ANNUAL REPORT
[PHOTO OF BALANCE SCALE]
TEMPLETON GLOBAL BOND FUND
AUGUST 31, 1997
FRANKLIN TEMPLETON
<PAGE>
[LOGO]
CELEBRATING 50 YEARS
[PHOTO OF THOMAS LATTA]
THOMAS LATTA
Portfolio Manager
Templeton Global Bond Fund
This year marks 50 years of business for Franklin Templeton. Over these years,
we have experienced profound changes in technology, regulations and customer
expectations within the mutual fund industry. As one of the largest mutual fund
families, we're proud to be an innovative industry leader, providing people like
you with an opportunity to invest in companies and governments around the globe.
In addition, we want to stress that all securities markets move both up and
down. Mixed in with the good years can be some bad years. Accordingly, mutual
fund share prices also move up and down. Every investor should expect such
fluctuations, which can be wide. When markets are going down, as well as up, we
encourage investors to maintain a long-term perspective. We thank you for your
past support and look forward to serving your investment needs in the years
ahead.
<PAGE>
SHAREHOLDER LETTER
Your Fund's Objective: The Templeton Global Bond Fund seeks current income, with
capital appreciation and growth of income, through a flexible policy of
investing primarily in debt securities of companies, governments and government
agencies of various nations throughout the world. The Fund also may invest in
preferred stock, common stocks which pay dividends, income-producing securities
convertible into common stocks of such companies, and depository receipts.
Dear Shareholder:
We are pleased to bring you this annual report of the Templeton Global Bond
Fund, which covers the 12 months ended August 31, 1997. The Fund's Class I
shares delivered a one-year cumulative total return of 6.87%, as discussed in
the Performance Summary on page 5, significantly outperforming the Fund's
benchmark, the unmanaged Salomon Brothers World Government Bond Index, which
posted a return of 0.68% for the same period.(1)
Global bond markets finished the reporting period with mixed results, after
experiencing severe volatility along the way. For example, during the period,
10-year U.S. Treasury bond yields fell from almost 7% to near 6%, rose again
towards 7% and then fell once more to near 6%, with each rise or fall in yield
resulting in about a 7% change in bond value. This volatility was primarily due
to fears of inflation and higher interest rates
(1) Source: Micropal. Index is unmanaged and includes reinvested dividends.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Shareholder Letter ......... 1
Performance Summaries
Class I ................. 5
Class II ................ 8
Advisor Class ........... 10
Financial Highlights and
Statement of Investments ... 13
Financial Statements ....... 19
Notes to Financial
Statements ................. 22
Independent Auditor's
Report ..................... 26
Tax Designation ............ 27
</TABLE>
[Pyramid Graphic]
FUND CATEGORY
Global
Growth
Growth & Income
Income
Tax-Free Income
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN INDEX COMPARISON
12-Month Performance
(8/31/96-8/31/97)
<S> <C>
Templeton Global Bond Fund-Class I(1) 6.87%
Salomon Brothers World Government Bond Index(2) 0.68%
</TABLE>
(1) Fund performance does not include the initial sales charge and represents
the change in value of an investment during the period shown. Total return
assumes reinvestment of dividends and capital gains at net asset value. The
historical data shown above pertains only to Class I shares of the Fund. The
Fund offers other classes of shares, subject to different fees and expenses,
which affect their performance. Please see the prospectus for more details.
Past performance is not predictive of future results.
(2) Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
in the U.S., the appreciation of the U.S. dollar relative to most other
currencies, and the struggle in Europe to establish a common currency.
Because the U.S. was experiencing a degree of economic growth historically
associated with rising inflation, the U.S. Federal Reserve Board raised the
federal funds rate .25%, from 5.25% to 5.5%, in March 1997. Growth then slowed
modestly in the second quarter of this year before accelerating again in July.
Activity in the U.S. had a significant influence on foreign bond and currency
markets. At the beginning of the reporting period, European interest rates were
at relatively low levels, with many markets experiencing short-term rates
considerably lower than U.S. rates. With higher rates possible in the U.S.,
foreign investors began purchasing U.S. dollar assets and the dollar began a
long, steady appreciation against most foreign currencies. During the period,
the U.S. dollar appreciated 22% against the German mark, from 1.48 to 1.81 marks
to the dollar. This meant that the value of German bond holdings in the Fund
declined by 22% in U.S.-dollar terms.
However, the decline in many foreign currencies relative to the U.S. dollar was
not exclusively the result of events in the United States. Domestic conditions
in Europe, particularly events surrounding the formation of a common European
currency, also were contributing factors. In attempting to meet requirements for
membership in the European Monetary Union, the French, Italian, and Spanish
governments cut their budgets aggressively, leading to declines in European
interest rates and depreciation of most European currencies relative to the U.S.
dollar. Although prospects for a common currency generally improved during the
period under review, a sense of heightened uncertainty remained, and many
European currencies experienced significant volatility as the process unfolded.
2
<PAGE>
Responding to the appreciation of the U.S. dollar, we reduced the Fund's
holdings in European bonds by selling modest amounts of assets from Denmark,
Italy, Spain, and the United Kingdom. At the beginning of the reporting period,
the Fund had invested 41% of its total net assets in European holdings; by the
end, this was down to 35%. We invested much of the proceeds from the sale of our
European holdings in U.S. Treasury securities. We also shifted assets out of
other U.S. dollar-denominated holdings, such as Australia, into U.S. assets.
During the period, our holdings of U.S. securities grew from 29.2% to 33.4% of
total net assets. In seeking to preserve the value of our remaining European
bond holdings, we increased the use of currency hedges during the period.
Finally, in reaction to increasing global economic growth, we reduced the Fund's
interest-rate sensitivity by shortening the portfolio's average maturity from
5.2 years at the beginning of the period to 4.3 years at the end of the period.
In our opinion, the greatest risk to bond values is expanding economic growth,
not only in the U.S., but also in Japan, Europe, and emerging markets. Should
this trend continue, we believe global bond markets could become more volatile
over the intermediate term because such growth could increase the risk that
certain key resources, particularly labor, may become scarce, leading to wage
and price increases. Because central banks generally raise interest rates in an
effort to slow growth to a non-inflationary level, this scenario could result in
increasing interest rates and declining bond prices. However, controlled rises
in interest rates before inflation occurs could lead to greater long-term global
financial stability.
Regarding global currencies, we believe that the U.S. dollar's fundamentals at
the end of the reporting period continued to support its value against
currencies of most European countries experiencing high labor costs and high
unemployment. Should
[PIE GRAPHIC]
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF ISSUERS OF SECURITIES
Based on Total Net Assets 8/31/97
<S> <C>
Europe 34.8%
United States 33.4%
Canada 8.1%
Latin America 6.5%
Australia & New Zealand 4.0%
Asia 2.5%
Short-Term Obligations
& Other Net Assets 10.7%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO BREAKDOWN
Based on Total Net Assets
8/31/97
<S> <C>
Government Bonds 81.4%
Corporate Bonds 5.2%
Common Stocks 1.7%
Preferred Stocks 1.0%
Short-Term Obligations
& Other Net Assets 10.7%
</TABLE>
For a complete list of portfolio holdings, please see page 16 of this report.
