ANNUAL REPORT
[PHOTO]
TEMPLETON GLOBAL BOND FUND
AUGUST 31, 1998
[LOGO] FRANKLIN TEMPLETON
PAGE
[CELEBRATING 50 YEARS GRAPHIC]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds which are managed by many of the investment professionals he
selected and trained.
[PHOTO OF THOMAS J. LATTA]
THOMAS J. LATTA
Portfolio Manager
Templeton Global Bond Fund
PAGE
SHAREHOLDER LETTER
Your Fund's Objective: 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 may also invest in
preferred stock, common stocks which pay dividends, income-producing securities
convertible into common stock of such companies, and depository receipts.
Dear Shareholder:
This annual report of Templeton Global Bond Fund covers the fiscal year ended
August 31, 1998. For global bond investors, the period was marked by three
trends: one, the continued decline in prices of raw materials and commodities,
which contributed to a favorable global inflation environment; two, the
emergence of periodic but persistent crises in developing countries; and three,
increasing bond prices in the world's major developed markets.
During the period, much of the world experienced relatively healthy economic
growth. In the U.S., for example, expansion continued for the sixth consecutive
year, and unemployment fell to levels not seen since the early 1970s. European
economies
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 21 of
this report.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Shareholder Letter ............. 1
Performance Summaries
Class I ..................... 6
Class II .................... 10
Advisor Class ............... 14
Financial Highlights &
Statement of Investments ....... 18
Financial Statements ........... 24
Notes to Financial
Statements ..................... 27
Independent Auditor's Report ... 32
Tax Designation ................ 33
</TABLE>
[PYRAMID GRAPH]
PAGE
GEOGRAPHIC DISTRIBUTION
BASED ON TOTAL NET ASSETS
8/31/98
<TABLE>
<S> <C>
UNITED STATES 39.5%
EUROPE 37.1%
CANADA 7.0%
LATIN AMERICA 5.0%
AUSTRALIA &
NEW ZEALAND 5.0%
ASIA 0.6%
SHORT-TERM
INVESTMENTS &
OTHER NET ASSETS 5.8%
</TABLE>
began to emerge from a sluggish growth environment. Those of Finland, Spain and
the Netherlands grew quite rapidly during the fiscal year, as the delayed impact
of low long-term interest rates began to stimulate economic activity. By the end
of the reporting period, accelerating growth had spread to Germany, France, and
Italy. Many continental European markets also benefited from a convergence in
interest rates in countries seeking membership in the European Economic Union.
Inflation in Europe and the U.S. was tame during the period, which surprised
many economists because growth in the two regions was relatively rapid. This
benign inflation environment was largely responsible for the decline in global
interest rates and corresponding rise in bond prices. For example, 10-year U.S.
Treasury bond yields declined from 6.30% to 5.05% during the reporting period,
while yields on similar government bonds in Germany declined from 5.69% to
4.22%.(1)
Japan, where banks were hamstrung by an enormous load of bad debt, presented a
different picture. Japanese government policy makers struggled throughout the
reporting period to restructure their economy, but they failed and Japan
remained in a recession. Its poor demand for products from other Asian markets
and the yen's persistent weakness put enormous pressure on the economies of
developing Asian countries.
Toward the end of the reporting period, Russia also came under tremendous
pressure because of its precarious debt financing. In order to establish at
least a semblance of stability, it devalued the ruble and declared a moratorium
on debt service. These conditions influenced debt instruments of other emerging
markets, including
1. Source: Bloomberg.
2
PAGE
those of Latin America. These crises also affected developed economies that were
highly dependent on commodity exports or trade with emerging economies. Canada,
Australia and New Zealand were influenced in this manner and, by the close of
the period, experienced rising interest rates and moderate declines in their
currencies relative to the U.S. dollar.
Responding to these conditions, global bond investors progressively reduced
their holdings of emerging market debt securities and looked for a "safe haven"
in higher quality, developed market government bonds. Within this environment,
Templeton Global Bond Fund - Class I produced a 2.82% cumulative total return
for the one-year period ended August 31, 1998, as discussed in the Performance
Summary on page 6.
During the period, we attempted to maximize the Fund's return by allocating
about 95% of total net assets to intermediate- and long-term bonds in developed
markets and less than 5% to what we believed to be the highest quality and most
liquid bonds available in emerging markets. In our opinion, this combination
appeared to offer the possibility of higher long-term returns with modestly
higher short-term volatility. However, our allocation to emerging market bonds
did hamper the Fund's performance modestly as these bonds generally
underperformed higher-quality bonds from developed markets.
The Fund's geographic distribution was relatively stable throughout the
reporting period. Our allocations to North American and European regions were
approximately 52% and 37%, respectively, on August 31, 1998. Within Europe, the
Fund's allocation in Italy was reduced by about 2% to 6.5% of total net assets
and in the United Kingdom was increased by over 3% to 8.2%. We also initiated a
small position of 1.6% of total net assets in New Zealand.
3
PAGE
PORTFOLIO BREAKDOWN
BASED ON TOTAL NET ASSETS
8/31/98
<TABLE>
<S> <C>
GOVERNMENT BONDS 87.2%
CORPORATE BONDS 5.4%
COMMON STOCKS 1.5%
LIMITED PARTNERSHIPS 0.1%
SHORT-TERM INVESTMENTS
& OTHER NET ASSETS 5.8%
</TABLE>
Near the end of the reporting period, we increased our use of foreign currency
hedging because we believed that the U.S. dollar would rise in value against
other currencies as investors sought a "safe haven" during Russia's and Japan's
economic crises. Our hedging activities were undertaken in an effort to minimize
the loss of value arising from changes in currency exchange rates for the Fund's
European currency-denominated bonds. At the end of the period, the Fund's net
U.S. dollar exposure was 86.1%, up from 52.1% at the end of the previous fiscal
year. The net exposure to European currencies stood at only 8.0% on August 31,
1998, down from 34.9% on August 31, 1997.
From our vantage point, the crisis in the emerging markets is not over. We
believe that there is likely to be continued volatility in both emerging and
developed markets until the impact of the crisis is better understood. But
increased volatility in lower-rated bond issues may present an opportunity for
investors with medium- to long-term investment horizons and the willingness to
tolerate moderately higher risk. In our opinion, another critical issue for
global interest rates will be the balance between global growth and inflation.
