1
TEMPLETON INCOME TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUSES OF TEMPLETON INCOME FUND DATED JANUARY 1, 1996,
AND TEMPLETON MONEY FUND DATED JANUARY 1, 1996,
EACH AS AMENDED FROM TIME TO TIME, 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/DIAL BEN
TABLE OF CONTENTS
General Information and History.......................1
Investment Objectives and Policies....................2
-Investment Policies.................................2
-Repurchase Agreements...............................2
-Debt Securities.....................................2
-Structured Investments..............................4
-Futures Contracts...................................4
-Options on Securities, Indices
and Futures.......................................5
-Foreign Currency Hedging Transactions...............8
-Investment Restrictions.............................9
-Risk Factors.......................................11
-Trading Policies...................................16
-Personal Securities Transactions...................17
Management of the Trust..............................17
Trustee Compensation.................................23
Principal Shareholders...............................24
Investment Management and Other
Services...........................................24
-Investment Management Agreements...................24
-Management Fees....................................26
-The Templeton Global Bond Managers
Division of Templeton Investment
Counsel, Inc.......................................27
Business Manager....................................26
-Custodian and Transfer Agent.......................28
-Legal Counsel......................................29
-Independent Accountants............................29
-Reports to Shareholders............................29
Brokerage Allocation.................................29
Purchase, Redemption and Pricing of
Shares.............................................32
-Ownership and Authority
Disputes.........................................34
-Tax-Deferred Retirement Plans......................34
-Letter of Intent...................................36
-Special Net Asset Value Purchases..................37
-Redemptions in Kind................................38
Tax Status...........................................39
Principal Underwriter................................45
Yield and Performance Information....................47
Description of Shares................................51
Financial Statements.................................52
Appendix
Corporate Bond and Commercial
Paper Ratings.....................................i
GENERAL INFORMATION AND HISTORY
Templeton Income Trust (the "Trust") was organized as a Massachusetts
business trust on June 16, 1986, and is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end management investment company with
two series of Shares: Templeton Income Fund, a non-diversified fund ("Income
Fund") and Templeton Money Fund, a diversified fund ("Money Fund")
(collectively, the "Funds").
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INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The investment objective and policies
of each Fund are described in each Fund's Prospectus under the
heading "General Description--Investment Objective and
Policies."
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which
the buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. The Templeton
Global Bond Managers Division of Templeton Investment Counsel, Inc. (the
"Investment Manager") will monitor the value of such securities daily to
determine that the value equals or exceeds the repurchase price. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon a Fund's ability to
dispose of the underlying securities. A Fund will enter into repurchase
agreements only with parties who meet creditworthiness standards approved by the
Board of Trustees, I.E., banks or broker-dealers which have been determined by
the Investment Manager to present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
transaction.
DEBT SECURITIES. Income Fund may invest in debt securities which are
rated in any category by Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"). See the Appendix for a description of the
S&P and Moody's ratings. As an operating policy, Income Fund will invest no more
than 5% of its assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in Income Fund's net asset value.
Although they may offer higher yields than do higher rated securities,
high risk, low rated debt securities (commonly referred to as "junk bonds") and
unrated debt securities generally involve greater volatility of price and risk
of principal and income, including the possibility of default by, or bankruptcy
of, the issuers of the securities. In addition, the markets in which low rated
and unrated debt securities are traded are more limited than those in which
higher rated
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securities are traded. The existence of limited markets for particular
securities may diminish Income Fund's ability to sell the securities at fair
value either to meet redemption requests or to respond to a specific economic
event such as a deterioration in the creditworthiness of the issuer. Reduced
secondary market liquidity for certain low rated or unrated debt securities may
also make it more difficult for each Fund to obtain accurate market quotations
for the purposes of valuing the Fund's portfolio. Market quotations are
generally available on many low rated or unrated securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of Income Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if Income Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, Income Fund may incur additional expenses
seeking recovery.
Income Fund may accrue and report interest income on high yield bonds,
such as zero coupon bonds or pay-in-kind securities, even though it receives no
cash interest until the security's maturity or payment date. In order to qualify
for beneficial tax treatment afforded regulated investment companies, and to be
relieved of federal tax liabilities, Income Fund must distribute substantially
all of its net income and gains to Shareholders (see "Tax Status") generally on
an annual basis. Income Fund may have to dispose of portfolio securities under
disadvantageous circumstances to generate cash or leverage itself by borrowing
cash in order to satisfy the distribution requirement.
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STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which Income Fund may invest are entities organized and operated solely for
the purpose of restructuring the investment characteristics of various
securities. These entities are typically organized by investment banking firms
which receive fees in connection with establishing each entity and arranging for
the placement of its securities. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of specified
instruments and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
Income Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
Income Fund is permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, Income Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
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.
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Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
Income Fund may also buy and sell index futures contracts with respect
to any stock or bond index traded on a recognized stock exchange or board of
trade. An index futures contract is a contract to buy or sell units of an index
at a specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
At the time Income Fund purchases a futures contract, an amount of
cash, U.S. Government securities, or other highly liquid debt securities equal
to the market value of the contract will be deposited in a segregated account
with Income Fund's custodian. When selling a stock index futures contract,
Income Fund will maintain with its custodian liquid assets that, when added to
the amounts deposited with a futures commission merchant or broker as margin,
are equal to the market value of the instruments underlying the contract.
Alternatively, Income Fund may "cover" its position by owning the instruments
underlying the contract or, in the case of a stock index futures contract,
owning a portfolio with a volatility substantially similar to that of the index
on which the futures contract is based, or holding a call option permitting
Income Fund to purchase the same futures contract at a price no higher than the
price of the contract written by Income Fund (or at a higher price if the
difference is maintained in liquid assets with Income Fund's custodian).
OPTIONS ON SECURITIES, INDICES AND FUTURES. Income Fund may write
covered put and call options and purchase put and call options on securities,
securities indices and futures contracts that are traded on United States and
foreign exchanges and in the over-the-counter markets.
An option on a security or a futures contract is a contract that gives
the purchaser of the option, in return for the premium paid, the right to buy a
specified security or futures contract (in the case of a call option) or to sell
a specified security or futures contract (in the case of a put option) from
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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.
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Income Fund will receive a premium from writing a put or call option,
which increases its gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security, index or futures contract
on which Income Fund has written a call option falls or remains the same, Income
Fund will realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
portfolio securities being hedged. If the value of the underlying security,
index or futures contract rises, however, Income Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in its investments. By writing a put option, Income Fund assumes
the risk of a decline in the underlying security, index or futures contract. To
the extent that the price changes of the portfolio securities being hedged
correlate with changes in the value of the underlying security, index or futures
contract, writing covered put options will increase Income Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
Income Fund may also purchase put options to hedge its investments
against a decline in value. By purchasing a put option, Income Fund will seek to
offset a decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of Income Fund's investments does
not decline as anticipated, or if the value of the option does not increase, its
loss will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security, index or
futures contract and the changes in value of Income Fund's security holdings
being hedged.