Short-Term Obligations & Other Net Assets includes a 0.3% unrealized gain on
forward exchange contracts.
3
<PAGE>
this situation continue, we would expect to maintain our emphasis on U.S.
dollar-denominated assets.
This discussion reflects the strategies we employed for the Fund during the 12
months under review, and includes our opinions as of the close of the period.
Because economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions, and decisions regarding portfolio holdings may
change as new circumstances arise. All figures shown are as of August 31, 1997,
and the Fund's holdings can be expected to change with market developments and
management of the portfolio. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
It is important to remember that there are special risks involved with global
investing related to market, currency, economic, social, political, and other
factors, in addition to the heightened risks associated with the relatively
small size and lesser liquidity of developing markets.
We thank you for your participation in the Templeton Global Bond Fund and look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Thomas Latta
Thomas Latta
Portfolio Manager
Templeton Global Bond Fund
4
<PAGE>
PERFORMANCE SUMMARY
CLASS I
The Templeton Global Bond Fund Class I shares reported a cumulative total return
of 6.87% for the 12-month period ended August 31, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any, and does not include the maximum 4.25%
initial sales charge. While we expect market volatility in the short term, we
have always maintained a long-term perspective when managing the Fund, and we
encourage shareholders to view their investments in a similar manner. As you can
see from the table on page 7, the Fund delivered a cumulative total return of
136.98% since its inception on September 18, 1986.
During the reporting period, the price of the Fund's Class I shares increased
6.0 cents ($0.06), from $9.76 on August 31, 1996, to $9.82 on August 31, 1997,
and shareholders received distributions of 60.0 cents ($0.60) per share in
dividend income. Distributions will vary depending on income earned by the Fund
and any profits realized from sales of securities in the portfolio, as well as
the level of the Fund's operating expenses.
The graph on page 6 compares the performance of the Fund's Class I shares over a
ten-year period with that of the unmanaged Salomon Brothers World Government
Bond Index and the Consumer Price Index (CPI), a commonly used measure of
inflation.
Past performance is not predictive of future results.
5
<PAGE>
Please remember that the Fund's performance differs from that of an index
because an index is not managed according to any investment strategy, includes
no sales charges or management expenses, and does not contain cash (the Fund
generally carries a certain percentage of cash at any given time). Of course,
one cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
CLASS 1
Total Return Comparison
$10,000 Investment (8/31/87 - 8/31/97)
[GRAPH]
<TABLE>
<CAPTION>
ADVISOR CLASS
TOTAL VALUE SB WGB CPI
- ---------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C>
8/31/87 10,000 10,000 $10,000
9/30/87 9,857 -2.81% 9,719 0.52% $10,049
10/30/87 9,628 6.73% 10,373 0.26% $10,075
11/30/87 9,782 3.47% 10,733 0.09% $10,089
12/31/87 10,006 4.29% 11,193 0.00% $10,088
1/31/88 10,056 -0.54% 11,133 0.26% $10,113
2/29/88 10,204 0.87% 11,230 0.26% $10,139
3/31/88 10,334 1.79% 11,431 0.43% $10,183
4/30/88 10,324 -0.49% 11,375 0.52% $10,235
5/31/88 10,324 -0.94% 11,268 0.34% $10,271
6/30/88 10,293 -2.18% 11,022 0.43% $10,315
7/31/88 10,313 -0.61% 10,955 0.42% $10,357
8/31/88 10,225 -1.12% 10,832 0.42% $10,401
9/30/88 10,401 2.58% 11,112 0.67% $10,472
10/31/88 10,651 4.62% 11,625 0.33% $10,506
11/30/88 10,782 1.53% 11,803 0.08% $10,516
12/31/88 10,714 -1.02% 11,683 0.17% $10,533
1/31/89 10,932 -1.46% 11,512 0.50% $10,586
2/28/89 10,798 0.07% 11,520 0.41% $10,628
3/31/89 10,852 -1.39% 11,360 0.58% $10,689
4/30/89 10,971 1.32% 11,510 0.65% $10,760
5/31/89 10,916 -2.11% 11,267 0.57% $10,821
6/30/89 11,026 2.01% 11,494 0.24% $10,848
7/31/89 11,365 4.55% 12,017 0.24% $10,874
8/31/89 11,388 -3.36% 11,613 0.16% $10,892
9/30/89 11,467 1.90% 11,833 0.32% $10,926
10/31/89 11,490 0.84% 11,933 0.48% $10,979
11/30/89 11,501 0.91% 12,041 0.24% $11,004
12/31/89 11,629 1.22% 12,188 0.16% $11,022
1/31/90 11,494 -1.32% 12,027 1.03% $11,126
2/28/90 11,453 -1.54% 11,842 0.47% $11,170
3/31/90 11,429 -0.99% 11,725 0.55% $11,213
4/30/90 11,369 -0.31% 11,689 0.16% $11,248
5/31/90 11,677 3.32% 12,077 0.23% $11,266
6/30/90 11,939 1.83% 12,298 0.54% $11,335
7/31/90 12,325 3.13% 12,683 0.38% $11,388
8/31/90 12,368 -0.78% 12,584 0.92% $11,484
9/30/90 12,375 1.12% 12,725 0.84% $11,562
10/31/90 12,556 4.46% 13,292 0.60% $11,641
11/30/90 12,663 1.66% 13,513 0.22% $11,667
12/31/90 12,779 0.99% 13,647 0.00% $11,710
1/31/91 13,018 2.50% 13,988 0.60% $11,781
2/28/91 13,115 0.03% 13,992 0.15% $11,798
3/31/91 12,819 -3.63% 13,484 0.15% $11,816
4/30/91 13,057 1.54% 13,692 0.15% $11,833
5/31/91 13,150 -0.13% 13,674 0.30% $11,867
6/30/91 13,017 -1.05% 13,530 0.29% $11,904
7/31/91 13,139 2.14% 13,820 0.15% $11,921
8/31/91 13,411 1.94% 14,088 0.29% $11,956
9/30/91 13,904 3.91% 14,639 0.44% $12,009
10/31/91 14,097 1.05% 14,793 0.15% $12,026
11/30/91 14,097 1.56% 15,023 0.29% $12,061
12/31/91 14,684 5.20% 15,805 0.07% $12,070
1/31/92 14,416 -1.78% 15,523 0.15% $12,087
2/29/92 14,332 -0.56% 15,436 0.36% $12,131
3/31/92 14,247 -1.06% 15,273 0.51% $12,192
4/30/92 14,419 0.72% 15,383 0.14% $12,210
5/31/92 14,839 3.07% 15,855 0.14% $12,227
6/30/92 15,276 2.80% 16,299 0.36% $12,271
7/31/92 15,643 2.33% 16,679 0.21% $12,298
8/31/92 15,672 2.80% 17,146 0.28% $12,332
9/30/92 15,063 1.00% 17,317 0.28% $12,367
10/31/92 15,212 -2.72% 16,846 0.35% $12,411
11/30/92 15,061 -1.59% 16,578 0.14% $12,428
12/31/92 15,141 0.60% 16,678 -0.07% $12,420
1/31/93 15,251 1.74% 16,968 0.49% $12,482
2/28/93 15,537 1.97% 17,302 0.35% $12,525
3/31/93 15,824 1.54% 17,569 0.35% $12,570
4/30/93 16,111 2.11% 17,939 0.28% $12,604
5/31/93 16,209 1.00% 18,119 0.14% $12,622