We believe global economic growth is likely to decline modestly and global
inflation may be quite tame in the near future. In our opinion, this would be an
excellent environment for high quality bonds and contributes to our positive
long-term outlook for the Fund.
Please remember this discussion reflects our views, opinions and portfolio
holdings as of August 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the
4
PAGE
Fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you better understand our investment and
management philosophy.
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 emerging markets. These special risks and
other considerations are discussed in the Fund's prospectus.
We thank you for your participation in Templeton Global Bond Fund and look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/THOMAS J. LATTA
Thomas J. Latta
Portfolio Manager
Templeton Global Bond Fund
5
PAGE
PERFORMANCE SUMMARY
CLASS I
Templeton Global Bond Fund - Class I produced a 2.82% cumulative total return
for the one-year period ended August 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the 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 9, the
Fund's Class I shares delivered a 143.67% cumulative total return since
inception on September 18, 1986.
The Fund's share price, as measured by net asset value, decreased 33 cents
($0.33), from $9.82 on August 31, 1997, to $9.49 on August 31, 1998. During the
reporting period, shareholders received per-share distributions of 55.0 cents
($0.5500) in income dividends and 5.5 cents ($0.0550) in long-term capital
gains. Distributions will vary depending on income earned by the Fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the Fund's operating expenses.
Past performance is not predictive of future results.
6
PAGE
The graph on page 8 compares the performance of the Fund's Class I shares over a
10-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.
Please remember, the Fund's performance differs from that of an index because an
index is not managed according to any investment strategy, does not contain cash
(the Fund generally carries a certain percentage of cash at any given time), and
includes no sales charges or management or operating expenses. 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.
7
PAGE
CLASS I
TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (9/1/88 - 8/31/98)
[LINE GRAPH]
The following line compares the performance of Templeton Global Bond Fund's
Class I shares to that of the Salomon Brothers World Government Bond Index and
to the Consumer Price Index based on a $10,000 investment from 9/1/88 to
8/31/98.
<TABLE>
<CAPTION>
Templeton Global Bond Salomon CPI
Fund -Class I* World Gov't
Bond Index
- ----------------------------------------------------------------------
<S> <C> <C> <C>
9/1/88 $9,574 $10,000 $10,000
Sep 88 $9,739 $10,258 $10,068
Oct-88 $9,973 $10,732 $10,101
Nov-88 $10,096 $10,896 $10,110
Dec-88 $10,032 $10,785 $10,127
Jan-89 $10,236 $10,628 $10,178
Feb-89 $10,110 $10,635 $10,218
Mar-89 $10,160 $10,487 $10,277
Apr-89 $10,272 $10,626 $10,345
May-89 $10,221 $10,401 $10,404
Jun-89 $10,324 $10,610 $10,429
Jul-89 $10,641 $11,094 $10,455
Aug-89 $10,662 $10,722 $10,472
Sep-89 $10,736 $10,924 $10,505
Oct-89 $10,758 $11,016 $10,556
Nov-89 $10,769 $11,116 $10,580
Dec-89 $10,888 $11,253 $10,597
Jan-90 $10,762 $11,104 $10,706
Feb-90 $10,723 $10,933 $10,756
Mar-90 $10,701 $10,825 $10,815
Apr-90 $10,645 $10,792 $10,833
May-90 $10,933 $11,151 $10,857
Jun-90 $11,178 $11,356 $10,916
Jul-90 $11,540 $11,712 $10,958
Aug-90 $11,580 $11,620 $11,058
Sep-90 $11,586 $11,749 $11,151
Oct-90 $11,756 $12,274 $11,218
Nov-90 $11,856 $12,478 $11,243
Dec-90 $11,965 $12,602 $11,243
Jan-91 $12,189 $12,917 $11,311
Feb-91 $12,279 $12,921 $11,327
Mar-91 $12,003 $12,452 $11,344
Apr-91 $12,226 $12,643 $11,360
May-91 $12,313 $12,627 $11,393
Jun-91 $12,188 $12,496 $11,428
Jul-91 $12,302 $12,763 $11,445
Aug-91 $12,557 $13,011 $11,478
Sep-91 $13,018 $13,519 $11,529
Oct-91 $13,199 $13,661 $11,546
Nov-91 $13,199 $13,876 $11,579
Dec-91 $13,749 $14,596 $11,588
Jan-92 $13,498 $14,335 $11,604
Feb-92 $13,419 $14,254 $11,647
Mar-92 $13,339 $14,103 $11,705
Apr-92 $13,501 $14,203 $11,722
May-92 $13,893 $14,639 $11,738
Jun-92 $14,303 $15,049 $11,781
Jul-92 $14,647 $15,400 $11,806
Aug-92 $14,674 $15,831 $11,839
Sep-92 $14,103 $15,989 $11,873
Oct-92 $14,243 $15,555 $11,915
Nov-92 $14,102 $15,307 $11,931
Dec-92 $14,177 $15,399 $11,924
Jan-93 $14,280 $15,666 $11,983
Feb-93 $14,547 $15,974 $12,024
Mar-93 $14,816 $16,219 $12,067
Apr-93 $15,085 $16,562 $12,100
May-93 $15,176 $16,728 $12,117
Jun-93 $15,070 $16,693 $12,134
Jul-93 $15,162 $16,740 $12,133
Aug-93 $15,409 $17,243 $12,167
Sep-93 $15,363 $17,448 $12,192
Oct-93 $15,596 $17,418 $12,243
Nov-93 $15,298 $17,293 $12,251
Dec-93 $15,644 $17,441 $12,251
Jan-94 $16,073 $17,581 $12,285
Feb-94 $15,674 $17,466 $12,328
Mar-94 $15,095 $17,441 $12,370
Apr-94 $15,047 $17,461 $12,386
May-94 $14,965 $17,308 $12,394
Jun-94 $14,736 $17,558 $12,436
Jul-94 $14,917 $17,698 $12,469
Aug-94 $15,066 $17,636 $12,521
Sep-94 $15,017 $17,764 $12,554
Oct-94 $15,184 $18,049 $12,563
Nov-94 $15,083 $17,801 $12,579
Dec-94 $15,083 $17,850 $12,579
Jan-95 $15,118 $18,224 $12,629
Feb-95 $15,359 $18,691 $12,679
Mar-95 $15,481 $19,801 $12,721
Apr-95 $15,846 $20,168 $12,763
May-95 $16,356 $20,735 $12,789
Jun-95 $16,390 $20,857 $12,814
Jul-95 $16,567 $20,906 $12,814
Aug-95 $16,657 $20,188 $12,848
Sep-95 $16,979 $20,639 $12,872
Oct-95 $17,285 $20,792 $12,915
Nov-95 $17,447 $21,028 $12,906
Dec-95 $17,830 $21,248 $12,897
Jan-96 $17,903 $20,985 $12,973
Feb-96 $17,774 $20,878 $13,015
Mar-96 $17,811 $20,849 $13,082
Apr-96 $17,903 $20,766 $13,132
May-96 $18,015 $20,771 $13,157
Jun-96 $18,260 $20,934 $13,166
Jul-96 $18,316 $21,335 $13,191
Aug-96 $18,562 $21,418 $13,216
Sep-96 $18,848 $21,505 $13,258
Oct-96 $19,288 $21,908 $13,300
