TEMPLETON GLOBAL BOND FUND
TEMPLETON INCOME TRUST -
CLASS A & C
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 1, 1999 [GRAPHIC OMITTED]
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated January 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended August 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies.......................................... 2
Risks........................................................ 7
Officers and Trustees......................................... 12
Management and Other Services................................. 17
Portfolio Transactions........................................ 19
Distributions and Taxes....................................... 19
Organization, Voting Rights and
Principal Holders............................................ 21
Buying and Selling Shares..................................... 22
Pricing Shares................................................ 28
The Underwriter............................................... 29
Performance................................................... 31
Miscellaneous Information..................................... 33
Description of Bond Ratings................................... 34
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK;
/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
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GOAL AND STRATEGIES
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The fund's investment goal is current income with capital appreciation and
growth of income. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund tries to achieve its goal by investing primarily in the debt securities
of companies, governments and their agencies located anywhere in the world,
including emerging markets.
Although the fund's principal investments are in debt securities, it may also
invest in equity securities including preferred stock and common stocks which
pay dividends, in income-producing securities convertible into common stock and
in American, European and Global Depositary Receipts.
The fund may invest in any industry although it will not concentrate (invest
more than 25% of its total assets) in any one industry. As a non-fundamental
policy approved by the fund's board of trustees, the fund's manager will select
securities for purchase by the fund from many industries that it believes to be
productive and beneficial.
The fund may invest up to 5% of its total assets in securities that may not be
resold without registration ("restricted securities"). There may be a lapse of
time between the fund's decision to sell any restricted security and the
registration of the security. During this period, the price of the security will
be subject to market fluctuations. The fund may invest up to 10% of its total
assets in restricted securities and securities which are not otherwise readily
marketable.
The fund may invest up to 100% of its total assets in emerging markets,
including up to 5% of its total assets in Russian securities.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances; and
structured investments. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
Independent rating organizations rate debt securities based upon their
assessment of the financial soundness of the issuer. Generally, a lower rating
indicates higher risk. As an operating policy, the fund will not invest more
than 5% of its total assets in non-investment grade securities (rated lower than
BBB by Standard & Poor's Corporation (S&P) or Baa by Moody's Investors Service,
Inc. (Moody's)). The average maturity of the debt securities in the fund's
portfolio will fluctuate depending upon the manager's judgment as to future
interest rate changes.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") are fixed-income securities which
are collateralized by pools of mortgage loans created by commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other issuers in the U.S. In effect, CMOs "pass through" the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. government agencies,
private issuers and the mortgage poolers. The fund may buy CMOs without
insurance or guarantees if, in the opinion of the manager, the sponsor is
creditworthy. Prepayments of the mortgages included in the mortgage pool may
influence the yield of the CMO. In addition, prepayments usually increase when
interest rates are decreasing, thereby decreasing the life of the pool. As a
result, reinvestment of prepayments may be at a lower rate than that on the
original CMO.
U.S. GOVERNMENT SECURITIES are obligations of, or guaranteed by, the U.S.
government, its agencies or instrumentalities. Some U.S. government securities,
such as Treasury bills and bonds, are supported by the full faith and credit of
the U.S. Treasury; others, such as those of Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations; still others are supported only by the credit of the
instrumentality.
COMMERCIAL PAPER Investments in commerical paper are limited to obligations
rated Prime-1 by
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Moody's or A-1 by S&P or, if not rated by Moody's or S&P, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P.
STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the fund may invest are entities organized and operated solely for the purpose
of restructuring the investment characteristics of various securities. These
entities are typically organized by investment banking firms which receive fees
in connection with establishing each entity and arranging for the placement of
its securities. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments and the
issuance by that entity of one or more classes of securities ("structured
investments") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured investments to create securities with
different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to structured investments is dependent on the extent of the cash flow on
the underlying instruments. Because structured investments of the type in which
the fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leverage for purposes of the limitations placed on the
extent of the fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, the fund's investment in these structured investments may be limited by
the restrictions contained in the 1940 Act. Structured investments are typically
sold in private placement transactions, and there currently is no active trading
market for structured investments. To the extent such investments are illiquid,
they will be subject to the fund's restrictions on investments in illiquid
securities.