Income Fund may purchase call options on individual securities or
futures contracts to hedge against an increase in the price of securities or
futures contracts that it anticipates purchasing in the future. Similarly,
Income Fund may purchase call options on a securities index to attempt to reduce
the risk of missing a broad market advance, or an advance in an industry or
market segment, at a time when Income Fund holds uninvested cash or short-term
debt securities awaiting investment. When purchasing call options, Income Fund
will bear the risk of losing all or a portion of the premium paid if the value
of the underlying security, index or futures contract does not rise.
There can be no assurance that a liquid market will exist when Income
Fund seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or
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the options exchange could suspend trading after the price has risen or fallen
more than the maximum specified by the exchange. Although Income Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by Income Fund, as
well as the cover for options written by Income Fund, are considered not readily
marketable and are subject to the Trust's limitation on investments in
securities that are not readily marketable. See "Investment Objectives and
Policies --Investment Restrictions."
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against
foreign currency exchange rate risks, Income Fund may enter into forward foreign
currency exchange contracts and foreign currency futures contracts, as well as
purchase put or call options on foreign currencies, as described below. Income
Fund may also conduct its foreign currency exchange transactions on a spot
(I.E., cash) basis at the spot rate prevailing in the foreign currency exchange
market.
Income Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to Income Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. Income Fund may
enter into a forward contract, for example, when it enters into a contract for
the purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. In addition, for example, when
Income Fund believes that a foreign currency may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
an amount of the former foreign currency approximating the value of some or all
of its portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because in
connection with Income Fund's forward foreign currency transactions, an amount
of its assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, Income Fund will always have
cash, cash equivalents or high quality debt securities available in an amount
sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, Income Fund's ability to utilize
forward contracts in the manner set
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forth above may be restricted. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for Income Fund than if it had not engaged in such
contracts.
Income Fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge up to the amount of the premium received, and Income Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuation in exchange rates,
although, in the event of rate movements adverse to its position, Income Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by Income Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
Income Fund may enter into exchange-traded contracts for the purchase
or sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
Income Fund's portfolio securities or adversely affect the prices of securities
that Income Fund intends to purchase at a later date. The successful use of
foreign currency futures will usually depend on the Investment Manager's ability
to forecast currency exchange rate movements correctly. Should exchange rates
move in an unexpected manner, Income Fund may not achieve the anticipated
benefits of foreign currency futures or may realize losses.
INVESTMENT RESTRICTIONS. The Funds have imposed upon themselves certain
investment restrictions which, together with their investment objectives, are
fundamental policies except as otherwise indicated. No changes in a Fund's
investment objectives or investment restrictions (except those which are not
fundamental policies) can be made without the approval of the Shareholders of
that Fund. For this purpose, the provisions of the 1940 Act require the
affirmative vote of the lesser of either (1) 67% or more of that Fund's Shares
present at a Shareholders' meeting at which more than 50% of the outstanding
Shares are present or represented by proxy or (2) more than 50% of the
outstanding Shares of that Fund.
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In accordance with these restrictions, each Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Funds may invest in marketable securities
secured by real estate or interests therein); invest in
other open-end investment companies (except in
connection with a merger, consolidation, acquisition or
reorganization); invest in interests (other than
publicly issued debentures or equity stock interests)
in oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts (except
futures contracts as described in Income Fund's
Prospectus).
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).
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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.
10. Participate on a joint or a joint and several basis in any
trading account in securities. (See "Investment Objectives and
Policies -- Trading Policies" as to transactions in the same
securities for the Funds and other Templeton Funds and
clients.)
11. Invest more than 5% of its net assets in warrants whether or
not listed on the New York or American Stock Exchanges, and
more than 2% of its net assets in warrants that are not listed
on those exchanges. Warrants acquired in units or attached to
securities are not included in this restriction.
In addition to the above restrictions, Money Fund will not invest more
than 5% of its total assets in the securities of any one issuer (exclusive of
U.S. Government securities) or purchase more than 10% of any class of securities
of any one company, including more than 10% of its outstanding voting
securities.
Whenever any investment restriction states a maximum percentage of a
Fund's assets which may be invested in any security or other property, it is
intended that such maximum percentage limitation be determined immediately after
and as a result of a Fund's acquisition of such security or property. The
investment restrictions do not preclude either Fund from purchasing the
securities of any issuer pursuant to the exercise of subscription rights
distributed to a Fund by the issuer, unless such purchase would result in a
violation of restrictions 7 or 8.
RISK FACTORS. Income Fund has an unlimited right to purchase securities
in any foreign country, developed or developing, if they are listed on an
exchange, as well as a limited right to purchase such securities if they are
unlisted.
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Investors should consider carefully the substantial risks involved in securities
of companies and governments of foreign nations, which are in addition to the
usual risks inherent in domestic investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Income Fund, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the New York Stock
Exchange ("NYSE") and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
Income Fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which Income Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United
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States economy in such respects as growth of gross domestic product, rate of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, Income Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Income Fund Shareholders.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (a) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (b) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption and crime in the
Russian economic system; (d) currency exchange rate volatility and the lack of
available currency hedging instruments; (e) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (f)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on Income Fund's ability to exchange local currencies for U.S. dollars; (g) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k)
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possible difficulty in identifying a purchaser of securities held by Income Fund
due to the underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for Income Fund to
lose its registration through fraud, negligence or even mere oversight. While
Income Fund will endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian or other agent
inspecting the share register and by obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other fraudulent act may
deprive the Fund of its ownership rights or improperly dilute its interests. In
addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for Income Fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, although a Russian
public enterprise with more than 1,000 shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not always
been strictly enforced. Because of this lack of independence, management of a
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may prevent Income Fund
from investing in the securities of certain Russian companies deemed suitable by
the Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by Income Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
- 14 -
<PAGE>
Income Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the Fund changes
investments from one country to another or when proceeds of the sale of Shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent Income Fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations.
Income Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which a Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady devaluation
relative to the U.S. dollar. Any devaluations in the currencies in which a
Fund's portfolio securities are denominated may have a detrimental impact on
that Fund. Through Income Fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where from time to time it places Income Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of Income Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services -- Custodian and
- 15 -
<PAGE>
Transfer Agent"). However, in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Investment Manager, any losses resulting
from the holding of Income Fund's portfolio securities in foreign countries
and/or with securities depositories will be at the risk of the Shareholders. No
assurance can be given that the Trustees' appraisal of the risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.