6/30/93 16,096 -0.21% 18,081 0.14% $12,639
7/31/93 16,194 0.28% 18,131 0.00% $12,639
8/31/93 16,457 3.01% 18,677 0.28% $12,674
9/30/93 16,408 1.19% 18,899 0.21% $12,700
10/31/93 16,657 -0.17% 18,867 0.41% $12,753
11/30/93 16,338 -0.71% 18,733 0.07% $12,762
12/31/93 16,708 0.85% 18,892 0.00% $12,761
1/31/94 17,166 0.80% 19,044 0.27% $12,797
2/28/94 16,740 -0.65% 18,920 0.34% $12,841
3/31/94 16,122 -0.14% 18,893 0.34% $12,885
4/30/94 16,070 0.11% 18,914 0.14% $12,903
5/31/94 15,983 -0.88% 18,748 0.07% $12,911
6/30/94 15,738 1.44% 19,018 0.34% $12,955
7/31/94 15,932 0.80% 19,170 0.27% $12,989
8/31/94 16,091 -0.35% 19,103 0.40% $13,042
9/30/94 16,038 0.72% 19,240 0.27% $13,077
10/31/94 16,217 1.60% 19,548 0.07% $13,086
11/30/94 16,110 -1.38% 19,278 0.13% $13,104
12/31/94 16,110 0.28% 19,332 0.00% $13,104
1/31/95 16,146 2.10% 19,738 0.40% $13,155
2/28/95 16,404 2.56% 20,243 0.40% $13,208
3/31/95 16,534 5.94% 21,446 0.33% $13,252
4/30/95 16,295 1.85% 21,843 0.33% $13,296
5/31/95 17,468 2.82% 22,459 0.20% $13,322
6/30/95 17,505 0.59% 22,591 0.20% $13,348
7/31/95 17,694 0.24% 22,645 0.00% $13,348
8/31/95 17,790 -3.44% 21,866 0.26% $13,384
9/30/95 18,134 2.23% 22,354 0.20% $13,409
10/31/95 18,460 0.74% 22,519 0.33% $13,454
11/30/95 18,634 1.13% 22,774 -0.07% $13,453
12/31/95 19,043 1.05% 23,013 -0.07% $13,444
1/31/96 19,121 -1.23% 22,730 0.59% $13,523
2/29/96 18,983 -0.51% 22,614 0.32% $13,567
3/31/96 19,023 -0.14% 22,582 0.52% $13,637
4/30/96 19,121 -0.40% 22,492 0.39% $13,689
5/31/96 19,241 0.02% 22,497 0.19% $13,715
6/30/96 19,502 0.79% 22,674 0.06% $13,724
7/31/96 19,562 1.92% 23,110 0.19% $13,750
8/31/96 19,824 0.39% 23,200 0.19% $13,777
9/30/96 20,130 0.41% 23,295 0.32% $13,821
10/31/96 20,600 1.87% 23,730 0.32% $13,864
11/30/96 21,134 1.32% 24,044 0.19% $13,891
12/31/96 21,176 -0.81% 23,849 0.00% $13,891
1/31/97 20,910 -2.67% 23,212 0.32% $13,935
2/28/97 20,851 -0.75% 23,038 0.31% $13,976
3/31/97 20,666 -0.76% 22,863 0.25% $14,018
4/30/97 20,712 -0.88% 22,662 0.13% $14,032
5/30/97 20,886 2.72% 23,278 -0.06% $14,018
6/30/97 21,126 1.19% 23,555 0.12% $14,032
7/31/97 21,215 -0.78% 23,371 0.12% $14,046
8/31/97 21,219 -0.06% 23,357 0.19% $14,074
TOTAL VALUE 112.19% 133.57% 40.74%
</TABLE>
For a complete list of portfolio holdings, please see page 16 of this report.
Short-Term Obligations & Other Net Assets includes a 0.3% unrealized gain on
forward exchange contracts.
THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S CLASS I
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.
*Performance figures represent the change in value of an investment
over the periods shown, and have been restated to include the current maximum
4.25% initial sales charge, assuming reinvestment of dividends and capital gains
at net asset value. Prior to July 1, 1994, Fund shares were offered at a higher
initial sales charge, and on January 1, 1993, the Fund implemented a Rule 12b-1
plan. Such expenses will affect subsequent performance. This was a period of
generally rising security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Source: U.S. Bureau of Labor Statistics (9/30/97).
Past performance is not predictive of future results.
6
<PAGE>
TEMPLETON GLOBAL BOND FUND
CLASS I
Periods ended 8/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (9/18/86)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 6.87% 35.32% 111.87% 136.98%
Average Annual Total Return(2) 2.36% 5.32% 7.33% 7.76%
Value of $10,000 Investment(3) $10,236 $12,957 $20,287 $22,691
</TABLE>
(1) Cumulative total returns represent the change in value of an investment over
the indicated periods, and do not include the sales charge. See Note below.
(2) Average annual total returns represent the average annual change in value of
an investment over the indicated periods, and include the current maximum 4.25%
initial sales charge. See Note below.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the indicated periods and include the current maximum 4.25%
initial sales charge.
Note: Prior to July 1, 1994, Fund shares were offered at a higher initial sales
charge. Thus, actual total returns would have been lower. On January 1, 1993,
the Fund implemented a Rule 12b-1 plan, which affects subsequent performance.
All calculations assume reinvestment of dividends and capital gains, if any, at
net asset value. Investment return and principal value will fluctuate with
market conditions, currency volatility, and the economic, social, and political
climates in countries where investments are made. Emerging markets involve
heightened risks related to the same factors, in addition to those associated
with the relatively small size and lesser liquidity of these markets. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
7
<PAGE>
CLASS II
The Templeton Global Bond Fund Class II shares reported a cumulative total
return of 6.44% for the 12-month period ended August 31, 1997. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any, and does not include sales charges.
During the reporting period, the price of the Fund's Class II shares increased
6.0 cents ($0.06), from $9.77 on August 31, 1996, to $9.83 on August 31, 1997.
During this time, shareholders received distributions of 56.05 cents ($0.5605)
per share in dividend income. Distributions will vary depending on income earned
by the Fund and any profits realized from sales of securities in the portfolio,
as well as the level of the Fund's operating expenses.
The graph on page 9 compares the performance of the Fund's Class II shares since
their inception with that of the unmanaged Salomon Brothers World Government
Bond Index and the Consumer Price Index (CPI), a commonly used measure of
inflation. Please remember that the Fund's performance differs from that of an
index because an index is not managed according to any investment strategy,
includes no sales charges or management expenses, and does not contain cash (the
Fund generally carries a certain percentage of cash at any given time). Of
course, one cannot invest directly in an index, nor is an index representative
of the Fund's portfolio.
Past performance is not predictive of future results.