WHEN-ISSUED SECURITIES New issues of certain debt securities are often offered
on a when-issued basis, that is, the payment obligation and the interest rate
are fixed at the time the buyer enters into the commitment, but delivery and
payment for the securities normally take place after the date of the commitment
to purchase. The value of when-issued securities may vary prior to and after
delivery depending on market conditions and changes in interest rate levels.
However, the fund will not accrue any income on these securities prior to
delivery. The fund will maintain in a segregated account with its custodian an
amount of cash or high quality debt securities equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
when-issued securities.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive less
appreciation than common stockholders and may have greater voting rights as
well. Equity securities may also include convertible securities, warrants or
rights. Convertible securities typically are debt securities or preferred stocks
which are convertible into common stock after certain time periods or under
certain circumstances. Warrants or rights give the holder the right to purchase
a common stock at a given time for a specified price.
DEPOSITARY RECEIPTS are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
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certain banks and broker-dealers. Under a repurchase agreement, the fund agrees
to buy a U.S. government security from one of these issuers and then to sell the
security back to the issuer after a short period of time (generally, less than
seven days) at a higher price. The bank or broker-dealer must transfer to the
fund's custodian, securities with an initial value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement.
Repurchase agreements may involve risks in the event of default or insolvency of
the seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. The fund will enter into repurchase
agreements only with parties who meet creditworthiness standards approved by the
fund's board, I.E., banks or broker-dealers that have been determined by the
manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORFOLIO SECURITIES The fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The fund may terminate the loans at any time and
obtain the return of the securities. The fund will continue to receive any
interest or dividends paid on the loaned securities and will continue to have
voting rights with respect to the securities.
FUTURES CONTRACTS Although the fund has the authority to buy and sell financial
futures contracts, it does not currently intend to enter into such transactions.
A financial futures contract is an agreement between two parties to buy or sell
a specified debt security at a set price on a future date. Currently, futures
contracts are available on several types of fixed-income securities including:
U.S. Treasury bonds, notes and bills, commercial paper and certificates of
deposit.
Although some financial futures contracts call for making or taking delivery of
the underlying securities, in most cases these obligations are closed out before
the settlement date. The closing of a contractual obligation is accomplished by
purchasing or selling an identical offsetting futures contract. Other financial
futures contracts by their terms call for cash settlements.
The fund may also buy and sell index futures contracts with respect to any stock
or bond index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
At the time the fund purchases a futures contract, an amount of cash, U.S.
government securities, or other highly liquid debt securities equal to the
market value of the contract will be deposited in a segregated account with the
fund's custodian. When selling a stock index futures contract, the fund will
maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
fund may "cover" its position by owning the instruments underlying the contract
or, in the case of a stock index futures contract, owning a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based, or holding a call option permitting the fund to purchase the
same futures contract at a price no higher than the price of the contract
written by the fund (or at a higher price if the difference is maintained in
liquid assets with the fund's custodian). The fund may not commit more than 5%
of its total assets to initial margin deposits on future contracts.
OPTIONS ON SECURITIES, INDICES AND FUTURES Although the fund has the authority
to sell covered put and call options and buy put and call options on securities,
securities indices and futures contracts that are traded on U.S. and foreign
exchanges and in the over-the-counter markets, it does not currently intend to
enter into such transactions.
An option on a security or a futures contract is a contract that gives the
purchaser of the option, in return for the premium paid, the right to buy a
specified security or futures contract (in the case of a call option) or to sell
a specified security or futures contract (in the case of a put option) from or
to the writer of the option at a designated price during the term of the option.
An option on a securities index gives the purchaser of the option, in return for
the premium paid, the right to receive from the seller cash equal to the
difference between the closing price of the index and the exercise price of the
option.
The fund may write a call or put option only if the option is "covered." A call
option on a security or futures contract written by the fund is "covered" if the
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fund owns the underlying security or futures contract covered by the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security or futures contract is also covered if
the fund holds a call on the same security or futures contract and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the fund in cash or high grade U.S. government securities in a
segregated account with its custodian. A put option on a security or futures
contract written by the fund is "covered" if the fund maintains cash or fixed
income securities with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security or futures
contract and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written.