Income Fund's ability to reduce or eliminate its futures and related
options positions will depend upon the liquidity of the secondary markets for
such futures and options. Income Fund intends to purchase or sell futures and
related options only on exchanges or boards of trade where there appears to be
an active secondary market, but there is no assurance that a liquid secondary
market will exist for any particular contract or at any particular time. Use of
futures and options for hedging may involve risks because of imperfect
correlations between movements in the prices of the futures or options and
movements in the prices of the securities being hedged. Successful use of
futures and related options by Income Fund for hedging purposes also depends
upon the Investment Manager's ability to predict correctly movements in the
direction of the market, as to which no assurance can be given.
Additional risks may be involved with Income Fund's special investment
techniques, including loans of portfolio securities and borrowing for investment
purposes. These risks are described under the heading "Investment Techniques" in
the Prospectus.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment adviser to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated 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
- 16 -
<PAGE>
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:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE
HARRIS J. ASHTON
Metro Center, 1 Station
Place
Stamford, Connecticut
Trustee
Chairman of the Board, president
and chief executive officer of
General Host Corporation (nursery
and craft centers); and a director
of RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-S
Foods. Age 63.
- 17 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Trustee
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillon, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Trustee
Retired; formerly, credit adviser,
National Bank of Canada, Toronto.
Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Trustee
Farmer; and president of Clairhaven
Investments, Ltd. and other private
investment companies. Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Trustee
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; and a
director of General Host
Corporation. Age 63.
- 18 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Trustee
President of Galbraith Properties,
Inc. (personal investment company);
director of Gulfwest Banks, Inc.
(bank holding company) (1995-
present) and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Trustee
Consultant of the Triangle Consulting Group; chairman of the board and
chief executive officer of Florida Progress Corporation (1982-February 1990) and
director of various of its subsidiaries; chairman and director of Precise Power
Corporation; executive-in-
residence of Eckerd College (1991- present); and a director of Checkers Drive-In
Restaurants, Inc.
Age 72.
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; General Host Corporation and Templeton Global
Investors, Inc.; and officer and director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin and of 55 of the
investment companies in the Franklin Templeton Group. Age 62.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Trustee
Director or trustee of various
civic associations; formerly,
economic analyst, U.S. Government.
Age 66.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Trustee
Chairman of White River Corporation (information services); director of Fund
America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, Fusion Systems Corporation, Infovest Corporation,
and Medimmune, Inc.; and formerly held the following position: chairman of
Hambrecht and Quist Group, director of H&Q Healthcare Investors and president of
the National Association of Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Trustee
Manager of personal investments (1978-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 The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations.
Age 66.
SAMUEL J. FORESTER, JR.
500 East Broward Blvd.
Fort Lauderdale, Florida
President
President of the Templeton Global Bond Managers Division of Templeton Investment
Counsel, Inc.; president or vice president of other Templeton Funds; founder and
partner of Forester, Hairston Investment Management (1989-1990); managing
director (Mid-East Region) of Merrill Lynch, Pierce, Fenner & Smith Inc.
(1987-1988); and an advisor for Saudi Arabian Monetary Agency (1982-1987). Age
47.
- 20 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President
President and director of Templeton Global Advisors Limited;
chief investment officer of the global equity group for Templeton Worldwide,
Inc.; vice president of the Templeton Funds; formerly, investment administrator
with Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age 35.
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president, treasurer and chief financial officer of
Franklin Resources, Inc.; director and executive vice president of Templeton
Investment Counsel, Inc.; director, president, and chief executive officer of
Templeton Global Investors, Inc.; director or trustee and president or vice
president of the Templeton Funds; accountant with Arthur Andersen & Company
(1982-1983); and a member of the International Society of Financial Analysts and
the American Institute of Certified Public Accountants. Age 35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.;
assistant vice president of Franklin Templeton Distributors, Inc.; formerly,
vice president and controller of the Keystone Group, Inc. Age 55.
NEIL S. DEVLIN
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Senior vice president, Portfolio Management/Research, of the
Templeton Global Bond Managers division of Templeton Investment Counsel, Inc.;
formerly, portfolio manager and bond analyst for Constitutional Capital
Management (1985-1987); bond trader and research analyst for Bank of New England
(1982-1985). Age 38.
- 21 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
THOMAS J. LATTA
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Global Bond Managers division of
Templeton Investment Counsel, Inc.; vice president of various Templeton Funds;
formerly, portfolio manager, Forester & Hairston (1988-1991); investment
adviser, Merrill Lynch, Pierce, Fenner & Smith Incorporated (1981-1988). Age 35.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice president of
Franklin Templeton Distributors, Inc.; secretary of the Templeton Funds;
formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill, Hollingdale
& Page (1988); and judicial clerk, U.S. District Court (Eastern District of
Virginia) (1984-1985). Age 42.
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
ertified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager with Ernst
& Young (certified public accountants) (1977-1989). Age 41.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads.
Age 50.
- --------------------
* These Trustees 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.
- 22 -
<PAGE>
There are no family relationships between any of the Trustees.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or Trustee who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $2,500 and a fee of
$200 per meeting attended of the Board and its Committees. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the
Trustees by the Trust and by all investment companies in the
Franklin Templeton Group:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Name of Compensation Fund Boards on which Franklin Templeton
TRUSTEE FROM THE FUND* TRUSTEE SERVES GROUP**
- ------- -------------- -------------- --------------
<S> <C> <C> <C>
Harris J. Ashton $2,975 56 $327,925
Nicholas F. Brady 2,975 24 98,225
F. Bruce Clarke 2,975 20 83,350
Hasso-G von Diergardt-Naglo 2,975 20 77,350
S. Joseph Fortunato 2,975 58 344,745
John Wm. Galbraith 825 23 70,100
Andrew H. Hines, Jr. 2,975 24 106,325
Betty P. Krahmer 2,975 24 93,475
Gordon S. Macklin 2,975 53 321,525
Fred R. Millsaps 2,975 24 104,325
</TABLE>
* For the fiscal year ended August 31, 1995.