8
<PAGE>
[GRAPH]
Inception: 5/1/95
<TABLE>
<CAPTION>
TOTAL VALUE SB WGB CPI
- ------------------------ -------------------- ----------------------
<S> <C> <C> <C> <C> <C>
5/1/95 9,902 10,000 10,000
5/31/95 10,209 2.82% 10,282 0.20% 10,020
6/30/95 10,229 0.59% 10,343 0.20% 10,040
7/31/95 10,337 0.24% 10,367 0.00% 10,039
8/31/95 10,377 -3.44% 10,011 0.27% 10,067
9/30/95 10,585 2.23% 10,234 0.19% 10,086
10/31/95 10,772 0.74% 10,310 0.33% 10,119
11/30/95 10,869 1.13% 10,426 -0.01% 10,118
12/31/95 11,103 1.05% 10,536 -0.07% 10,111
1/31/96 11,156 -1.23% 10,406 0.59% 10,171
2/29/96 11,084 -0.51% 10,353 0.32% 10,204
3/31/96 11,103 -0.14% 10,339 0.52% 10,256
4/30/96 11,145 -0.40% 10,297 0.38% 10,296
5/31/96 11,199 0.02% 10,299 0.19% 10,316
6/30/96 11,347 0.79% 10,381 0.06% 10,322
7/31/96 11,379 1.92% 10,580 0.19% 10,342
8/31/96 11,539 0.39% 10,621 0.19% 10,362
9/30/96 11,700 0.41% 10,665 0.32% 10,395
10/31/96 11,982 1.87% 10,864 0.32% 10,428
11/29/96 12,288 1.32% 11,008 0.19% 10,448
12/31/96 12,308 -0.81% 10,919 0.00% 10,448
1/31/97 12,147 -2.67% 10,627 0.31% 10,480
2/28/97 12,094 -0.75% 10,547 0.30% 10,512
3/31/97 11,981 -0.76% 10,467 0.30% 10,544
4/30/97 12,014 -0.88% 10,375 0.10% 10,554
5/30/97 12,095 2.72% 10,657 -0.10% 10,543
6/30/97 12,239 1.19% 10,784 0.10% 10,554
7/31/97 12,285 -0.78% 10,700 0.10% 10,564
Aug-97 12,282 -0.06% 10,693 0.20% 10,586
TOTAL RETURN 22.82% 6.93% 5.86%
</TABLE>
THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S CLASS II
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.
*Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of dividends
and capital gains at net asset value. This was a period of generally rising
security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Source: U.S. Bureau of Labor Statistics (9/30/97).
TEMPLETON GLOBAL BOND FUND
CLASS II
Periods ended 8/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (5/1/95)
------ --------
<S> <C> <C>
Cumulative Total Return(1) 6.44% 24.31%
Average Annual Total Return(2) 4.37% 9.30%
Value of $10,000 Investment(3) $10,437 $12,307
</TABLE>
(1) Cumulative total returns represent the change in value of an investment over
the indicated periods, and do not include the sales charges.
(2) Average annual total returns represent the average annual change in value of
an investment over the indicated periods. They include the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge applicable to shares
redeemed within 18 months of investment.
(3) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the indicated periods and include all sales charges.
All calculations assume reinvestment of dividends and capital gains, if any, at
net asset value. Investment return and principal value will fluctuate with
market conditions, currency volatility, and the economic, social, and political
climates in countries where investments are made. Emerging markets involve
heightened risks related to the same factors, in addition to those associated
with the relatively small size and lesser liquidity of these markets. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
9
<PAGE>
ADVISOR CLASS
Templeton Global Bond Fund Advisor Class shares produced a cumulative total
return of 0.80% for the period from January 2, 1997 (commencement of sales)
through August 31, 1997. The price of the Fund's shares decreased 34 cents
($0.34) from $10.16 to $9.82 over the same period.
During this time, shareholders received distributions of 41.59 cents ($0.4159)
per share in dividend income. Distributions will vary depending on income earned
by the Fund and any profits realized from the sales of securities in the
portfolio, as well as the level of the Fund's operating expenses.
The graph on page 11 compares the performance of the Fund's Advisor Class shares
over a ten-year period with that of the unmanaged Salomon Brothers World
Government Bond Index and the Consumer Price Index (CPI), a commonly used
measure of inflation. For periods prior to January 2, 1997, the Fund performance
is that of the Fund's Class I shares, excluding the initial sales charge, but
including Class I expenses. Please remember that the Fund's performance differs
from that of an index because an index is not managed according to any
investment strategy, includes no management expenses, and does not contain cash
(the Fund generally carries a certain percentage of cash at any given time). Of
course, one cannot invest directly in an index, nor is an index representative
of the Fund's portfolio.
Past performance is not predictive of future results.
10
<PAGE>
ADVISOR CLASS
Total Return Comparison
$10,000 Investment (8/31/87 - 8/31/97)
[GRAPH]
<TABLE>
<CAPTION>
TOTAL VALUE SB WGB CPI
- ------------------------ -------------------- ----------------------
<S> <C> <C> <C> <C> <C>
8/31/87 9,573 10,000 $10,000
9/30/87 9,436 -2.81% 9,719 0.52% $10,049
10/30/87 9,217 6.73% 10,373 0.26% $10,075
11/30/87 9,364 3.47% 10,733 0.09% $10,089
12/31/87 9,579 4.29% 11,193 0.00% $10,088
1/29/88 9,626 -0.54% 11,133 0.26% $10,113
2/29/88 9,768 0.87% 11,230 0.26% $10,139
3/31/88 9,892 1.79% 11,431 0.43% $10,183
4/29/88 9,883 -0.49% 11,375 0.52% $10,235
5/31/88 9,883 -0.94% 11,268 0.34% $10,271