Nov-96 $19,788 $22,196 $13,325
Dec-96 $19,827 $22,017 $13,325
Jan-97 $19,574 $21,428 $13,367
Feb-97 $19,515 $21,268 $13,407
Mar-97 $19,339 $21,106 $13,441
Apr-97 $19,379 $20,921 $13,457
May-97 $19,517 $21,490 $13,449
Jun-97 $19,776 $21,746 $13,465
Jul-97 $19,856 $21,577 $13,481
Aug-97 $19,836 $21,564 $13,506
Sep-97 $20,160 $22,023 $13,540
Oct-97 $20,242 $22,480 $13,574
Nov-97 $20,200 $22,135 $13,566
Dec-97 $20,190 $22,068 $13,550
Jan-98 $20,211 $22,283 $13,574
Feb-98 $20,314 $22,464 $13,601
Mar-98 $20,314 $22,241 $13,629
Apr-98 $20,440 $22,596 $13,653
May-98 $20,482 $22,650 $13,678
Jun-98 $20,503 $22,683 $13,694
Jul-98 $20,482 $22,713 $13,710
Aug-98 $20,396 $23,332 $13,727
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS I SHARES. THE FUND
OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
THEIR PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
period shown, and have been restated to include the current, maximum 4.25%
initial sales charge, assuming reinvestment of distributions at net asset value.
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.
Past performance is not predictive of future results.
**Source: Salomon Brothers. Index is unmanaged and includes reinvested interest.
One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
8
PAGE
CLASS I
PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (9/18/86)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CUMULATIVE TOTAL RETURN(1) 2.82% 32.51% 113.04% 143.67%
AVERAGE ANNUAL TOTAL RETURN(2) -1.58% 4.86% 7.39% 7.35%
VALUE OF $10,000 INVESTMENT(3) $9,842 $12,677 $20,396 $23,331
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to include the
current, maximum 4.25% initial sales charge. Prior to July 1, 1994, Fund shares
were offered at a higher initial sales charge; thus, actual total returns would
have been lower.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and have been restated to include the current,
maximum 4.25% initial sales charge. 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 distributions at
net asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, currency volatility, and
the economic, social, and political climates of countries where the Fund
invests. Emerging markets involve heightened risks related to the same factors,
in addition to those associated with their relatively small size and lesser
liquidity. Also, as a non-diversified investment company, the Fund may invest in
a relatively small number of issuers and, as a result, be subject to greater
risk of loss with respect to its portfolio securities. You may have a gain or
loss when you sell your shares.
Past performance is not predictive of future results.
9
PAGE
CLASS II
Templeton Global Bond Fund - Class II produced a 2.46% cumulative total return
for the one-year period ended August 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The Fund's share price, as measured by net asset value, decreased 33 cents
($0.33), from $9.83 on August 31, 1997, to $9.50 on August 31, 1998. During the
reporting period, shareholders received per-share distributions of 51.5 cents
($0.5150) in income dividends and 5.5 cents ($0.0550) in long-term capital
gains. Distributions will vary depending on income earned by the Fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the Fund's operating expenses.
Past performance is not predictive of future results.
10
PAGE
The graph on page 12 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, the Fund's performance differs from that
of an index because an index is not managed according to any investment
strategy, does not contain cash (the Fund generally carries a certain percentage
of cash at any given time), and includes no sales charges or management or
operating expenses. 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.
11
PAGE
CLASS II
Total Return Index Comparison
$10,000 Investment (5/1/95 - 8/31/98)
[LINE GRAPH]
he following line graph compares the performance of Templeton Global Bond
Fund's Class II shares to that of the Salomon Brothers World Government Bond
Index and to the Consumer Price Index based on a $10,000 investment from 5/1/95
to 8/31/98.
<TABLE>
<CAPTION>
Templeton Global Bond Salomon World CPI
Fund -Class II* Gov't Bond
Index
<S> <C> <C> <C>
- -------------------------------------------------------------------
5/1/95 $9,902 $10,000 $10,000
May 95 $10,209 $10,281 $10,020
Jun-95 $10,229 $10,342 $10,040
Jul-95 $10,337 $10,366 $10,040
Aug-95 $10,377 $10,010 $10,067
Sep-95 $10,585 $10,234 $10,086
Oct-95 $10,772 $10,310 $10,119
Nov-95 $10,869 $10,426 $10,112
Dec-95 $11,103 $10,536 $10,105
Jan-96 $11,156 $10,405 $10,164
Feb-96 $11,084 $10,352 $10,197
Mar-96 $11,103 $10,338 $10,250
Apr-96 $11,145 $10,297 $10,289
May-96 $11,199 $10,299 $10,309
Jun-96 $11,347 $10,380 $10,316
Jul-96 $11,379 $10,579 $10,335
Aug-96 $11,539 $10,620 $10,355
Sep-96 $11,700 $10,663 $10,388
Oct-96 $11,982 $10,863 $10,421
Nov-96 $12,288 $11,006 $10,441
Dec-96 $12,308 $10,917 $10,441
Jan-97 $12,147 $10,625 $10,473
Feb-97 $12,094 $10,546 $10,505
Mar-97 $11,981 $10,465 $10,531
Apr-97 $12,014 $10,374 $10,544
May-97 $12,095 $10,656 $10,537
Jun-97 $12,239 $10,783 $10,550
Jul-97 $12,285 $10,699 $10,563
Aug-97 $12,282 $10,692 $10,583
Sep-97 $12,478 $10,920 $10,609
Oct-97 $12,512 $11,147 $10,636
Nov-97 $12,489 $10,976 $10,629
Dec-97 $12,485 $10,942 $10,617
Jan-98 $12,481 $11,049 $10,636
Feb-98 $12,541 $11,139 $10,657
Mar-98 $12,549 $11,028 $10,678
Apr-98 $12,610 $11,204 $10,697
May-98 $12,632 $11,231 $10,717
Jun-98 $12,654 $11,247 $10,730
Jul-98 $12,636 $11,262 $10,742
Aug-98 $12,584 $11,569 $10,755
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS II SHARES. THE FUND
OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
THEIR PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of distributions at net asset value. Past
performance is not predictive of future results.
