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
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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
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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
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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
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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 secur-
ities 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 devel-
opment programs; purchase or sell commodity contracts
(except futures contracts as described in Income Fund's
Prospectus); or, as a fundamental principle approved by
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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
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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
underdeveloped, 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. Foreign markets have
substantially less volume than the New York Stock Exchange 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
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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.
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.
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 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.
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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. 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. They 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.
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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:
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
JOHN M. TEMPLETON* Chairman of the Board of other
Lyford Cay Templeton Funds; president of First
Nassau, Bahamas Trust Bank, Ltd., Nassau, Bahamas;
Chairman of the Board and previously Chairman of the
Board and employee of Templeton,
Galbraith & Hansberger Ltd. (prior
to October 30, 1992).
F. BRUCE CLARKE Retired; former credit advisor,
19 Vista View Blvd. National Bank of Canada, Toronto; a
Thornhill, Ontario director or trustee of other
Trustee Templeton Funds.
HASSO-G VON DIERGARDT-NAGLO Farmer; president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies; a director or
Trustee trustee of other Templeton Funds.
BETTY P. KRAHMER A director or trustee of other
2201 Kentmere Parkway Templeton Funds; director or
Wilmington, Delaware trustee of various civic
Trustee associations; former economic
analyst, U.S. Government.
JOHN G. BENNETT, JR. A director or trustee of other
3 Radnor Corporate Center Templeton Funds; founder, chairman
Suite 150 of the board, and president of the
100 Matsonford Road Foundation for New Era
Radnor, Pennsylvania Philanthropy; president and
Trustee chairman of the boards of the
Evelyn M. Bennett Memorial
Foundation and NEP International
Trust; chairman of the board and
chief executive officer of The
Bennett Group International, LTD;
chairman of the boards of Human
Service Systems, Inc. and Multi-
Media Communicators, Inc.; a
director or trustee of many
national and international
organizations, universities, and
grant-making foundations serving in
various executive board capacities;
member of the Public Policy
Committee of the Advertising
Council.
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
FRED R. MILLSAPS A director or trustee of other
2665 NE 37th Drive Templeton Funds; manager of
Fort Lauderdale, Florida personal investments (1978-
Trustee present); chairman and chief
executive officer of Landmark
Banking Corporation (1969-1978);
financial vice president of Florida
Power and Light (1965-1969); vice
president of Federal Reserve Bank
of Atlanta (1958-1965); director of
various business and nonprofit
organizations.
ANDREW H. HINES, JR. Consultant, Triangle Consulting
150 2nd Avenue N. Group; chairman of the board and
St. Petersburg, Florida chief executive officer of Florida
Trustee 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);
director of Checkers Drive-In
Restaurants, Inc.; a director or
trustee of other Templeton Funds.
CHARLES B. JOHNSON* President, chief executive officer,
777 Mariners Island Blvd. and director, Franklin Resources,
San Mateo, California Inc.; chairman of the board,
Vice President and Franklin Templeton Distributors,
Trustee Inc.; chairman of the board and
director, Franklin Advisers, Inc.;
director, Franklin Administrative
Services, Inc. and General Host
Corporation; director of Templeton
Global Investors, Inc.; director or
trustee of other Templeton Funds;
and officer and director, trustee
or managing general partner, as the
case may be, of most other
subsidiaries of Franklin and of
most of the investment companies in
the Franklin Group of Funds.
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
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); director of RBC
Trustee Holdings Inc. (a bank holding
company) and Bar-S Foods; director
or trustee of other Templeton
Funds; and director, trustee or
managing general partner, as the
case may be, for most of the
investment companies in the
Franklin Group of Funds.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation; director
Trustee or trustee of other Templeton
Funds; and director, trustee or
managing general partner, as the
case may be, for most of the
investment companies in the
Franklin Group of Funds.
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland Infovest Corporation, Fund America
Trustee Enterprise Holdings, Inc., Martin
Marietta Corporation, MCI
Communications Corporation and
Medimmune, Inc.; director or
trustee of other Templeton Funds;
director, trustee, or managing
general partner, as the case may
be, of most of the investment
companies in the Franklin Group of
Funds; formerly: chairman,
Hambrecht and Quist Group;
director, H&Q Healthcare Investors;
and president, National Association
of Securities Dealers, Inc.
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
NICHOLAS F. BRADY* A director or trustee of other
The Bullitt House Templeton Funds; chairman of
102 East Dover Street Templeton Emerging Markets
Easton, Maryland Investment Trust PLC; chairman and
Trustee president of Darby Advisors, Inc.
(an investment firm) since January,
1993; director of the H. J. Heinz
Company, Capital Cities/ABC, Inc.
and the Christiana Companies;
Secretary of the United States
Department of the Treasury from
1988 to January, 1993; chairman of
the board of Dillon, Read & Co.
Inc. (investment banking) prior
thereto.
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); 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; investment
administrator with Roy West Trust
Corporation (Bahamas) Limited
(1984-1985).