6/30/88 9,853 -2.18% 11,022 0.43% $10,315
7/29/88 9,872 -0.61% 10,955 0.42% $10,357
8/31/88 9,788 -1.12% 10,832 0.42% $10,401
9/30/88 9,957 2.58% 11,112 0.67% $10,472
10/31/88 10,196 4.62% 11,625 0.33% $10,506
11/30/88 10,322 1.53% 11,803 0.08% $10,516
12/30/88 10,256 -1.02% 11,683 0.17% $10,533
1/31/89 10,465 -1.46% 11,512 0.50% $10,586
2/28/89 10,337 0.07% 11,520 0.41% $10,628
3/31/89 10,388 -1.39% 11,360 0.58% $10,689
4/28/89 10,502 1.32% 11,510 0.65% $10,760
5/31/89 10,450 -2.11% 11,267 0.57% $10,821
6/30/89 10,555 2.01% 11,494 0.24% $10,848
7/31/89 10,880 4.55% 12,017 0.24% $10,874
8/31/89 10,901 -3.36% 11,613 0.16% $10,892
9/29/89 10,977 1.90% 11,833 0.32% $10,926
10/31/89 10,999 0.84% 11,933 0.48% $10,979
11/30/89 11,010 0.91% 12,041 0.24% $11,004
12/29/89 11,132 1.22% 12,188 0.16% $11.022
1/31/90 11,003 -1.32% 12,027 1.03% $11,126
2/28/90 10,964 -1.54% 11,842 0.47% $11,170
3/30/90 10,941 -0.99% 11,725 0.55% $11,213
4/30/90 10,883 -0.31% 11,689 0.16% $11,248
5/31/90 11,178 3.32% 12,077 0.23% $11,266
6/29/90 11,429 1.83% 12,298 0.54% $11,335
7/31/90 11,799 3.13% 12,683 0.38% $11,388
8/31/90 11,840 -0.78% 12,584 0.92% $11,484
9/28/90 11,846 1.12% 12,725 0.84% $11,562
10/31/90 12,020 4.46% 13,292 0.60% $11,641
11/30/90 12,122 1.66% 13,513 0.22% $11,667
12/31/90 12,233 0.99% 13,647 0.00% $11,710
1/31/91 12,462 2.50% 13,988 0.60% $11,781
2/28/91 12,554 0.03% 13,992 0.15% $11,798
3/29/91 12,271 -3.63% 13,484 0.15% $11,816
4/30/91 12,499 1.54% 13,692 0.15% $11,833
5/31/91 12,588 -0.13% 13,674 0.30% $11,867
6/28/91 12,461 -1.05% 13,530 0.29% $11,904
7/31/91 12,577 2.14% 13,820 0.15% $11,921
8/30/91 12,838 1.94% 14,088 0.29% $11,956
9/30/91 13,310 3.91% 14,639 0.44% $12,009
10/31/91 13,495 1.05% 14,793 0.15% $12,026
11/29/91 13,494 1.56% 15,023 0.29% $12,061
12/31/91 14,056 5.20% 15,805 0.07% $12,070
1/31/92 13,800 -1.78% 15,523 0.15% $12,087
2/28/92 13,719 -0.56% 15,436 0.36% $12,131
3/31/91 13,638 -1.06% 15,273 0.51% $12,192
4/30/92 13,803 0.72% 15,383 0.14% $12,210
5/29/92 14,205 3.07% 15,855 0.14% $12,227
6/30/92 14,623 2.80% 16,299 0.36% $12,271
7/31/92 14,975 2.33% 16,679 0.21% $12,298
8/31/92 15,002 2.80% 17,146 0.28% $12,332
9/30/92 14,419 1.00% 17,317 0.28% $12,367
10/30/92 14,562 -2.72% 16,846 0.35% $12,411
11/30/92 14,418 -1.59% 16,578 0.14% $12,428
12/31/92 14,494 0.60% 16,678 -0.07% $12,420
1/29/93 14,600 1.74% 16,968 0.49% $12,482
2/26/93 14,873 1.97% 17,302 0.35% $12,525
3/31/93 15,148 1.54% 17,569 0.35% $12,570
4/30/93 15,423 2.11% 17,939 0.28% $12,604
5/31/93 15,516 1.00% 18,119 0.14% $12,622
6/30/93 15,408 -0.21% 18,081 0.14% $12,639
7/30/93 15,502 0.28% 18,131 0.00% $12,639
8/31/93 15,754 3.01% 18,677 0.28% $12,674
9/30/93 15,707 1.19% 18,899 0.21% $12,700
10/29/93 15,945 -0.17% 18,867 0.41% $12,753
11/30/93 15,640 -0.71% 18,733 0.07% $12,762
12/31/93 15,994 0.85% 18,892 0.00% $12,761
1/31/94 16,433 0.80% 19,044 0.27% $12,797
2/28/94 16,025 -0.65% 18,920 0.34% $12,841
3/31/94 15,433 -0.14% 18,893 0.34% $12,885
4/29/94 15,384 0.11% 18,914 0.14% $12,903
5/31/94 15,300 -0.88% 18,748 0.07% $12,911
6/30/94 15,066 1.44% 19,018 0.34% $12,955
7/29/94 15,251 0.80% 19,170 0.27% $12,989
8/31/94 15,404 -0.35% 19,103 0.40% $13,042
9/30/94 15,353 0.72% 19,240 0.27% $13,077
10/31/94 15,525 1.60% 19,548 0.07% $13,086
11/30/94 15,421 -1.38% 19,278 0.13% $13,104
12/30/94 15,421 0.28% 19,332 0.00% $13,104
1/31/95 15,456 2.10% 19,738 0.40% $13,155
2/28/95 15,703 2.56% 20,243 0.40% $13,208
3/31/95 15,828 5.94% 21,446 0.33% $13,252
4/28/95 16,201 1.85% 21,843 0.33% $13,296
5/31/95 16,722 2.82% 22,459 0.20% $13,322
6/30/95 16,757 0.59% 22,591 0.20% $13,348
7/31/95 16,938 0.24% 22,645 0.00% $13,348
8/31/95 17,030 -3.44% 21,866 0.26% $13,384
9/29/95 17,359 2.23% 22,354 0.20% $13,409
10/31/95 17,672 0.74% 22,519 0.33% $13,454
11/30/95 17,838 1.13% 22,774 -0.07% $13,453
12/29/95 18,229 1.05% 23,013 -0.07% $13,444
1/31/96 18,304 -1.23% 22,730 0.59% $13,523
2/29/96 18,172 -0.51% 22,614 0.32% $13,567
3/29/96 18,210 -0.14% 22,582 0.52% $13,637
4/30/96 18,304 -0.40% 22,492 0.39% $13,689
5/31/96 18,419 0.02% 22,497 0.19% $13,715
6/28/96 18,669 0.79% 22,674 0.06% $13,724
7/31/96 18,726 1.92% 23,110 0.19% $13,750
8/30/96 18,977 0.39% 23,200 0.19% $13,777
9/30/96 19,270 0.41% 23,295 0.32% $13,821
10/31/96 19,720 1.87% 23,730 0.32% $13,864
11/29/96 20,231 1.32% 24,044 0.19% $13,891
12/31/96 20,271 -0.81% 23,849 0.00% $13,891
1/31/97 20,013 -2.67% 23,212 0.32% $13,935
2/28/97 19,952 -0.75% 23,038 0.31% $13,976
3/31/97 19,772 -0.76% 22,863 0.25% $14,018
4/30/97 19,813 -0.88% 22,662 0.13% $14,032
5/30/97 19,954 2.72% 23,278 -0.06% $14,018
6/30/97 20,219 1.19% 23,555 0.12% $14,032
7/31/97 20,300 -0.78 23,371 0.12% $14,046
8/29/97 20,280 -0.06 23,357 0.19% $14,074
TOTAL RETURN 102.80% 133.57% 40.74%
</TABLE>
<TABLE>
<CAPTION>
SINCE
INCEPTION
OF THE FUND
1-YEAR 5-YEAR 10-YEAR (9/18/86)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Average Annual Total Return**** 7.04% 6.25% 7.81% 8.21%
</TABLE>
THE HISTORICAL PERFORMANCE DATA SHOWN PERTAINS ONLY TO THE FUND'S ADVISOR CLASS
SHARES. THE FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND
EXPENSES, WHICH AFFECT THEIR PERFORMANCE. PLEASE SEE THE PROSPECTUS FOR MORE
DETAILS.