**Source: Salomon Brothers. Index is unmanaged and includes reinvested interest.
One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
12
PAGE
CLASS II
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 2.46% 21.27% 27.08%
Average Annual Total Return(2) 0.44% 6.30% 7.13%
Value of $10,000 Investment(3) $10,044 $12,011 $12,584
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 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 period indicated and include sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified investment company, the Fund may invest in a relatively small
number of issuers and, as a result, be subject to greater risk of loss with
respect to its portfolio securities. You may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
13
PAGE
ADVISOR CLASS
Templeton Global Bond Fund - Advisor Class produced a 3.08% cumulative total
return for the one-year period ended August 31, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions.
The Fund's share price, as measured by net asset value, decreased 33 cents
($0.33), from $9.82 on August 31, 1997, to $9.49 on August 31, 1998. During the
reporting period, shareholders received per-share distributions of 57.33 cents
($0.5733) in income dividends and 5.5 cents ($0.0550) in long-term capital
gains. Distributions will vary depending on income earned by the Fund and any
profits realized from the sale of securities in the portfolio, as well as the
level of the Fund's operating expenses.
Past performance is not predictive of future results.
14
PAGE
The graph on page 16 compares the performance of Templeton Global Bond Fund -
Advisor Class over a 10-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. Please remember, the Fund's performance differs from that
of an index because an index is not managed according to any investment
strategy, does not contain cash (the Fund generally carries a certain percentage
of cash at any given time), and includes no management or operating expenses. 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.
15
PAGE
ADVISOR CLASS
Total Return Index Comparison
$10,000 Investment (9/1/88 - 8/31/98)
[LINE GRAPH]
The following line graph compares the performance of Templeton Global Bond
Fund's Advisor Class shares to that of the Salomon Brothers World Government
Bond Index and to the Consumer Price Index based on a $10,000 investment from
9/1/88 to 8/31/98.
<TABLE>
<CAPTION>
Templeton Global Bond Fund Salomon World Gov't CPI
- Advisor Class Bond Index
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
9/1/88 $10,000 $10,000 $10,000
Sep 88 $10,172 $10,258 $10,068
Oct-88 $10,417 $10,732 $10,101
Nov-88 $10,545 $10,896 $10,110
Dec-88 $10,478 $10,785 $10,127
Jan-89 $10,691 $10,628 $10,178
Feb-89 $10,560 $10,635 $10,218
Mar-89 $10,612 $10,487 $10,277
Apr-89 $10,729 $10,626 $10,345
May-89 $10,676 $10,401 $10,404
Jun-89 $10,783 $10,610 $10,429
Jul-89 $11,115 $11,094 $10,455
Aug-89 $11,137 $10,722 $10,472
Sep-89 $11,214 $10,924 $10,505
Oct-89 $11,236 $11,016 $10,556
Nov-89 $11,248 $11,116 $10,580
Dec-89 $11,373 $11,253 $10,597
Jan-90 $11,241 $11,104 $10,706
Feb-90 $11,200 $10,933 $10,756
Mar-90 $11,177 $10,825 $10,815
Apr-90 $11,118 $10,792 $10,833
May-90 $11,419 $11,151 $10,857
Jun-90 $11,676 $11,356 $10,916
Jul-90 $12,054 $11,712 $10,958
Aug-90 $12,096 $11,620 $11,058
Sep-90 $12,102 $11,749 $11,151
Oct-90 $12,279 $12,274 $11,218
Nov-90 $12,384 $12,478 $11,243
Dec-90 $12,497 $12,602 $11,243
Jan-91 $12,731 $12,917 $11,311
Feb-91 $12,825 $12,921 $11,327
Mar-91 $12,537 $12,452 $11,344
Apr-91 $12,770 $12,643 $11,360
May-91 $12,860 $12,627 $11,393
Jun-91 $12,730 $12,496 $11,428
Jul-91 $12,849 $12,763 $11,445
Aug-91 $13,115 $13,011 $11,478
Sep-91 $13,597 $13,519 $11,529
Oct-91 $13,786 $13,661 $11,546
Nov-91 $13,786 $13,876 $11,579
Dec-91 $14,360 $14,596 $11,588
Jan-92 $14,098 $14,335 $11,604
Feb-92 $14,016 $14,254 $11,647
Mar-92 $13,933 $14,103 $11,705
Apr-92 $14,101 $14,203 $11,722
May-92 $14,512 $14,639 $11,738
Jun-92 $14,939 $15,049 $11,781
Jul-92 $15,298 $15,400 $11,806
Aug-92 $15,326 $15,831 $11,839
Sep-92 $14,731 $15,989 $11,873
Oct-92 $14,877 $15,555 $11,915
Nov-92 $14,729 $15,307 $11,931
Dec-92 $14,808 $15,399 $11,924
Jan-93 $14,915 $15,666 $11,983
Feb-93 $15,194 $15,974 $12,024
Mar-93 $15,475 $16,219 $12,067
Apr-93 $15,756 $16,562 $12,100
May-93 $15,851 $16,728 $12,117
Jun-93 $15,741 $16,693 $12,134
Jul-93 $15,837 $16,740 $12,133
Aug-93 $16,094 $17,243 $12,167
Sep-93 $16,046 $17,448 $12,192
Oct-93 $16,290 $17,418 $12,243
Nov-93 $15,978 $17,293 $12,251
Dec-93 $16,340 $17,441 $12,251
Jan-94 $16,788 $17,581 $12,285
Feb-94 $16,371 $17,466 $12,328
Mar-94 $15,767 $17,441 $12,370
Apr-94 $15,716 $17,461 $12,386
May-94 $15,631 $17,308 $12,394
Jun-94 $15,391 $17,558 $12,436
Jul-94 $15,580 $17,698 $12,469
Aug-94 $15,737 $17,636 $12,521
Sep-94 $15,685 $17,764 $12,554
Oct-94 $15,860 $18,049 $12,563
Nov-94 $15,755 $17,801 $12,579
Dec-94 $15,754 $17,850 $12,579
Jan-95 $15,790 $18,224 $12,629
Feb-95 $16,042 $18,691 $12,679
Mar-95 $16,170 $19,801 $12,721
Apr-95 $16,551 $20,168 $12,763
May-95 $17,083 $20,735 $12,789
Jun-95 $17,119 $20,857 $12,814
Jul-95 $17,304 $20,906 $12,814
Aug-95 $17,398 $20,188 $12,848