** For the calendar year ended December 31, 1995.
- 23 -
<PAGE>
PRINCIPAL SHAREHOLDERS
As of December 1, 1995, there were 20,479,601 Shares of Income Fund
outstanding, of which 1,494 Shares (0.007%) were owned beneficially by all the
Trustees and officers of the Trust as a group. As of December 1, 1995, there
were 179,674,450 Shares of Money Fund outstanding, of which 364,954 Shares
(0.203%) were owned beneficially by all the Trustees and officers of the Trust
as a group. As of December 1, 1995, to the knowledge of management, no person
owned beneficially, directly or indirectly, 5% or more of either Fund's
outstanding Shares, except Madhatter, c/o Security Trust, owned 19,118,387
Shares of Money Fund (10% of Money Fund's outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of each Fund
is the Templeton Global Bond Managers division of Templeton Investment Counsel,
Inc., a Florida corporation with offices located at Broward Financial Centre,
Fort Lauderdale, Florida 33394-3091. The Investment Management Agreements, dated
October 30, 1992, relating to Income Fund and Money Fund were approved by the
Shareholders of each Fund on October 30, 1992, were last approved by the Board
of Trustees, including a majority of the Trustees who were not parties to the
Agreements or interested persons of any such party, at a meeting on December 5,
1995, and will run through December 31, 1996. 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
- 24 -
<PAGE>
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 certain of its affiliates have
selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
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.
The Investment Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its accounts, which may differ from action taken by the Investment Manager
on behalf of a Fund. Similarly, with respect to a Fund, the Investment Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund or account. Furthermore,
the Investment Manager is not obligated to refrain from investing in securities
held by a Fund or other funds or accounts which it manages or administers. Of
course, any transactions for the accounts of the Investment Manager and other
access persons will be made in compliance with the Trust's Code of Ethics.
Each Investment Management Agreement provides that the Investment
Manager shall have no liability to the Trust, a Fund or any Shareholder of a
Fund for any error of judgment, mistake of law, or any loss arising out of any
investment or other act or omission in the performance by the Investment Manager
of its duties under the Agreement, except liability resulting from willful
misfeasance, bad faith or gross negligence on the
- 25 -
<PAGE>
Investment Manager's part or reckless disregard of its duties under the
Agreement. Each Investment Management Agreement will terminate automatically in
the event of its assignment, and may be terminated by the Trust on behalf of a
Fund at any time without payment of any penalty on 60 days' written notice, with
the approval of a majority of the Trustees in office at the time or by vote of a
majority of the outstanding voting securities of that Fund (as defined in the
1940 Act).
MANAGEMENT FEES. For its services, Income Fund pays the Investment
Manager a monthly fee equal on an annual basis to 0.50% of its average daily net
assets, reduced to 0.45% of such net assets in excess of $200,000,000 and
further reduced to 0.40% of such net assets in excess of $1,300,000,000. Money
Fund pays the Investment Manager a monthly fee equal on an annual basis to 0.35%
of its average daily net assets, reduced to 0.30% of such net assets in excess
of $200,000,000 and further reduced to 0.25% of such net assets in excess of
$1,300,000,000. Each class of Shares pays a portion of the fee, determined by
the proportion of the Fund that it represents.
The Investment Manager will comply with any applicable state
regulations which may require the Investment Manager to make reimbursements to
either Fund in the event that a Fund's aggregate operating expenses, including
the advisory fee, but generally excluding interest, taxes, brokerage commissions
and extraordinary expenses, are in excess of specific applicable limitations.
The strictest rule currently applicable to a Fund is 2.5% of the first
$30,000,000 of net assets, 2% of the next $70,000,000 of net assets and 1.5% of
the remainder.
During the fiscal years ended August 31, 1995, 1994, and 1993, 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
$989,493, $1,040,324, and $950,197, and $736,511, respectively. During the
fiscal years ended August 31, 1995, 1994, and 1993, the Investment Manager (and,
prior to April 1, 1993, Templeton Global Bond Managers, Inc.) received fees from
Money Fund of $713,915, $486,625, and $346,737, and $538,444, respectively.
THE TEMPLETON GLOBAL BOND MANAGERS DIVISION OF TEMPLETON
INVESTMENT COUNSEL, INC. The Investment Manager is an indirect
wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"),
a publicly traded company whose shares are listed on the New York
Stock Exchange. Charles B. Johnson (a Trustee and Officer of the
Trust) and Rupert H. Johnson, Jr. are principal shareholders of
Franklin and own, respectively, approximately 20% and 16% of its
outstanding shares. Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
- 26 -
<PAGE>
BUSINESS MANAGER. Templeton Global Investors, Inc. performs
certain administrative functions as Business Manager for the
Funds, including:
o providing office space, telephone, office equipment and
supplies for the Trust;
o paying compensation of the Trust's officers for
services rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Funds;
o 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;
o 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;
o monitoring relationships with organizations serving the
Funds, including the custodian and printers;
o providing trading desk facilities for the Funds;
o 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;
o monitoring the qualifications of tax-deferred
retirement plans providing for investment in Shares of
the Funds; and
o 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%
- 27 -
<PAGE>
annually of such net assets in excess of $700,000,000, and further reduced to
0.075% annually of such net assets in excess of $1,200,000,000. Each class of
Shares pays a portion of the fee, determined by the proportion of the Fund that
it represents. The fee is allocated between the Funds according to their
respective average daily net assets. Since the Business Manager's fee covers
services often provided by investment advisors to other funds, each Fund's
combined expenses for advisory and administrative services together may be
higher than those of some other investment companies.
During the fiscal years ended August 31, 1995, 1994, and 1993, the
Business Manager (and, prior to April 1, 1993, Templeton Funds Management, Inc.,
the previous business manager) received business management fees of $575,302,
$499,794, and $420,292, 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
- 28 -
<PAGE>
include processing purchase, transfer and redemption orders; making dividend
payments, capital gain distributions and reinvestments; and handling routine
communications with Shareholders. The Transfer Agent receives from Income Fund
an annual fee of $14.77 per Shareholder account plus out-of-pocket expenses and
from Money Fund an annual fee of $22.91 per Shareholder account plus
out-of-pocket expenses. These fees are adjusted each year to reflect changes in
the Department of Labor Consumer Price Index.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Trust.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Trust. Its audit services comprise examination of the Funds' financial
statements and review of the Funds' filings with the Securities and Exchange
Commission ("SEC") and the Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Funds' fiscal years end on August 31.
Shareholders are provided at least semiannually with reports showing the Funds'
portfolios and other information, including an annual report with financial
statements audited by the independent accountants. Shareholders who would like
to receive an interim quarterly report may phone the Fund Information Department
at 1-800/DIAL BEN.
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
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and any commissions and other costs paid), the efficiency with
which the transaction is effected, the ability to effect the
transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial
strength and stability of the broker. Such considerations are
judgmental and are weighed by the Investment Manager in
determining the overall reasonableness of brokerage
commissions.