The fund will cover call options on securities indices that it writes by owning
securities whose price changes, in the opinion of the manager, are expected to
be similar to those of the index, or in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the fund covers a call
option on a securities index through ownership of securities, such securities
may not match the composition of the index. In that event, the fund will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The fund will cover put options on securities
indices that it writes by segregating assets equal to the option's exercise
price, or in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
The fund will receive a premium from writing a put or call option, which
increases its gross income in the event the option expires unexercised or is
closed out at a profit. If the value of a security, index or futures contract on
which the fund has written a call option falls or remains the same, the fund
will realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
portfolio securities being hedged. If the value of the underlying security,
index or futures contract rises, however, the fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in its investments. By writing a put option, the fund assumes the
risk of a decline in the underlying security, index or futures contract. To the
extent that the price changes of the portfolio securities being hedged correlate
with changes in the value of the underlying security, index or futures contract,
writing covered put options will increase the fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The fund may also buy put options to hedge its investments against a decline in
value. By purchasing a put option, the fund will seek to offset a decline in the
value of the portfolio securities being hedged through appreciation of the put
option. If the value of the fund's investments does not decline as anticipated,
or if the value of the option does not increase, its loss will be limited to the
premium paid for the option plus related transaction costs. The success of this
strategy will depend, in part, on the accuracy of the correlation between the
changes in value of the underlying security, index or futures contract and the
changes in value of the fund's security holdings being hedged.
The fund may buy call options on individual securities or futures contracts to
hedge against an increase in the price of securities or futures contracts that
it anticipates buying in the future. Similarly, the fund may buy call options on
a securities index to attempt to reduce the risk of missing a broad market
advance, or an advance in an industry or market segment, at a time when the fund
holds uninvested cash or short-term debt securities awaiting investment. When
buying call options, the fund will bear the risk of losing all or a portion of
the premium paid if the value of the underlying security, index or futures
contract does not rise.
There can be no assurance that a liquid market will exist when the fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, it may experience losses in some cases as a result of such
inability. The value of over-the-counter options purchased by the fund, as well
as the cover for options written by the fund, are considered not readily
marketable and are subject to the fund's limitation on investments in securities
that are not readily marketable. See "Investment restrictions."
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FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency
exchange rate risks, the fund may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The fund may also
conduct its foreign currency exchange transactions on a spot (I.E., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
The fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to reduce the risk to the fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when the fund believes
that a foreign currency may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell an amount of the
former foreign currency approximating the value of some or all of its portfolio
securities denominated in such foreign currency. This second investment practice
is generally referred to as "cross-hedging." Because in connection with the
fund's forward contracts an amount of its assets equal to the amount of the
purchase will be held aside or segregated to be used to pay for the commitment,
the fund will always have cash, cash equivalents or high quality debt securities
available in an amount sufficient to cover any commitments under these contracts
or to limit any potential risk. The segregated account will be marked-to-market
on a daily basis. While these contracts are not presently regulated by the
Commodity Futures Trading Commission, it may in the future assert authority to
regulate forward contracts. In such event, the fund's ability to utilize forward
contracts in the manner set forth above may be restricted. Forward contracts may
limit potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the fund than if it had not engaged in
such contracts.
The fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge up to the amount of the premium received, and the fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to its position, the fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the fund will be traded on U.S. and
foreign exchanges or over-the-counter.
The fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the fund's portfolio securities or adversely affect the prices of securities
that the fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the manager's ability to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in (1) U.S. government securities maturing
in 13 months or less; (2) commercial paper; (3) bank time deposits with less
than seven days remaining to maturity; and (4) bankers' acceptances.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund may not:
1. Invest in real estate or mortgages on real estate (although the fund may
invest in marketable securities secured by real estate or interests
therein); invest in other open-end investment
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companies(except in connection with a merger, consolidation, acquisition or
reorganization); invest in interests (other than publicly issued debentures
or equity stock interests) in oil, gas or other mineral exploration or
development programs; purchase or sell commodity contracts (except futures
contracts as described in the fund's prospectus).
2. Purchase or retain securities of any company in which trustees or officers
of the trust or of the manager, individually owning more than 1/2 of 1% of
the securities of such company, in the aggregate own more than 5% of the
securities of such company.
3. Invest in any company for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities; or purchase on margin or
sell short, except that the fund may make margin payments in connection
with futures, options and currency transactions.
5. Loan money, except that the fund may purchase a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness.
6. Invest more than 5% of the value of its total assets in securities of
issuers which have been in continuous operation less than three years.