Sep-95 $17,734 $20,639 $12,872
Oct-95 $18,054 $20,792 $12,915
Nov-95 $18,224 $21,028 $12,906
Dec-95 $18,623 $21,248 $12,897
Jan-96 $18,699 $20,985 $12,973
Feb-96 $18,565 $20,878 $13,015
Mar-96 $18,603 $20,849 $13,082
Apr-96 $18,700 $20,766 $13,132
May-96 $18,817 $20,771 $13,157
Jun-96 $19,072 $20,934 $13,166
Jul-96 $19,131 $21,335 $13,191
Aug-96 $19,387 $21,418 $13,216
Sep-96 $19,686 $21,505 $13,258
Oct-96 $20,146 $21,908 $13,300
Nov-96 $20,668 $22,196 $13,325
Dec-96 $20,709 $22,017 $13,325
Jan-97 $20,449 $21,428 $13,368
Feb-97 $20,391 $21,268 $13,408
Mar-97 $20,211 $21,106 $13,441
Apr-97 $20,256 $20,921 $13,457
May-97 $20,425 $21,490 $13,449
Jun-97 $20,660 $21,746 $13,465
Jul-97 $20,747 $21,577 $13,481
Aug-97 $20,751 $21,564 $13,507
Sep-97 $21,094 $22,023 $13,541
Oct-97 $21,163 $22,480 $13,575
Nov-97 $21,133 $22,135 $13,566
Dec-97 $21,141 $22,068 $13,550
Jan-98 $21,146 $22,283 $13,575
Feb-98 $21,258 $22,464 $13,602
Mar-98 $21,285 $22,241 $13,629
Apr-98 $21,399 $22,596 $13,654
May-98 $21,448 $22,650 $13,678
Jun-98 $21,497 $22,683 $13,694
Jul-98 $21,457 $22,713 $13,711
Aug-98 $21,390 $23,332 $13,727
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S ADVISOR CLASS SHARES. THE
FUND OFFERS OTHER SHARE CLASSES SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH
AFFECT THEIR PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of distributions at net asset value. On
January 2, 1997, the Fund began selling Advisor Class shares to certain eligible
investors as described in the prospectus. This share class does not have sales
charges or a Rule 12b-1 plan. 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 sales charge, but
including the effect of Class I expenses, containing 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. Past performance is not predictive of future results.
**Source: Salomon Brothers. Index is unmanaged and includes reinvested interest.
One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
16
PAGE
ADVISOR CLASS
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR* 5-YEAR* 10-YEAR* (9/18/86)*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 3.08% 32.90% 113.90% 144.65%
Average Annual Total Return(1) 3.08% 5.85% 7.90% 7.77%
Value of $10,000 Investment(2) $10,308 $13,290 $21,390 $24,465
</TABLE>
*On January 2, 1997, the Fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. 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 sales
charge, but including the effect of Class I expenses, containing Rule 12b-1
fees; and (b) for periods after January 1, 1997, figures reflect actual Advisor
Class performance, including deduction of all fees and expenses applicable only
to that class. Since January 2, 1997 (commencement of sales), the cumulative
total return of Advisor Class shares was 3.90%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility, and the economic, social,
and political climates of countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. Also, as a
non-diversified investment company, the Fund may invest in a relatively small
number of issuers and, as a result, be subject to greater risk of loss with
respect to its portfolio securities. You may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
17
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1998 1997 1996 1995 1994+
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year......................... $9.82 $9.76 $9.32 $9.05 $9.96
--------------------------------------------------------
Income from investment operations:
Net investment income..................................... .60 .63 .69 .73 .72
Net realized and unrealized gains (losses)................ (.32) .03 .35 .17 (.91)
--------------------------------------------------------
Total from investment operations........................... .28 .66 1.04 .90 (.19)
--------------------------------------------------------
Less distributions from:
Net investment income..................................... (.55) (.60) (.58) (.54) (.53)
Net realized gains........................................ (.06) -- -- -- (.07)
Tax return of capital..................................... -- -- (.02) (.09) (.12)
--------------------------------------------------------
Total distributions........................................ (.61) (.60) (.60) (.63) (.72)
--------------------------------------------------------
Net asset value, end of year............................... $9.49 $9.82 $9.76 $9.32 $9.05
--------------------------------------------------------
--------------------------------------------------------
Total Return*.............................................. 2.82% 6.87% 11.44% 10.43% (2.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................ $189,898 $198,131 $185,596 $191,301 $205,482
Ratios to average net assets:
Expenses.................................................. 1.17% 1.15% 1.13% 1.18% 1.18%
Net investment income..................................... 6.12% 6.41% 7.09% 7.99% 7.50%
Portfolio turnover rate.................................... 75.95% 166.69% 109.40% 101.12% 139.23%
</TABLE>
*Total return does not reflect sales commissions.
+Based on weighted average shares outstanding.