*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of dividends and capital gains at net asset
value. Effective January 2, 1997, the Fund began offering Advisor Class shares
to certain eligible investors as described in its prospectus. This share class
does not have sales charges or Rule 12b-1 plans. Performance quotations have
been calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the Fund's Class I performance, excluding the effect of the Class I
maximum initial sales charge, but including the effect of the Class I expenses,
including Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures
reflect actual Advisor Class performance including the deduction of all fees and
expenses applicable only to that class. This was a period of generally rising
security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Source: U.S. Bureau of Labor Statistics (9/30/97).
****Please see table on page 12.
Past performance is not predictive of future results.
11
<PAGE>
TEMPLETON GLOBAL BOND FUND
ADVISOR CLASS
Periods Ended 8/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
THE FUND
1-YEAR 5-YEAR 10-YEAR (9/18/86)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 7.04% 35.53% 112.21% 137.36%
Average Annual Total Return(1) 7.04% 6.25% 7.81% 8.21%
Value of $10,000 Investment(2) $10,704 $13,540 $21,219 $23,735
</TABLE>
Effective January 2, 1997, the Fund began offering Advisor Class shares to
certain eligible investors as described in its prospectus. This share class does
not have sales charges or Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the Fund's Class I performance, excluding the effect of the Class I maximum
initial sales charge, but including the effect of the Class I expenses,
including Rule 12b-1 fees; and (b) for periods after January 1, 1997, figures
reflect actual Advisor Class performance, including deduction of all charges and
fees applicable to that class. Since January 2, 1997 (commencement of sales),
the cumulative total return of Advisor Class shares was 0.80%.
(1) Cumulative total returns represent the change in value of an investment over
the indicated periods. Average annual total returns represent the average annual
change in value of an investment over the indicated periods.
(2) These figures represent the value of a hypothetical $10,000 investment in
the Fund over the specified periods.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Investment return and principal value will fluctuate with market
conditions, currency volatility, and the economic, social, and political
climates in countries where investments are made. Emerging markets involve
heightened risks related to the same factors, in addition to those associated
with the relatively small size and lesser liquidity of these markets. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
12
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
1997 1996 1995 1994+ 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year................... $9.76 $9.32 $9.05 $9.96 $10.55
--------------------------------------------------------------------
Income from investment operations:
Net investment income............................... .63 .69 .73 .72 .82
Net realized and unrealized gains (losses).......... .03 .35 .17 (.91) (.35)
--------------------------------------------------------------------
Total from investment operations..................... .66 1.04 .90 (.19) .47
--------------------------------------------------------------------
Less distributions:
Dividends from net investment income................ (.60) (.58) (.54) (.53) (.76)
Distributions from net realized gains............... -- -- -- (.07) (.30)
Tax basis return of capital......................... -- (.02) (.09) (.12) --
--------------------------------------------------------------------
Total distributions.................................. (.60) (.60) (.63) (.72) (1.06)
--------------------------------------------------------------------
Net asset value, end of year......................... $9.82 $9.76 $9.32 $9.05 $ 9.96
====================================================================
Total return*........................................ 6.87% 11.44% 10.43% (2.01)% 5.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)...................... $198,131 $185,596 $191,301 $205,482 $206,667
Ratios to average net assets:
Expenses............................................ 1.15% 1.13% 1.18% 1.18% 1.01%
Net investment income............................... 6.41% 7.09% 7.99% 7.50% 8.45%
Portfolio turnover rate.............................. 166.69% 109.40% 101.12% 139.23% 266.93%
</TABLE>
*Total return does not reflect sales commissions.
+Based on weighted average shares outstanding.
13
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1997 1996 1995+
-----------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year...................................... $9.77 $9.31 $9.05
-----------------------------------------------
Income from investment operations:
Net investment income.................................................. .57 .61 .21
Net realized and unrealized gains...................................... .05 .41 .24
-----------------------------------------------
Total from investment operations........................................ .62 1.02 .45
-----------------------------------------------
Less distributions:
Dividends from net investment income................................... (.56) (.54) (.15)
Tax basis return of capital............................................ -- (.02) (.04)
-----------------------------------------------
Total distributions..................................................... (.56) (.56) (.19)
-----------------------------------------------
Net asset value, end of year............................................ $9.83 $9.77 $9.31
===============================================
Total return*........................................................... 6.44% 11.20% 5.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000's)......................................... $16,629 $6,563 $2,043
Ratios to average net assets:
Expenses............................................................... 1.54% 1.56% 1.57%**
Net investment income.................................................. 5.96% 6.69% 7.47%**
Portfolio turnover rate................................................. 166.69% 109.40% 101.12%
</TABLE>
*Total return does not reflect sales commissions or contingent deferred sales
charge and is not annualized.
**Annualized
+For the period May 1, 1995 (effective date) to August 31, 1995.
14
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
--------------
1997+
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period............................................................. $10.16
-------
Income from investment operations:
Net investment income........................................................................... .42
Net realized and unrealized (loss).............................................................. (.34)
-------
Total from investment operations................................................................. .08
-------
Less distributions:
Dividends from net investment income............................................................ (.42)
-------
Net asset value, end of period................................................................... $ 9.82
==============
Total return*.................................................................................... 0.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's)................................................................ $12,742
Ratios to average net assets:
Expenses........................................................................................ 0.88%**
Net investment income........................................................................... 6.76%**
Portfolio turnover rate.......................................................................... 166.69%
</TABLE>
*Total return is not annualized.
**Annualized
+For the period January 2, 1997 (effective date) to August 31, 1997.
See notes to financial statements.
15
<PAGE>
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM INVESTMENTS 89.3%
ARGENTINA 2.6%
Perez Companc SA, 144A, 8.125%, 7/15/07................................ $ 5,000,000 $ 4,996,874
Republic of Argentina, 8.375%, 12/20/03................................ 940,000 932,950
------------
5,929,824
------------
AUSTRALIA 4.0%
Government of Australia, 10.00%, 10/15/02.............................. 10,611,000 AUD 9,148,563
------------
CANADA 8.1%
Government of Canada,
10.50%, 7/01/00...................................................... 10,600,000 CAD 8,721,036
10.50%, 3/01/01...................................................... 6,235,000 CAD 5,242,771
10.00%, 5/01/02...................................................... 5,135,000 CAD 4,381,958
------------
18,345,765
------------
CHILE 1.8%
Compania Sud Americana de Vapores SA,
7.375%, 12/08/03..................................................... 1,500,000 1,511,250
7.375%, 12/08/03..................................................... 2,500,000 2,518,750
------------
4,030,000
------------
COLOMBIA 1.1%
Republic of Colombia, 7.25%, 2/23/04................................... 2,500,000 2,421,875
------------
DENMARK 3.8%
Government of Denmark, 8.00%, 5/15/03.................................. 18,495,000 DKK 3,016,018
Kingdom of Denmark, 9.00%, 11/15/00.................................... 35,140,000 DKK 5,722,176
------------
8,738,194
------------
GERMANY 7.8%
Federal Republic of Germany,
8.00%, 7/22/02....................................................... 8,605,000 DEM 5,399,393
7.75%, 2/21/00 Bundesrep............................................. 20,705,000 DEM 12,412,678
------------
17,812,071
------------
HONG KONG 0.9%
PIV Investment Finance (Cayman) Ltd., 4.50%, 12/01/00, conv............ 2,250,000 2,092,500
------------
INDIA 0.3%
Essar Gujarat Ltd., 144A, 8.498%, 7/15/99, FRN......................... 775,000 747,875
------------
INDONESIA 0.9%
PT Astra International, 9.75%, 4/29/01................................. 2,000,000 2,130,000
------------
ITALY 8.2%
Buoni Poliennali Del Tes,
12.00%, 1/17/99...................................................... 2,900,000,000 ITL 1,753,354
10.50%, 11/01/00..................................................... 3,530,000,000 ITL 2,233,431
10.00%, 8/01/03...................................................... 9,460,000,000 ITL 6,248,439
7.75%, 11/01/06...................................................... 3,450,000,000 ITL 2,089,014
Government of Italy, 10.50%, 7/15/00................................... 10,205,000,000 ITL 6,402,945
------------
18,727,183
------------
</TABLE>
16
<PAGE>
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG TERM INVESTMENTS (CONT.)