2. In selecting brokers for portfolio transactions, the Investment
Manager takes into account its past experience as to brokers
qualified to achieve "best execution," including brokers who
specialize in any foreign securities held by Income Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for a Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions to
which fixed minimum commission rates are not
applicable, to cause a Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager in making
the selection in question determines in good faith that
such amount of commission is reasonable in relation to
the value of the brokerage and research services
provided by such broker, viewed in terms of either that
particular transaction or the Investment Manager's
overall responsibilities with respect to the Funds and
the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination,
the Investment Manager is not required to place or
attempt to place a specific dollar value on the
research or execution services of a broker or on the
portion of any commission reflecting either of said
services. In demonstrating that such determinations
were made in good faith, the Investment Manager shall
be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Trust's
brokerage policy; that the research services provide
lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-
making responsibilities; and that the commissions paid
were within a reasonable range. The determination that
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commissions were within a reasonable range shall be based on
any available information as to the level of commissions known
to be charged by other brokers on comparable transactions, but
there shall be taken into account the Trust's policies that (i)
obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that usually
it is more beneficial to a Fund to obtain a favorable price
than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies which are
provided for the Investment Manager are useful to the
Investment Manager in performing its advisory services under
its Investment Management Agreements with the Funds. Research
services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under its
Investment Management Agreements with the Funds. Research
furnished by brokers through whom a Fund effects securities
transactions may be used by the Investment Manager for any of
its accounts, and not all such research may be used by the
Investment Manager for that Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with
fixed brokerage commission rates, account may be taken of
various services provided by the broker, including quotations
outside the United States for daily pricing of foreign
securities held in a Fund's portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with
primary market makers acting as principal, except where, in the
judgment of the Investment Manager, better prices and execution
may be obtained on a commission basis or from other sources.
5. Sales of the Funds' Shares (which shall be deemed to
include also shares of other companies registered under
the 1940 Act which have either the same investment
adviser or an investment adviser affiliated with the
Investment Manager) made by a broker are one factor
among others to be taken into account in deciding to
allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers)
for the account of a Fund to that broker; provided that
the broker shall furnish "best execution," as defined
in paragraph 1 above, and that such allocation shall be
within the scope of that Fund's other policies as
stated above; and provided further, that in every
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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, 1995, 1994,
and 1993, Income Fund paid total brokerage commissions of $0, $32,000, and
$5,363, and $16,578, respectively. Money Fund paid no brokerage commissions
during those years. All portfolio transactions are allocated to broker-dealers
only when their prices and execution, in the judgment of the Investment Manager,
are equal to the best available within the scope of the Trust's policies. There
is no fixed method used in determining which broker-dealers receive which order
or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Each Fund's Prospectus describes the manner in which a
Fund's Shares may be purchased and redeemed. See "How to Buy
Shares of the Fund" and "How to Sell Shares of the Fund."
Net asset value per Share is calculated separately for each Fund. Net
asset value per Share is determined as of the scheduled closing of the NYSE
(generally 4:00 p.m., New York time), every Monday through Friday (exclusive of
national business holidays). The Trust's offices will be closed, and net asset
value will not be calculated, on those days on which the NYSE is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take
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place on every New York business day. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which each Fund's net asset value is not calculated. Income Fund calculates net
asset value per Share, and therefore effects sales, redemptions and repurchases
of its Shares, as of the close of the NYSE once on each day on which that
Exchange is open. Such calculation does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Trustees.
Money Fund uses the amortized cost method to determine the value of its
portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized
cost method involves valuing a security at its cost and amortizing any discount
or premium over the period until maturity, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which Money Fund would receive if the security were sold. During these periods
the yield to a Shareholder may differ somewhat from that which could be obtained
from a similar fund which utilizes a method of valuation based upon market
prices. Thus, during periods of declining interest rates, if the use of the
amortized cost method resulted in a lower value of Money Fund's portfolio on a
particular day, a prospective investor in Money Fund would be able to obtain a
somewhat higher yield than would result from investment in a fund utilizing
solely market values, and existing Money Fund Shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, Money Fund must (i) maintain a dollar-weighted average
portfolio maturity of 90 days or less; (ii) purchase securities having remaining
maturities of 397 days or less; and (iii) invest only in U.S. dollar denominated
securities determined in accordance with procedures established by the Board of
Trustees to present minimal credit risks and which are rated in one of the two
highest rating categories for debt obligations by at least two nationally
recognized statistical rating organizations (or one rating organization if the
instrument is rated by only one such organization, subject to ratification of
the investment by the Board of Trustees). If a security is unrated, it must be
of comparable quality as determined in accordance with procedures established by
the Board
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of Trustees, including approval or ratification of the security
by the Board except in the case of U.S. Government securities.
Pursuant to Rule 2a-7, the Board is required to establish procedures
designed to stabilize, to the extent reasonably possible, Money Fund's price per
Share as computed for the purpose of sales and redemptions at $1.00. Such
procedures will include review of Money Fund's portfolio holdings by the Board
of Trustees, at such intervals as it may deem appropriate, to determine whether
Money Fund's net asset value calculated by using available market quotations
deviates from $1.00 per Share based on amortized cost. The extent of any
deviation will be examined by the Board of Trustees. If such deviation exceeds
1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists which may
result in material dilution or other unfair results to investors or existing
Shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per Share by
using available market quotations.
The Board of Trustees may establish procedures under which a Fund may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE is restricted, (3) an emergency exists
as a result of which disposal of securities owned by a Fund is not reasonably
practicable or it is not reasonably practicable for a Fund fairly to determine
the value of its net assets, or (4) for such other period as the SEC may by
order permit for the protection of the holders of a Fund's Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
each Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, a Fund may surrender ownership of all or a
portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus,
the following special purchase plans also are available:
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TAX-DEFERRED RETIREMENT PLANS. The Trust offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
. For individuals whether or not covered by other
qualified plans;
. For simplified employee pensions;
. For employees of tax-exempt organizations; and
. For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) and
such other documentation as it deems necessary, as to whether or not U.S. income
tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not
covered by qualified private or governmental retirement plans) may purchase
Shares of a Fund pursuant to an IRAs. However, contributions to an IRA by an
individual who is covered by a qualified private or governmental plan may not be
tax-deductible depending on the individual's income. Custodial services for IRAs
are available through FTTC. Disclosure statements summarizing certain aspects of
IRAs are furnished to all persons investing in such accounts, in accordance with
IRS regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to
establish a simplified form of employee retirement program investing in Shares
of a Fund, there are available Simplified Employee Pensions invested in IRA
Plans. Details and materials relating to these plans will be furnished upon
request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS
(403(B)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
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compensation arrangement for the purchase of Shares of a Fund without being
taxed currently on the investment. Contributions which are made by the employer
through salary reduction are excludable from the gross income of the employee.