18
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
----------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------
1998 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.......................... $9.83 $9.77 $9.31 $9.05
----------------------------------------
Income from investment operations:
Net investment income...................................... .56 .57 .61 .21
Net realized and unrealized gains (losses)................. (.32) .05 .41 .24
----------------------------------------
Total from investment operations............................ .24 .62 1.02 .45
----------------------------------------
Less distributions from:
Net investment income...................................... (.51) (.56) (.54) (.15)
Net realized gains......................................... (.06) -- -- --
Tax return of capital...................................... -- -- (.02) (.04)
----------------------------------------
Total distributions......................................... (.57) (.56) (.56) (.19)
----------------------------------------
Net asset value, end of year................................ $9.50 $9.83 $9.77 $9.31
----------------------------------------
----------------------------------------
Total Return*............................................... 2.46% 6.44% 11.20% 5.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $20,404 $16,629 $6,563 $2,043
Ratios to average net assets:
Expenses................................................... 1.56% 1.54% 1.56% 1.57%**
Net investment income...................................... 5.73% 5.96% 6.69% 7.47%**
Portfolio turnover rate..................................... 75.95% 166.69% 109.40% 101.12%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to August 31, 1995.
19
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
------------------------
YEAR ENDED AUGUST 31,
------------------------
1998 1997+
------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $9.82 $10.16
------------------------
Income from investment operations:
Net investment income...................................... .62 .42
Net realized and unrealized losses......................... (.32) (.34)
------------------------
Total from investment operations............................ .30 .08
------------------------
Less distributions from:
Net investment income...................................... (.57) (.42)
Net realized gains......................................... (.06) --
------------------------
Total distributions......................................... (.63) (.42)
------------------------
Net asset value, end of year................................ $9.49 $9.82
------------------------
------------------------
Total Return*............................................... 3.08% .80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $11,330 $12,742
Ratios to average net assets:
Expenses................................................... .91% .88%**
Net investment income...................................... 6.38% 6.76%**
Portfolio turnover rate..................................... 75.95% 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.
20
PAGE
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 94.2%
ARGENTINA 1.9%
Perez Companc SA, 144A, 8.125%, 7/15/07..................... $ 5,000,000 $ 3,425,000
Republic of Argentina:
8.375%, 12/20/03.......................................... 480,000 355,200
11.00%, 10/09/06.......................................... 460,000 336,375
------------
4,116,575
------------
AUSTRALIA 3.4%
Government of Australia, 7.50%, 7/15/05..................... 12,035,000AUD 7,518,974
------------
CANADA 7.0%
Government of Canada:
10.50%, 7/01/00........................................... 10,600,000CAD 7,316,585
10.50%, 3/01/01........................................... 6,235,000CAD 4,417,217
10.00%, 5/01/02........................................... 5,135,000CAD 3,737,324
------------
15,471,126
------------
CHILE 1.6%
Compania Sud Americana de Vapores SA:
7.375%, 12/08/03.......................................... 1,500,000 1,372,500
144A, 7.375%, 12/08/03.................................... 2,500,000 2,287,500
------------
3,660,000
------------
COLOMBIA .9%
Republic of Colombia, 7.25%, 2/23/04........................ 2,500,000 1,955,750
------------
DENMARK 2.0%
Kingdom of Denmark:
8.00%, 5/15/03............................................ 19,995,000DKK 3,401,118
9.00%, 11/15/00........................................... 6,605,000DKK 1,072,856
------------
4,473,974
------------
GERMANY 9.8%
Federal Republic of Germany:
Bundesrep, 7.75%, 2/21/00................................. 20,705,000DEM 12,439,437
5.25%, 2/21/01............................................ 250,000DEM 147,250
8.00%, 7/22/02............................................ 8,605,000DEM 5,630,456
Hypothekenbank In Essen AG, 5.25%, 1/22/08.................. 5,790,000DEM 3,435,914
------------
21,653,057
------------
INDIA .1%
Essar Steel Ltd., FRN, Reg. S, 8.40%, 7/20/99............... 315,000 266,175
------------
INDONESIA .2%
PT Astra International, 9.75%, 4/29/01...................... 2,000,000 450,000
------------
</TABLE>
21
PAGE
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
PRINCIPAL AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ITALY 6.5%
Buoni Poliennali del Tesoro:
12.00%, 1/17/99........................................... 2,900,000,000ITL $ 1,698,385
10.50%, 7/15/00........................................... 1,270,000,000ITL 809,503
10.50%, 11/01/00.......................................... 3,530,000,000ITL 2,286,495
10.50%, 9/01/05........................................... 12,290,000,000ITL 9,538,086
------------
14,332,469
------------
MEXICO .2%
United Mexican States, 9.75%, 2/06/01....................... 460,000 414,000
------------
NEW ZEALAND 1.6%
Government of New Zealand, 6.50%, 2/15/00................... 7,240,000NZD 3,587,381
------------
SOUTH KOREA .3%
Pohang Iron & Steel, 6.625%, 7/01/03........................ 1,000,000 753,392
------------
SPAIN 7.1%
Government of Spain:
12.25%, 3/25/00........................................... 952,710,000ESP 7,157,173
10.10%, 2/28/01........................................... 522,900,000ESP 4,002,272
10.90%, 8/30/03........................................... 520,500,000ESP 4,511,127
------------
15,670,572
------------
SWEDEN 3.5%
Kingdom of Sweden, 10.25%, 5/05/03.......................... 51,400,000SEK 7,854,769
------------
UNITED KINGDOM 8.2%
United Kingdom:
8.00%, 12/07/00........................................... 5,825,000GBP 10,119,790
7.00%, 11/06/01........................................... 1,175,000GBP 2,021,656
conv. stk., 9.50%, 4/18/05................................ 2,960,000GBP 6,020,655
------------
18,162,101
------------
UNITED STATES 39.5%
+*Acadia Partners LP........................................ 999,667 155,628
+Penobscot Partners LP...................................... 333 3,800
+Texas Utilities Holding Co................................. 70,000 2,975,000
U.S. Treasury Bond, 6.375%, 8/15/27......................... 6,170,000 7,028,019
U.S. Treasury Notes:
6.125%, 7/31/00........................................... 5,950,000 6,076,443
6.625%, 3/31/02........................................... 22,505,000 23,644,316
6.375%, 8/15/02........................................... 11,960,000 12,531,844
6.25%, 2/15/03............................................ 4,900,000 5,149,594
</TABLE>
22
PAGE
TEMPLETON GLOBAL BOND FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
PRINCIPAL AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
UNITED STATES (CONT.)