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
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.
and Templeton Global Investors,
Inc.; president or vice president
of the Templeton Funds; accountant,
Arthur Andersen & Company (1982-
1983); member of the International
Society of Financial Analysts and
the American Institute of Certified
Public Accountants.
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; attorney,
Dechert Price & Rhoads (1985-1988)
and Freehill, Hollingdale & Page
(1988); judicial clerk, U.S.
District Court (Eastern District of
Virginia) (1984-1985).
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,
Constitutional Capital Management
(1985-1987); bond trader and
research analyst, Bank of New
England (1982-1985).
<PAGE>
Name, Address and Principal Occupation
Offices with Trust During Past Five Years
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 of 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.; former
partner of Grant Thornton,
independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
____________________
* Messrs. Templeton, Johnson and Brady 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. Messrs. Clarke, von Diergardt,
Bennett, Hines, Millsaps, Ashton, Macklin and Fortunato and Mrs.
Krahmer are Trustees who are not "interested persons" of the
Trust.
PRINCIPAL SHAREHOLDERS
As of December 2, 1994, there were 22,506,860 Shares of
Income Fund outstanding, of which 3,818 Shares (0.017%) were
owned beneficially by all the Trustees and officers of the Trust
as a group. As of December 2, 1994, there were 269,382,671
Shares of Money Fund outstanding, of which 26,278 Shares (0.010%)
were owned beneficially by all the Trustees and officers of the
Trust as a group. As of December 2, 1994, 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,
<PAGE>
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
<PAGE>
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.
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), Rupert H. Johnson, Jr. and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively,
approximately 20%, 16% and 9.2% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
<PAGE>
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. The fee is allocated between the Funds
according to their respective average daily net assets. Since
<PAGE>
the Business Manager's fee HPII (Primary): Bitstream
3.0HPSMBS3.PRS 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 $14.42 per Shareholder account plus out-of-pocket
expenses and from Money Fund an annual fee of $22.37 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.
<PAGE>
Independent Accountants. The firm of McGladrey & Pullen,
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 and
the Internal Revenue Service.
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.
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 close of
business on the New York Stock Exchange, 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 New York Stock Exchange 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
New York Stock Exchange 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
New York Stock Exchange 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
<PAGE>
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 New York
Stock Exchange is closed other than for customary weekend and
holiday closings, (2) trading on the New York Stock Exchange 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
Securities and Exchange Commission may by order permit for the
protection of the holders of a Fund's Shares.
<PAGE>
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: (a) 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 (b) 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 Internal Revenue Service 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 Templeton Funds Trust Company receives the
participant's election on Internal Revenue Service Form W-4P
(available on request from Templeton Funds Trust Company) 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
Individual Retirement Account. 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 Individual
Retirement Accounts are available through Templeton Funds Trust
Company. Disclosure statements summarizing certain aspects of
Individual Retirement Accounts are furnished to all persons
<PAGE>
investing in such accounts, in accordance with Internal Revenue
Service 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, are available through the
Principal Underwriter. Custodial services are provided by
Templeton Funds Trust Company.
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 Internal
Revenue Service. A "Section 401(k) plan" is also available.
Templeton Funds Trust Company 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 Shares of Income Fund or any other fund in the
Franklin Templeton Group 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, including automatic investment and payroll
deduction plans), and to beneficially hold the total amount of
such 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 Application in the Funds' Prospectuses. Payment for not less
than 5% of the total intended amount must accompany the executed
LOI. Those 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
<PAGE>
sales commission on all 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 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.
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 Internal Revenue Code of 1986, as amended
(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
<PAGE>
by a Shareholder, and are not eligible for the dividends received
deduction. All dividends and distributions are taxable to
Shareholders, whether or not reinvested in Shares of either Fund.
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
<PAGE>
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
<PAGE>
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 forward and
futures 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.
<PAGE>
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
<PAGE>
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 Internal Revenue Service (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.
<PAGE>
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"), 700 Central Avenue, 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 ("Plan"). Under each Plan, a Fund
may reimburse the Principal Underwriter monthly (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)
for FTD's costs and expenses in connection with any activity
which is primarily intended to result in the sale of the Funds'
Shares. Payments to FTD 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 each Plan, the
costs and expenses not reimbursed in any one given month
(including costs and expenses not reimbursed because they exceed
the 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) may be reimbursed in subsequent months or years.
During the fiscal year ended August 31, 1994, FTD incurred
costs and expenses of $469,730 in connection with distribution of
Income Fund's Shares and $213,238 in connection with distribution
of Money Fund's Shares. 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 Money Fund, may be reimbursed by the Trust during the fiscal
year ending August 31, 1995 or in subsequent years. In the event
that either Plan is terminated, the Trust will not be liable to
FTD for any unreimbursed expenses that had been carried forward
<PAGE>
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.
<PAGE>
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)6 - 1]
cd
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
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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 Corp.,
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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, 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:
"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."
* Sir John Templeton, who currently serves as Chairman of the
Trust's Board, is not involved in investment decisions,
which are made by each Fund's Investment Manager.
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"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 in the Franklin Templeton Group 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
<PAGE>
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.
<PAGE>
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.
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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.
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