SOUTH KOREA 0.4%
Pohang Iron & Steel, 6.625%, 7/01/03................................... $ 1,000,000 $ 972,898
------------
SPAIN 6.8%
Government of Spain,
12.25%, 3/25/00...................................................... 952,710,000 ESP 7,269,399
10.10%, 2/28/01...................................................... 522,900,000 ESP 3,932,213
10.90%, 8/30/03...................................................... 237,560,000 ESP 1,945,586
Santander Finance Ltd., B, pfd......................................... 91,700 2,309,694
------------
15,456,892
------------
SWEDEN 3.3%
Kingdom of Sweden,
13.00%, 6/15/01...................................................... 11,100,000 SWE 1,750,750
10.25%, 5/05/03...................................................... 23,000,000 SWE 3,490,614
8.00%, 8/15/07....................................................... 15,400,000 SWE 2,149,850
------------
7,391,214
------------
UNITED KINGDOM 4.9%
United Kingdom,
8.00%, 12/07/00...................................................... 5,550,000 GBP 9,221,487
7.00%, 11/06/01...................................................... 1,175,000 GBP 1,900,528
------------
11,122,015
------------
UNITED STATES 33.4%
+Acadia Partners LP.................................................... 999,667 1,121,226
General RE Corp........................................................ 1,055 204,538
+Holophane Corp........................................................ 755 17,554
+Penobscot Partners LP................................................. 333 5,318
+Plum Creek Timber Co. LP.............................................. 265 8,828
Texas Utilities Holding Co............................................. 70,000 2,441,250
U.S. Treasury Bond, 6.375%, 8/15/02.................................... 8,575,000 8,633,962
U.S. Treasury Note 6.25%, 8/31/00...................................... 12,920,000 12,976,538
6.125%, 7/31/00...................................................... 14,251,000 14,268,828
6.625%, 4/30/02...................................................... 22,605,000 22,958,226
7.25%, 8/15/04....................................................... 12,584,000 13,225,004
------------
75,861,272
------------
VENEZUELA 1.0%
Venezuela Front Load Interest Reduction Bond, A, 3/31/07............... 2,380,952 2,233,631
------------
TOTAL LONG TERM INVESTMENTS (COST $207,708,498)........................ 203,161,772
============
</TABLE>
17
<PAGE>
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1997 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT* VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM OBLIGATIONS 8.1%
Deutsche Bank AG, 5.61%, 9/2/97..................................... $ 10,408,000 $ 10,408,000
Federal Home Loan Mortgage Corp., 9/22/97........................... 3,950,000 3,938,063
Federal National Mortgage Assn., 9/10/97............................ 3,995,164 3,995,164
------------
TOTAL SHORT TERM OBLIGATIONS (COST $18,338,945)..................... 18,341,227
------------
TOTAL INVESTMENTS 97.4% (COST $226,047,443)......................... 221,502,999
OTHER ASSETS, LESS LIABILITIES 2.3%................................. 5,333,966
NET EQUITY IN FORWARD CONTRACTS 0.3%................................ 665,622
------------
TOTAL NET ASSETS 100.0%............................................. $227,502,587
============
</TABLE>
CURRENCY ABBREVIATIONS:
AUD -- Australia
CAD -- Canada
DEM -- Germany
DKK -- Denmark
ESP -- Spain
GBP -- United Kingdom
ITL -- Italy
SWE -- Sweden
*Securities traded in U.S. dollars unless otherwise indicated.
+Non-income producing.
See notes to financial statements.
18
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $226,047,443)............................. $221,502,999
Cash................................................................................ 3,600
Receivables:
Investment securities sold......................................................... 77,638
Fund shares sold................................................................... 1,409,716
Interest........................................................................... 4,483,840
Unrealized gain on forward foreign currency contracts (Note 6)...................... 1,599,361
------------
Total assets.................................................................... 229,077,154
------------
Liabilities:
Payables:
Capital shares redeemed............................................................ 330,868
Accrued expenses................................................................... 309,960
Unrealized loss on forward foreign currency contracts (Note 6)...................... 933,739
------------
Total liabilities............................................................... 1,574,567
------------
Net assets, at value........................................................... $227,502,587
============
Net assets consist of:
Undistributed net investment income................................................. $ 742,866
Net unrealized depreciation......................................................... (3,930,590)
Accumulated net realized loss....................................................... (794,805)
Beneficial shares................................................................... 231,485,116
------------
Net assets, at value............................................................ $227,502,587
============
CLASS I:
Net asset value per share ($198,131,330 / 20,167,728 shares outstanding)............ $9.82
------------
Maximum offering price per share ($9.82 / 95.75%)................................... $10.26
------------
CLASS II:
Net asset value per share ($16,629,205 / 1,691,845 shares outstanding).............. $9.83
------------
Maximum offering price per share ($9.83 / 99.00%)................................... $9.93
------------
ADVISOR CLASS:
Net asset value and offering price per share ($12,742,052 / 1,297,699 shares
outstanding)...................................................................... $9.82
============
</TABLE>
See notes to financial statements.
19
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997
<TABLE>
<S> <C> <C>
Investment income:
(net of $175,649 foreign taxes withheld)
Interest................................................................ $15,194,749
Dividends............................................................... 700,388
-----------
Total investment income............................................. $15,895,137
Expenses:
Management fees (Note 3)................................................ 1,046,390
Administrative fees (Note 3)............................................ 309,301
Distribution Fees (Note 3)
Class I................................................................ 492,733
Class II............................................................... 74,398
Transfer agent fees (Note 3)............................................ 288,000
Custodian fees.......................................................... 41,500
Reports to shareholders................................................. 81,500
Professional fees (Note 3).............................................. 33,100
Registration and filing fees............................................ 53,000
Trustees' fees and expenses............................................. 25,818
Other................................................................... 4,112
-----------
Total expenses...................................................... 2,449,852
-----------
Net investment income.............................................. 13,445,285
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments............................................................ (1,323,532)
Foreign currency transactions.......................................... 3,879,778
-----------
Net realized gain....................................................... 2,556,246
Net unrealized appreciation (depreciation) on:
Investments............................................................ (2,930,262)
Translation of other assets and liabilities denominated in foreign
currencies........................................................... 568,514
-----------
Net unrealized depreciation............................................. (2,361,748)
-----------
Net realized and unrealized gain......................................... 194,498
-----------
Net increase in net assets resulting from operations..................... $13,639,783
===========
</TABLE>
See notes to financial statements.