7.875%, 11/15/04.......................................... $ 14,038,000 $ 16,156,861
6.625%, 5/15/07........................................... 12,262,000 13,553,342
+Washington Mutual Inc...................................... 10,475 335,184
------------
87,610,031
------------
VENEZUELA .4%
Venezuela Front Load Interest Reduction Bond, A, 6.625%,
3/31/07................................................... 2,142,852 886,605
------------
TOTAL LONG TERM INVESTMENTS (COST $220,409,836)............. 208,836,951
------------
(a)REPURCHASE AGREEMENT 4.7%
Morgan Stanley Inc., 5.75%, 9/01/98 (Maturity Value
$10,415,663) (COST $10,414,000) Collateralized by U.S.
Treasury Notes and Bonds.................................. 10,414,000 10,414,000
------------
TOTAL INVESTMENTS (COST $230,823,836) 98.9%................. 219,250,951
NET EQUITY IN FORWARD CONTRACTS (.4%)....................... (851,645)
OTHER ASSETS, LESS LIABILITIES 1.5%......................... 3,232,717
------------
TOTAL NET ASSETS 100.0%..................................... $221,632,023
------------
------------
</TABLE>
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C>
AUD -- Australian Dollar
CAD -- Canadian Dollar
DEM -- German Mark
DKK -- Danish Krone
ESP -- Spanish Peseta
GBP -- British Pound
ITL -- Italian Lira
NZD -- New Zealand Dollar
SEK -- Swedish Krona
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
(a)At August 31, 1998, all repurchase agreements held by the Fund had been
entered into on that date.
+Securities represent equity investments.
See Notes to Financial Statements.
23
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $220,409,836).... $208,836,951
Repurchase agreement, at value and cost.................... 10,414,000
Cash....................................................... 959
Receivables:
Investment securities sold................................ 201,691,629
Fund shares sold.......................................... 454,560
Dividends and interest.................................... 4,891,670
Unrealized gain on forward exchange contracts (Note 6)..... 812,378
------------
Total assets.......................................... 427,102,147
------------
Liabilities:
Payables:
Investment securities purchased........................... 201,855,791
Fund shares redeemed...................................... 1,640,850
To affiliates............................................. 208,245
Unrealized loss on forward exchange contracts (Note 6)..... 1,664,023
Accrued liabilities........................................ 101,215
------------
Total liabilities..................................... 205,470,124
------------
Net assets, at value........................................ $221,632,023
------------
------------
Net assets consist of:
Undistributed net investment income........................ $ 785,814
Net unrealized depreciation................................ (12,419,017)
Accumulated net realized loss.............................. (131,258)
Beneficial shares.......................................... 233,396,484
------------
Net assets, at value........................................ $221,632,023
------------
------------
CLASS I:
Net asset value per share ($189,898,066 / 20,001,184 shares
outstanding).............................................. $9.49
------------
------------
Maximum offering price per share ($9.49 / 95.75%).......... $9.91
------------
------------
CLASS II:
Net asset value per share ($20,404,127 / 2,147,450 shares
outstanding)*............................................. $9.50
------------
------------
Maximum offering price per share ($9.50 / 99.00%).......... $9.60
------------
------------
ADVISOR CLASS:
Net asset value and maximum offering price per share
($11,329,830 / 1,194,022 shares outstanding).............. $9.49
------------
------------
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
24
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Dividends.................................................. $ 326,354
Interest................................................... 16,518,993
-----------
Total investment income............................... $16,845,347
Expenses:
Management fees (Note 3)................................... 1,139,351
Administrative fees (Note 3)............................... 340,429
Distribution fees (Note 3)
Class I................................................... 509,684
Class II.................................................. 125,086
Transfer agent fees (Note 3)............................... 288,060
Custodian fees............................................. 34,438
Reports to shareholders.................................... 156,400
Registration and filing fees............................... 55,000
Professional fees.......................................... 66,000
Trustees' fees and expenses................................ 27,000
Other...................................................... 1,853
-----------
Total expenses........................................ 2,743,301
-----------
Net investment income........................... 14,102,046
-----------
Realized and unrealized gains (losses):
Net realized gain from:
Investments............................................... 132,821
Foreign currency transactions............................. 764,874
-----------
Net realized gain..................................... 897,695
Net unrealized depreciation on:
Investments............................................... (7,028,441)
Translation of assets and liabilities denominated in
foreign currencies....................................... (1,459,986)
-----------
Net unrealized depreciation........................... (8,488,427)
-----------
Net realized and unrealized loss............................ (7,590,732)
-----------
Net increase in net assets resulting from operations........ $ 6,511,314
-----------
-----------
</TABLE>
See Notes to Financial Statements.
25
PAGE
TEMPLETON GLOBAL BOND FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 14,102,046 $ 13,445,285
Net realized gain from investments and foreign currency
transactions............................................ 897,695 2,556,246
Net unrealized depreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... (8,488,427) (2,361,748)
-------------------------------
Net increase in net assets resulting from operations.... 6,511,314 13,639,783
Distributions to shareholders from:
Net investment income:
Class I.................................................. (11,190,365) (11,873,359)
Class II................................................. (1,004,165) (653,900)
Advisor Class............................................ (803,082) (175,160)
Net realized gains:
Class I.................................................. (1,112,297) --
Class II................................................. (115,925) --
Advisor Class............................................ (67,412) --
Capital share transactions (Note 2):
Class I.................................................. (1,581,970) 11,375,603
Class II................................................. 4,463,377 10,137,187
Advisor Class............................................ (970,039) 12,893,491
-------------------------------
Net increase (decrease) in net assets................... (5,870,564) 35,343,645
Net assets:
Beginning of year.......................................... 227,502,587 192,158,942
-------------------------------
End of year................................................ $221,632,023 $227,502,587
-------------------------------
-------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 785,814 $ 742,866
-------------------------------
-------------------------------
</TABLE>
See Notes to Financial Statements.