Such deferred compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), are
available through the Principal Underwriter.
Custodial services are provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND
PARTNERSHIPS. For employers who wish to purchase Shares of a Fund in conjunction
with employee retirement plans, there is a prototype master plan which has been
approved by the IRS. A "Section 401(k) plan" is also available. FTTC furnishes
custodial services for these plans. For further details, including custodian
fees and plan administration services, see the master plan and related material
which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $100,000 or more in
Class I Shares of Templeton Income Fund or Class I Shares of any other fund in
the Franklin Group of Funds and the Templeton Family of Funds, except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, Templeton
Variable Products Series Fund, Franklin Valuemark Funds and Franklin Government
Securities Trust (the "Franklin Templeton Funds") within 13 months (whether in
one lump sum or in installments, the first of which may not be less than 5% of
the total intended amount and each subsequent installment not less than $25
unless the investor is a qualifying employee benefit plan (the "Benefit Plan"),
including automatic investment and payroll deduction plans), and to beneficially
hold the total amount of such Class I Shares fully paid for and outstanding
simultaneously for at least one full business day before the expiration of that
period, should execute a Letter of Intent ("LOI") on the form provided in the
Shareholder Application in the Prospectus. Payment for not less than 5% of the
total intended amount must accompany the executed LOI unless the investor is a
Benefit Plan. Except for purchases of Shares by a Benefit Plan, those Class I
Shares purchased with the first 5% of the intended amount stated in the LOI will
be held as "Escrowed Shares" for as long as the LOI remains unfulfilled.
Although the Escrowed Shares are registered in the investor's name, his full
ownership of them is conditional upon fulfillment of the LOI. No Escrowed Shares
can be redeemed by the investor for any purpose until the LOI is fulfilled or
terminated. If the LOI is terminated for any reason other than fulfillment, the
Transfer Agent will redeem that portion of the Escrowed Shares required and
apply the proceeds to pay any adjustment that may be appropriate to the sales
commission on all Class I Shares (including the Escrowed Shares) already
purchased
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<PAGE>
under the LOI and apply any unused balance to the investor's account. The LOI is
not a binding obligation to purchase any amount of Shares, but its execution
will result in the purchaser paying a lower sales charge at the appropriate
quantity purchase level. A purchase not originally made pursuant to an LOI may
be included under a subsequent LOI executed within 90 days of such purchase. In
this case, an adjustment will be made at the end of 13 months from the effective
date of the LOI at the net asset value per Share then in effect, unless the
investor makes an earlier written request to the Principal Underwriter upon
fulfilling the purchase of Shares under the LOI. In addition, the aggregate
value of any Shares, including Class II Shares, purchased prior to the 90-day
period referred to above may be applied to purchases under a current LOI in
fulfilling the total intended purchases under the LOI. However, no adjustment of
sales charges previously paid on purchases prior to the 90-day period will be
made.
If an LOI is executed on behalf of a benefit plan (such plans are
described under "How to Buy Shares of the Fund -- Net Asset Value Purchases
(Both Classes)" in the Templeton Income Fund Prospectus), the level and any
reduction in sales charge for these employee benefit plans will be based on
actual plan participation and the projected investments in the Franklin
Templeton Funds under the LOI. Benefit Plans are not subject to the requirement
to reserve 5% of the total intended purchase, or to any penalty as a result of
the early termination of a plan, nor are Benefit Plans entitled to receive
retroactive adjustments in price for investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase Class I Shares of
Income Fund at net asset value (without a front-end or contingent deferred sales
charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its affiliates
may make payments, out of its own resources, to securities dealers who initiate
and are responsible for such purchases, as indicated below. FTD may make these
payments in the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain redemptions
made within 12 months of the calendar month following purchase, as well as other
conditions, all of which may be imposed by an agreement between FTD, or its
affiliates, and the securities dealer.
Except for Money Fund, the following amounts will be paid by FTD or one
of its affiliates, out of its own resources, to securities dealers who initiate
and are responsible for (i) purchases of most equity and fixed-income Franklin
Templeton
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Funds made at net asset value by certain designated retirement plans (excluding
IRA and IRA rollovers): 1.00% on sales of $1 million but less than $2 millon,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more; and (ii)
purchases of most fixed-income Franklin Templeton Funds made at net asset value
by non-designated retirement plans: 0.75% on sales of $1 million but less than
$2 million, plus 0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of
$50 million but less than $100 million, plus 0.15% on sales of $100 million or
more. These payment breakpoints are reset every 12 months for purposes of
additional purchases. With respect to purchases made at net asset value by
certain trust companies and trust departments of banks and certain retirement
plans of organizations with collective retirement plan assets of $10 million or
more, FTD, or one of its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Funds' Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, a Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with rules of the SEC. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net asset
value. If Shares are redeemed in kind, the redeeming Shareholder might incur
brokerage costs in converting the assets into cash. A Fund is obligated to
redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net
assets during any 90-day period for any one Shareholder.
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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 gain. Money Fund intends to declare dividends daily and to pay dividends
monthly. By so doing and meeting certain diversification of assets and other
requirements of the Code, each Fund intends to qualify as a regulated investment
company under the Code. The status of a Fund as a regulated investment company
does not involve government supervision of management or of its investment
practices or policies. As a regulated investment company, a Fund generally will
be relieved of liability for U.S. federal income tax on that portion of its net
investment income and net realized capital gains which it distributes to its
Shareholders. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are also subject to a nondeductible 4%
excise tax. To avoid application of the excise tax, each Fund intends to
distribute in accordance with the calendar year distribution requirement.
Dividends from net investment income and distributions from short-term
capital gains (the excess of net short-term capital gains over net long-term
capital losses) are taxable to Shareholders as ordinary income. Distributions
from net investment income may be eligible for the corporate dividends received
deduction to the extent attributable to Income Fund's qualifying dividend
income. However, the alternative minimum tax applicable to corporations may
reduce the benefit of the dividends received deduction. Distributions from net
long-term capital gains (the excess of net long-term capital gains over net
short-term capital losses) designated by a Fund as capital gain dividends are
taxable to Shareholders as long-term capital gains, regardless of the length of
time a Fund's Shares have been held by a Shareholder, and are not eligible for
the dividends received deduction. Generally, dividends and distributions are
taxable to Shareholders, whether received in cash or reinvested in Shares of
either Fund. Any distributions that are not from a Fund's investment company
taxable income or net capital gain may be characterized as a return of capital
to Shareholders or, in some cases, as capital gain. Shareholders will be
notified annually as to the Federal tax status of dividends and distributions
they received and any tax withheld thereon.