20
<PAGE>
TEMPLETON GLOBAL BOND FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income:.............................................. $ 13,445,285 $ 13,711,029
Net realized gain (loss) from investments and foreign currency
transactions....................................................... 2,556,246 (163,615)
Net unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign
currencies......................................................... (2,361,748) 7,528,543
---------------------------------
Net increase in net assets resulting from operations............ 13,639,783 21,075,957
Distributions to shareholders from:
Net investment income:
Class I............................................................ (11,873,359) (11,385,814)
Class II........................................................... (653,900) (224,274)
Advisor Class...................................................... (175,160) --
Tax basis return of capital:
Class I............................................................ -- (377,284)
Class II........................................................... -- (7,432)
Capital share transactions (Note 2)
Class I............................................................ 11,375,603 (14,645,026)
Class II........................................................... 10,137,187 4,379,078
Advisor Class...................................................... 12,893,491 --
---------------------------------
Net increase (decrease) in net assets........................... 35,343,645 (1,184,795)
Net assets:
Beginning of year.................................................... 192,158,942 193,343,737
---------------------------------
End of year.......................................................... $227,502,587 $192,158,942
=================================
Undistributed net investment income included in net assets:
Beginning of year.................................................... $ -- $ --
=================================
End of year.......................................................... $ 742,866 $ --
=================================
</TABLE>
See notes to financial statements.
21
<PAGE>
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Global Bond Fund (the Fund), is a separate, non-diversified series of
Templeton Income Trust (the Trust), which is an open-end, investment company
registered under the Investment Company Act of 1940. The Fund seeks current
income with capital appreciation and growth of income through a flexible policy
of investing in debt securities, governments and government agencies of various
nations throughout the world. The following summarizes the Fund's significant
accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
c. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities and income items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. When the Fund purchases or sells foreign securities it will customarily
enter into a foreign exchange contract to minimize foreign exchange risk from
the trade date to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from change in market prices on securities held. Such changes are included
in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the differences between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
d. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
22
<PAGE>
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (cont.)
1. SUMMARY OF ACCOUNTING POLICIES (CONT.)
e. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities are recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
f. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The Fund offers three classes of shares: Class I, Class II and Advisor Class
shares. The shares differ by their initial sales load, distribution fees, and
voting rights on matters affecting a single class and the exchange privilege of
each class.
At August 31, 1997, there were an unlimited number of shares of beneficial
interest authorized ($.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
CLASS I SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................ 8,683,958 $ 86,215,013 3,539,465 $ 34,194,502
Shares issued on reinvestment of distributions............. 817,138 8,116,791 841,801 8,104,725
Shares redeemed............................................ (8,348,405) (82,956,201) (5,902,799) (56,944,253)
-------------------------------------------------------------
Net increase (decrease).................................... 1,152,691 $ 11,375,603 (1,521,533) $(14,645,026)
=============================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
CLASS II SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold................................................ 1,214,404 $ 12,072,843 584,301 $ 5,648,608
Shares issued on reinvestment of distributions............. 56,414 559,590 18,544 179,041
Shares redeemed............................................ (250,933) (2,495,246) (150,240) (1,448,571)
-------------------------------------------------------------
Net increase............................................... 1,019,885 $ 10,137,187 452,605 $ 4,379,078
=============================================================
</TABLE>
23
<PAGE>
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (cont.)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1997*
-----------------------------
ADVISOR CLASS SHARES AMOUNT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold............................................. 1,727,048 $ 17,132,789
Shares issued on reinvestment of distributions.......... 5,975 58,875
Shares redeemed......................................... (435,324) (4,298,173)
-----------------------------
Net increase............................................ 1,297,699 $ 12,893,491
=============================
</TABLE>
*Effective date of Advisor Class shares was January 2, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers of Templeton Investment Counsel,
Inc. (TICI), Franklin Templeton Services, Inc. (FT Services), Franklin Templeton
Distributors, Inc. (Distributors), and Franklin Templeton Investor Services,
Inc. (Investor Services), the Fund's investment manager, administrative manager,
principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
---------------------------------------------------------------------------
<C> <S>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
The Fund pays FT Services its allocated share of an administrative fee based on
the Trust's average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
---------------------------------------------------------------------------
<C> <S>
0.15% First $200 million
0.135% Next $500 million
0.10% Next $500 million
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% and 0.65% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares. Under the Class I distribution plan, costs
exceeding the maximum may be reimbursed in subsequent periods. At August 31,
1997 unreimbursed costs were $23,198. Distributors paid net commissions on sales
of the Fund's shares and received contingent deferred sales charges for the year
of $2,666 and $4,182, respectively.
During the year ended August 31, 1997, legal fees of $3,442 were paid to a law
firm in which an officer of the Trust is a partner.
24
<PAGE>
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (cont.)
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1997, aggregated $345,429,853 and $322,346,812, respectively.
5. INCOME TAXES
At August 31, 1997, the net unrealized depreciation, based on the cost of
investments for income tax purposes of $226,049,232, was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $1,775,472
Unrealized depreciation (6,321,705)
----------
Net unrealized depreciation $(4,546,233)
==========
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risks,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At August 31,
1997, the Fund has outstanding forward exchange contracts for the sale of
currencies as set out below. These contracts are reported in the financial
statements at the Fund's net equity, as measured by the difference between the
forward exchange rates at the reporting date and the forward exchange rates at
the date of entry into the contract.
<TABLE>
<S> <C>
Unrealized gain on offsetting forward exchange contracts.... $1,599,361
Unrealized loss on offsetting forward exchange contracts.... (933,739)
----------
Net unrealized gain on forward exchange contracts........... $ 665,622
==========
</TABLE>
25
<PAGE>
TEMPLETON GLOBAL BOND FUND
Independent Auditor's Report
THE BOARD OF TRUSTEES AND SHAREHOLDERS
TEMPLETON GLOBAL BOND FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton Global Bond Fund, a series of
Templeton Income Trust, as of August 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the periods indicated in the accompanying financial statements. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Global Bond Fund as of August 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
September 26, 1997
26
<PAGE>
TEMPLETON GLOBAL BOND FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $64,000 as a capital gain dividend for the fiscal year ended August
31, 1997.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
2.66% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1997.
27
<PAGE>
This page intentionally left blank
<PAGE>
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
SHAREHOLDER SERVICES
1-800/632-2301
FUND INFORMATION
1-800/342-5236
This report must be preceded or accompanied by the current prospectus for the
Templeton Global Bond Fund, which contains more complete information including
risk factors, charges and expenses. Like any investment in securities, the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
Investment Manager, which will not always be profitable or wise. The Fund and
Fund investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not invest
in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
406 A97 10/97
TL406 A97
[GRAPHIC] Printed on recycled paper
<PAGE>