26
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 of companies, governments and government
agencies of various nations throughout the world, as well as preferred stock,
common stocks which pay dividends, income-producing securities which are
convertible into common stock of such companies, and depository receipts. 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. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate 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 changes 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 and the difference 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.
c. 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 all of its taxable income.
d. 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 is recorded as soon as
27
PAGE
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (continued)
1. SUMMARY OF ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
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.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. 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.
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. BENEFICIAL SHARES
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, voting
rights on matters affecting a single class of shares and the exchange privilege
of each class.
At August 31, 1998, 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,
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold................................................ 5,805,764 $ 56,610,214 8,683,958 $ 86,215,013
Shares issued on reinvestment of distributions............. 935,877 9,102,189 817,138 8,116,791
Shares redeemed............................................ (6,908,185) (67,294,373) (8,348,405) (82,956,201)
-------------------------------------------------------------
Net increase (decrease).................................... (166,544) $ (1,581,970) 1,152,691 $ 11,375,603
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
28
PAGE
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (continued)
2. BENEFICIAL SHARES (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------
1998 1997
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold................................................. 910,441 $ 8,897,295 1,214,404 $12,072,843
Shares issued on reinvestment of distributions.............. 100,468 976,732 56,414 559,590
Shares redeemed............................................. (555,304) (5,410,650) (250,933) (2,495,246)
-----------------------------------------------------------
Net increase................................................ 455,605 $ 4,463,377 1,019,885 $10,137,187
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------
1998 1997*
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISOR CLASS SHARES:
Shares sold................................................. 957,957 $ 9,380,180 1,727,048 $17,132,789
Shares issued on reinvestment of distributions.............. 18,458 178,859 5,975 58,875
Shares redeemed............................................. (1,080,092) (10,529,078) (435,324) (4,298,173)
-----------------------------------------------------------
Net increase (decrease)..................................... (103,677) $ (970,039) 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
- -----------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
29
PAGE
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- ---------------------------------------
<S> <C>
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 shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At August 31, 1998, unreimbursed cost were $73,567. Distributors
received net commissions on sales of the Fund's shares and received contingent
deferred sales charges for the year of $777 and $12,258, respectively.
Legal fees of $26,326 were paid to a law firm in which a partner is an officer
of the Trust.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At August 31, 1998, the net unrealized depreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 2,584,129
Unrealized depreciation..................................... (14,157,014)
------------
Net unrealized depreciation................................. $(11,572,885)
============
</TABLE>
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1998 aggregated $173,601,321 and $161,032,640, respectively.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risk,
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
30
PAGE
TEMPLETON GLOBAL BOND FUND
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
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. The 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 day of entry into the contract.
As of August 31, 1998, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- -------------- ---------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
1,540,000 Australian Dollars.......................................... U.S. $ 935,180 9/8/98 U.S. $ 53,822
1,000,000 Australian Dollars.......................................... 604,800 9/9/98 32,482
2,200,000 Australian Dollars.......................................... 1,331,550 9/10/98 72,433
3,080,000 Australian Dollars.......................................... 1,833,216 9/15/98 70,335
1,540,000 Australian Dollars.......................................... 915,145 9/18/98 33,669
4,027,000 New Zealand Dollars......................................... 2,021,554 9/14/98 25,887
504,500 New Zealand Dollars......................................... 259,010 9/3/98 8,964
----------- -----------
U.S. $ 7,900,455 297,592
----------- -----------
-----------
Net unrealized gain on offsetting forward exchange contracts........ 514,786
-----------
Unrealized gain on forward exchange contracts..................... 812,378
-----------
CONTRACTS TO BUY:
- --------------
540,000 New Zealand Dollars......................................... U.S. $ 318,168 9/15/98 (9,091)
----------- -----------
-----------
CONTRACTS TO SELL:
- --------------
3,027,000 British Pounds.............................................. U.S. $ 4,893,176 11/24/98 (153,156)
1,000,000 British Pounds.............................................. 1,618,160 11/27/98 (48,699)
9,350,000 Canadian Dollars............................................ 5,958,545 9/30/98 (17,805)
29,000,000 Deutschemarks............................................... 16,273,850 9/17/98 (187,700)
21,500,000 Deutschemarks............................................... 11,905,026 9/21/98 (302,193)
32,000,000 Deutschemarks............................................... 17,706,264 9/21/98 (462,619)
21,500,000 Deutschemarks............................................... 11,971,047 9/24/98 (238,398)
----------- -----------
U.S. $70,326,068 (1,410,570)
-----------
-----------
Net unrealized loss on offsetting forward exchange contracts........ (244,362)
-----------
Unrealized loss on forward exchange contracts..................... (1,664,023)
-----------
Net unrealized loss on forward exchange contracts............... U.S. $ (851,645)
-----------
-----------
</TABLE>
31
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, 1998, 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 period 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 audit.
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, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
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, 1998, 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 29, 1998
32
PAGE
TEMPLETON GLOBAL BOND FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates the following amount as a capital gain dividend for the fiscal year
ended August 31, 1998:
<TABLE>
<S> <C>
20% Rate Gain............................................... $1,290,241
----------
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
1.22% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1998.
33
PAGE
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PAGE
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. 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.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Global
Currency Fund
Franklin Templeton Hard
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
FUND ALLOCATOR SERIES
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida++
Georgia
Hawaii+++
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+ Portfolio of insured municipal securities.
++ Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
09/98
PAGE
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
1-800/DIAL BEN(R)
www.franklin-templeton.com
SHAREHOLDER SERVICES
1-800/632-2301
FUND INFORMATION
1-800/342-5236
This report must be preceded or accompanied by the current prospectus
of Templeton Global Bond Fund, which contains more complete information
including risk factors, charges and expenses. Like any investment in securities,
the value of the Fund's portfolio will be subject to the risk of loss from
market, currency, economic, political and other factors, as well as investment
decisions by the Investment Manager, which will not always be profitable or
wise. The Fund and its investors are not protected from such losses by the
Investment Manager. Therefore, investors who cannot accept this risk should not
invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
406 A98 10/98 [Recycle Logo] Printed on recycled paper