7. Invest more than 15% of its total assets in securities of foreign companies
that are not listed on a recognized U.S. or foreign securities exchange,
including no more than 5% of its total assets in restricted securities and
no more than 10% of its total assets in restricted securities and other
securities (including repurchase agreements having more than seven days
remaining to maturity) which are not restricted but which are not readily
marketable (I.E., trading in the security is suspended or, in the case of
unlisted securities, market makers do not exist or will not entertain bids
or offers).
8. Invest more than 25% of its total assets in a single industry.
9. Borrow money, except that the fund may borrow money in amounts up to 30% of
the value of the fund's net assets. In addition, the fund may not pledge,
mortgage or hypothecate its assets for any purpose, except that the fund
may do so to secure such borrowings and then only to an extent not greater
than 15% of its total assets. Arrangements with respect to margin for
futures contracts are not deemed to be a pledge of assets.
10. Participate on a joint or a joint and several basis in any trading account
in securities. (See "Portfolio Transactions" as to transactions in the same
securities for the fund, other clients and/or other mutual funds within the
Franklin Templeton Group of Funds.)
11. Invest more than 5% of its net assets in warrants whether or not listed on
the New York Stock Exchange (NYSE) or American Stock Exchange, and more
than 2% of its net assets in warrants that are not listed on those
exchanges. Warrants acquired in units or attached to securities are not
included in this restriction.
The fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
RISKS
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INTEREST RATE Because the fund invests primarily in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
FOREIGN SECURITIES The fund has an unlimited right to purchase securities in any
foreign country, developed or developing, if they are listed on an exchange, as
well as a limited right to purchase such securities if they are unlisted.
Investors should consider carefully the substantial risks involved in
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securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the NYSE and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the U.S.
EMERGING MARKETS. Investments in companies domiciled in developing countries may
be subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in many developing countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in some developing countries may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial and, in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist governments
of a number of Eastern European countries expropriated large amounts of private
property in the past, in many cases without adequate compensation, and there can
be no assurance that such expropriation will not occur in the future. In the
event of expropriation, the fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to the fund
shareholders.
RUSSIAN SECURITIES. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in the
U.S. securities markets, and should be considered highly speculative. Such risks
include, together with Russia's continuing political and economic instability
and the slow-paced development of its market economy, the following: (a) delays
in settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be impossible
or more difficult than in other countries to obtain and/or enforce a judgment;
(c) pervasiveness of corruption, insider trading, and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (f) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the fund's ability to exchange local currencies for U.S. dollars; (g) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market
8
PAGE
capitalizations, when compared to securities and issuers in more developed
markets; (i) the difficulties associated with obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the fund to lose its registration
through fraud, negligence or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either by
itself or through a custodian or other agent inspecting the share register and
by obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the fund of its ownership rights
or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY The fund's management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations.
9
PAGE
The fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the fund's portfolio
securities are denominated may have a detrimental impact on the fund. Through
the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places the fund's investments.
The exercise of this flexible policy may include decisions to buy securities
with substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed losses.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
DIVERSIFICATION. The fund is a "non-diversified" investment company, which means
the fund is not limited in the proportion of its assets that may be invested in
the securities of a single issuer. However, the fund intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code, which generally will relieve the fund of any
liablility for federal income tax to the extent its earnings are distributed to
shareholders. See "Distributions and Taxes". To so qualify, among other
requirements, the fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of the
fund's total assets will be invested in the securities of a single issuer, and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer and the fund will not own more than 10% of the outstanding
voting securities of a single issuer. The fund's investments in U.S. government
securities are not subject to these limitations. Because the fund, as a
non-diversified investment company, may invest in a smaller number of individual
issuers than a diversified company, and may be more susceptible to any single
economic, political or regulatory occurance, an investment in the fund may
present greater risk to an investor than an investment in a diversified company.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, high risk, low rated and unrated debt securities generally
involve greater volatility of price and risk of principal and income, including
the possibility of default by, or bankruptcy of, the issuers of the securities.
In addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may diminish the
fund's ability to sell the securities at fair value either to meet redemption
requests or to respond to a specific economic event such as a deterioration in
the creditworthiness of the issuer. Reduced secondary market liquidity for
certain low rated or unrated debt securities may also make it more difficult for
the fund to obtain accurate market quotations for the purposes of valuing the
fund's portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the fund
were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade
10
PAGE
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the fund may incur additional expenses
seeking recovery.