Debt securities purchased by a Fund may be treated for federal income
tax purposes as having original issue discount. Original issue discount
essentially represents interest for federal tax purposes and can be defined
generally as the excess of the stated redemption price at maturity over the
issue price. Original issue discount, whether or not any income is actually
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received by a Fund, is treated for U.S. federal income tax purposes as income
earned by the Fund, and therefore is subject to the distribution requirements of
the Code. Generally, the amount of original issue discount included in the
income of a Fund each year is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued but unpaid
interest.
In addition, debt securities may be purchased by a Fund at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Fund purchased the securities. This additional discount
represents market discount for federal income tax purposes. In the case of any
debt security having a fixed maturity date of more than one year from the date
of issue and having market discount, the gain realized on disposition will be
treated as interest for most purposes of the Code to the extent it does not
exceed the accrued market discount on the security (unless a Fund elects for all
its debt securities having a fixed maturity date of more than one year from the
date of issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. In the case
of any debt security having a fixed maturity date of not more than one year from
the date of issue, the gain realized on disposition will be treated as
short-term capital gain. Market discount on securities with a fixed maturity
date not exceeding one year from the date of issue generally is included in
income on a ratable basis.
Income Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If Income Fund receives a so-called
"excess distribution" with respect to PFIC stock, Income Fund itself may be
subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by Income Fund to Shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which Income Fund held the PFIC shares. Income
Fund itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent
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application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
Income Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market Income Fund's PFIC shares at the
end of each taxable year (and on certain other dates prescribed in the Code),
with the result that unrealized gains are treated as though they were realized.
If this election were made, tax at the fund level under the PFIC rules would
generally be eliminated, but Income Fund could, in limited circumstances, incur
nondeductible interest charges. Income Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Certain of the options, futures contracts and forward contracts in
which Income Fund may invest are "section 1256 contracts." Gains or losses on
section 1256 contracts generally are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by Income Fund at the
end of each taxable year (and, with certain exceptions, for purposes of the 4%
excise tax, on October 31 of each year) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by Income Fund may
result in "straddles" for U.S. federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by Income Fund. In
addition, losses realized by Income Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which the
losses are realized. Because only a few regulations implementing the straddle
rules have been promulgated, the tax consequences to Income Fund of hedging
transactions are not entirely clear. The hedging transactions may increase the
amount of short-term capital gain realized by Income Fund which is taxed as
ordinary income when distributed to Shareholders.
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Income Fund may make one or more of the elections available under the
Code which are applicable to straddles. If Income Fund makes any of the
elections, the amount, character, and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the elections made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders and which will be taxed to Shareholders as ordinary
income or long-term capital gain may be increased or decreased as compared to a
fund that did not engage in such hedging transactions.
Requirements relating to Income Fund's tax status as a regulated
investment company may limit the extent to which Income Fund will be able to
engage in such transactions in options, futures and forward contracts.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time a Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of a
Fund's net investment income to be distributed to its Shareholders as ordinary
income. For example, fluctuations in exchange rates may increase the amount of
income that a Fund must distribute in order to qualify for treatment as a
regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, a Fund would not be able to
make ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as a return of capital to Shareholders
for federal income tax purposes, rather than as an ordinary dividend, reducing
each Shareholder's basis in his Fund Shares, or as a capital gain.
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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
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his basis in the Shares. Such gain or loss generally will be treated as capital
gain or loss if the Shares are capital assets in the Shareholder's hands, and
will be long-term if the Shareholder's holding period for the Shares is more
than one year and generally otherwise will be short-term. Any loss realized on a
sale or exchange will be disallowed to the extent that the Shares disposed of
are replaced (including replacement through the reinvesting of dividends and
capital gain distributions in Income Fund) within a period of 61 days beginning
30 days before and ending 30 days after the disposition of the Shares. In such a
case, the basis of the Shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a Shareholder on the sale of Income Fund
Shares held by the Shareholder for 6 months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the Shareholder with respect
to such Shares. It is not anticipated that gain or loss will be realized from a
disposition of Money Fund Shares since that Fund intends to maintain a share
price of $1.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the Shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the Shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of stock. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
The Funds generally will be required to withhold federal income tax at
a rate of 31% ("backup withholding") from dividends paid, capital gain
distributions and redemption proceeds (except redemptions from Money Fund), to a
Shareholder if (1) the Shareholder fails to furnish a Fund with the
Shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Shareholder or a Fund that the Shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding.
Ordinary dividends and taxable capital gain distributions declared in
October, November, or December with a record date in such a month and paid
during the following January will be
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treated as having been paid by a Fund and received by Shareholders on December
31 of the calendar year in which declared, rather than the calendar year in
which the dividends are actually received.
U.S. tax rules applicable to foreign investors may differ
significantly from those outlined above. Distributions also may
be subject to state, local and foreign taxes. Shareholders
should consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of each Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
Each Fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a
Distribution Plan with respect to each class of Shares (the "Plans"). Under the
Plans adopted with respect to Class I Shares (including all Shares issued by
Money Fund), each Fund may reimburse FTD or others quarterly (subject to a limit
of 0.15% per annum of Money Fund's average daily net assets and 0.25% per annum
of Income Fund's average daily net assets attributable to Class I Shares) for
costs and expenses incurred by FTD or others in connection with any activity
which is primarily intended to result in the sale of the Funds' Shares. Income
Fund also has a second class of Shares, designated Class II Shares. Under the
Plan adopted with respect to Class II Shares, Income Fund will pay FTD or others
quarterly (subject to a limit of 0.65% per annum of the Fund's average daily
assets attributable to Class II Shares of which up to 0.15% of such net assets
may be paid to dealers for personal service and/or maintenance of Shareholder
accounts) for costs and expenses incurred by FTD or others in connection with
any activity which is primarily intended to result in the sale of the Fund's
Shares. Payments to FTD or others could be for various types of activities,
including (1) payments to broker-dealers who provide certain services of value
to each Fund's Shareholders (sometimes referred to as a "trail fee"); (2)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (3) payments to employees or agents of
the Principal Underwriter who engage in or support distribution of Shares; (4)
payments of the costs of preparing, printing and distributing Prospectuses and
reports to prospective investors and of printing and advertising expenses; (5)
payment of dealer commissions and wholesaler compensation in connection with
sales of the Funds' Shares exceeding $1 million (on which Income Fund imposes no
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initial sales charge) and interest or carrying charges in connection therewith;
and (6) such other similar services as the Trust's Board of Trustees determines
to be reasonably calculated to result in the sale of Shares. Under the Plans,
the costs and expenses not reimbursed in any one given quarter (including costs
and expenses not reimbursed because they exceed the percentage limit applicable
to either class of Shares) may be reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1995, FTD incurred costs and
expenses of $447,469 in connection with distribution of Shares of Income Fund,
$1,893 in connection with distribution of Class II Shares of Income Fund, and
$306,623 in connection with distribution of Shares of Money Fund. During the
same period, the Trust made reimbursements pursuant to the Plans in the amount
of $457,562 on behalf of Income Fund and $311,237 on behalf of Money Fund. As
indicated above, unreimbursed expenses, which amount to $4,614 for Class I
Shares of Money Fund, may be reimbursed by the Trust during the fiscal year
ending August 31, 1996 or in subsequent years. In the event that a Plan is
terminated, the Trust will not be liable to FTD for any unreimbursed expenses
that had been carried forward from previous months or years. During the fiscal
year ended August 31, 1995, FTD spent, pursuant to the Plans, with respect to
Income Fund, the following amounts on: compensation to dealers, $350,328 (Class
I) and $354 (Class II); sales promotion, $1,299 (Class I); wholesale costs and
expenses,$4,935 (Class I) and $1,492 (Class II); advertising, $$12,360 (Class
I); and printing, $78,547 (Class I) and $47 (Class II); and, with respect to
Money Fund, the following amounts on: compensation to dealers, $278,765;
printing, $24,313; wholesale costs and expenses, $8,159; and advertising, $0.