The fund may accrue and report interest income on high yield bonds, such as zero
coupon bonds or pay-in-kind securities, even though it receives no cash interest
until the security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies, and to be
relieved of federal tax liabilities, the fund must distribute substantially all
of its net income and gains to shareholders (see "Distributions and Taxes")
generally on an annual basis. Thus, the fund may have to dispose of portfolio
securities under disadvantageous circumstances to generate cash or leverage
itself by borrowing cash in order to satisfy the distribution requirement.
DERIVATIVE SECURITIES are those whose values are dependent upon the performance
of one or more other securities or investments or indices; in contrast to common
stock, for example, whose value is dependent upon the operations of the issuer.
Stock index futures contracts and options on securities indices are considered
derivative investments. To the extent the fund enters into these transactions,
their success will depend upon the manager's ability to predict pertinent market
movements.
Some of the risks involved in stock index futures transactions relate to the
fund's ability to reduce or eliminate its futures positions, which will depend
upon the liquidity of the secondary markets for such futures. The fund intends
to purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract at any particular
time. Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use of stock
index futures by the fund for hedging purposes also depends upon the manager's
ability to predict correctly movements in the direction of the market, as to
which no assurance can be given.
There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the fund seeks to close out an
option position. If the fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by the fund, it would not be able to close out
the option. If restrictions on exercise were imposed, the fund might be unable
to exercise an option it has purchased. Except to the extent that a call option
on an index written by the fund is covered by an option on the same index
purchased by the fund, movements in the index may result in a loss to the fund;
however, such losses may be mitigated by changes in the value of the fund's
securities during the period the option was outstanding.
11
PAGE
OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris J. Ashton (66) Trustee Director, RBC Holdings, Inc. (bank holding company)
191 Clapboard Ridge Road and Bar-S Foods (meat packing company): director
Greenwich, CT 06830 or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, President, Chief Executive Officer and Chairman
of the Board, General Host Corporation (nursery and craft
centers.)
- ------------------------------------------------------------------------------------------------------------------------------------
* Nicholas F. Brady (68) Trustee Chairman, Templeton Emerging Markets Investment Trust
The Bullitt House PLC, Templeton Latin America Investment Trust PLC,
102 East Dover Street Darby Overseas Investments, Ltd. and Darby Emerging
Easton, MD 21601 Markets Investments LDC (investment firms) (1994-present);
Director, Templeton Global Strategy Funds, Amerada Hess
Corporation (exploration and refining of natural gas),
Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and
allied products); director or trustee, as the case may be,
of 21 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Secretary of the United States
Department of the Treasury (1988-1993) and Chairman of the
Board, Dillon, Read & Co., Inc. (investment banking) prior to
1988.
- ------------------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato (66) Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at Morris County and director of trustee, as the case may be, of 51 of
P.O. Box 1945 the investment companies in the Franklin Templeton Group
Morristown, NJ 07962-1945 of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
John Wm. Galbraith (77) Trustee President, Galbraith Properties, Inc. (personal investment
360 Central Avenue company); Director Emeritus, Gulf West Banks, Inc. (bank holding
Suite 1300 company) (1995-present); director or trustee, as the case may be,
St. Petersburg, FL 33701 of 20 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Director, Mercantile Bank
(1991-1995), Vice Chairman, Templeton, Galbraith & Hansberger Ltd.
(1986-1992), and Chairman, Templeton Funds Management, Inc.
(1974-1991).
- ------------------------------------------------------------------------------------------------------------------------------------
12
PAGE
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew H. Hines, Jr. (75) Trustee Consultant for the Triangle Consulting Group;
150 2nd Avenue N. Executive-in-Residence of Eckerd College (1991-present); director
St. Petersburg, FL 33701 or trustee, as the case may be, of 22 of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Director, Precise Power Corporation (1990-1997),
Director, Checkers Drive-In Restaurant, Inc. (1994-1997), and
Chairman of the Board and Chief Executive Officer, Florida
Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
- ------------------------------------------------------------------------------------------------------------------------------------
* Charles B. Johnson (65) Chairman President, Chief Executive Officer and Director, Franklin
777 Mariners Island Blvd. of the Board Resources, Inc.; Chairman of the Board and Director, Franklin
San Mateo, CA 94404 and Vice President Advisers, Inc., Franklin Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton
Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services Inc.; officer
and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 50 of the
investment companies in the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
Betty P. Krahmer (69) Trustee Director or trustee of various civic associations; director or
2201 Kentmere Parkway trustee, as the case may be, of 21 of the investment companies in
Wilmington, DE 19806 the Franklin Templeton Group of Funds; and FORMERLY, Economic
Analyst, U.S. Government.