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, 1995, 1994, and
1993, FTD (and, prior to June 1, 1993, Templeton Funds Distributor, Inc.)
retained of such discount $0 , $277,670 and $326,584, or approximately 0%,
18.16% and 19.54%, 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
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as principal for their own account in buying Shares from the Principal
Underwriter. No agency relationship exists between any dealer and a Fund or the
Principal Underwriter.
The Underwriting Agreement provides that each Fund shall pay the costs
and expenses incident to registering and qualifying its Shares for sale under
the Securities Act of 1933 and under the applicable blue sky laws of the
jurisdictions in which the Principal Underwriter desires to distribute such
Shares, and for preparing, printing and distributing Prospectuses and reports to
Shareholders. The Principal Underwriter pays the cost of printing additional
copies of Prospectuses and reports to Shareholders used for selling purposes.
(The Funds pay costs of preparation, set-up and initial supply of the Funds'
Prospectuses for existing Shareholders.)
The Underwriting Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The Underwriting Agreement may be terminated
without penalty by either party upon 60 days' written notice to the other,
provided termination by the Trust shall be approved by the Board of Trustees or
a majority (as defined in the 1940 Act) of the Shareholders. The Principal
Underwriter is relieved of liability for any act or omission in the course of
its performance of the Underwriting Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the principal underwriter for the other Franklin 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:
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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, 1995, the yield of Money
Fund was 4.79% and the effective yield of Money Fund was 4.91%.
The Funds may, from time to time, include their total return in
advertisements or reports to Shareholders or prospective investors. Quotations
of average annual total return for the Funds will be expressed in terms of the
average annual compounded rate of return for periods in excess of one year or
the total return for periods less than one year of a hypothetical investment in
the Funds over periods of one, five, or ten years (up to the life of a Fund)
calculated pursuant to the following formula: P(1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return for
periods of one year or more or the total return for periods of less than one
year, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of the maximum initial sales charge and
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. Income
Fund's average annual total return for the one- and five-year periods ended
August 31, 1995 and from inception on September 24, 1986 through August 31,
1995, was 5.74%, 6.61%, and 7.48%, respectively, for Class I Shares. Money
Fund's average annual total return for the one- and five-year periods ended
August 31, 1995 and from inception on October 3, 1987 through August 31, 1995,
was 4.72%, 3.85% and 5.21%, 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
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group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in a Fund. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
Performance information for a Fund reflects only the performance of a
hypothetical investment in a Fund during the particular time period on which the
calculations are based. Performance information should be considered in light of
a Fund's investment objective and policies, characteristics and quality of the
portfolio and the market conditions during the given time period, and should not
be considered as a representation of what may be achieved in the future.
From time to time, each Fund and the Investment Manager may also refer
to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to
a liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries
as published by various statistical organizations.
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(6) To assist investors in understanding the different returns
and risk characteristics of various investments, 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) 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."
. "Invest - don't trade or speculate."
. "Remain flexible and open-minded about types of
investment."
- --------
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Trust's Board on April 16, 1995. He is no longer
involved with the investment management process.
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. "Buy low."
. "When buying stocks, search for bargains among
quality stocks."
. "Buy value, not market trends or the economic
outlook."
. "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
. "Do your homework or hire wise experts to help
you."
. "Aggressively monitor your investments."
. "Don't panic."
. "Learn from your mistakes."
. "Outperforming the market is a difficult task."
. "An investor who has all the answers doesn't even
understand all the questions."
. "There's no free lunch."
. "And now the last principle: Do not be fearful or
negative too often."
In addition, each Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders of
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of redemption, except as follows: all
consideration received from the sale of Shares of a Fund, together with all
income, earnings, profits and proceeds thereof, belongs to that Fund and is
charged with liabilities in respect to that Fund and of that Fund's part of
general liabilities of the Trust in the proportion that the total net assets of
the Fund bear to the total net assets of both Funds. The net asset value of a
Share of a Fund is based on the assets belonging to that Fund less the
liabilities charged to that Fund, and dividends are paid on
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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 Annual Reports to
Shareholders of Templeton Income Fund and Templeton Money Fund dated August 31,
1995 are incorporated herein by reference.
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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
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have a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are between
sound obligations and those where the speculative elements begin to predominate.
Although these bonds have adequate asset coverage and normally are protected by
satisfactory earnings, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and principal.
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and principal in accordance with the terms of the obligation. While such bonds
may have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER. The Prime rating is the highest commercial paper
rating assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Issuers within this Prime
category may be given ratings 1, 2 or 3, depending on the relative strengths of
these factors.
Commercial paper rated A by S&P has the following characteristics: (i)
liquidity ratios are adequate to meet cash requirements; (ii) long-term senior
debt rating should be A or better, although in some cases BBB credits may be
allowed if other factors outweigh the BBB; (iii) the issuer should have access
to at least two additional channels of borrowing; (iv) basic earnings and cash
flow should have an upward trend with allowances made for unusual circumstances;
and (v) typically the issuer's industry should be well established and the
issuer should have a strong position within its industry and the reliability and
quality of management should be unquestioned. Issuers rated A are further
referred to by use of numbers 1, 2 and 3 to denote relative strength within this
highest classification.
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