- ------------------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (70) Trustee Director, Fund American Enterprises Holdings, Inc.; Martek
8212 Burning Tree Road Biosciences Corporation, MCI WorldCom (information services),
Bethesda, MD 20817 MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the
case may be, of 49 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Chairman, White
River Corporation (financial services) and Hambrecht and Quist
Group (investment banking), and President, National Association of
Securities Dealers, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Fred R. Millsaps (69) Trustee Manager of personal investments (1978-present); director of
2665 N.E. 37th Drive various business and nonprofit organizations; director or
Fort Lauderdale, FL 33308 trustee, as the case may be, of 22 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman
and Chief Executive Officer, Landmark Banking Corporation
(1969-1978), Financial Vice President, Florida Power and Light
(1965-1969), and Vice President, Federal Reserve Bank of Atlanta
(1958-1965).
- ------------------------------------------------------------------------------------------------------------------------------------
13
PAGE
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gregory E. McGowan (49) President Director and Executive Vice President, Templeton Investment
500 East Broward Blvd. Counsel, Inc.; Executive Vice President-International Development
Fort Lauderdale, FL and Chief International Counsel, Templeton Worldwide, Inc.;
33394-3091 Executive Vice President, Director and General Counsel, Templeton
International, Inc.; Executive Vice President and Secretary,
Templeton Global Advisors Limited; President of other Templeton
Funds; officer of 4 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Senior Attorney, U.S.
Securities and Exchange Commission.
- -----------------------------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Jr. (58) Vice President Executive Vice President and Director, Franklin Resources, Inc.
777 Mariners Island Blvd. and Franklin Templeton Distributors, Inc.; President and Director,
San Mateo, CA 94404 Franklin Advisers, Inc; Senior Vice President and Director,
Franklin Advisory Services, Inc. and Franklin Investment Advisory
Services, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and
of 53 of the investment companies in the Franklin Templeton Group
of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (53) Vice President Executive Vice President and Director, Franklin Resources, Inc.,
777 Mariners Island Blvd. Franklin Templeton Distributors, Inc. and Franklin Templeton
San Mateo, CA 94404 Services, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc; and officer
and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and 53 of the
investment companies in the Franklin Templeton Group of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Charles E. Johnson (42) Vice President Senior Vice President and Director, Franklin Resources, Inc.
500 East Broward Blvd. Senior Vice President, Franklin Templeton Distributors, Inc.;
Fort Lauderdale, FL President and Director, Templeton Worldwide, Inc.; Chairman and
33394-3091 Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the
other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 34
of the investment companies in the Franklin Templeton Group of
Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek (50) Vice President Senior Vice President and General Counsel, Franklin Resources,
777 Mariners Island Blvd. Inc.; Senior Vice President, Franklin Templeton Services, Inc. and
San Mateo, CA 94404 Franklin Templeton Distributors, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Vice President, Franklin Advisory
Services, Inc., Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the
Franklin Templeton Group of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
14
PAGE
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Martin L. Flanagan (38) Vice President Senior Vice President and Chief Financial Officer, Franklin
777 Mariners Island Blvd. Resources, Inc.; Executive Vice President and Director, Templeton
San Mateo, CA 94404 Worldwide, Inc.; Executive Vice President, Chief Operating Officer
and Director, Templeton Investment Counsel, Inc.; Executive Vice
President and Chief Financial Officer, Franklin Advisers, Inc.;
Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; Senior Vice President
and Chief Financial Officer, Franklin/Templeton Investor Services,
Inc.; officer and/or director of some of the other subsidiaries
of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
- -----------------------------------------------------------------------------------------------------------------------------------
Mark G. Holowesko (38) President President, Templeton Global Advisors Limited; Chief Investment
Lyford Cay Officer, Global Equity Group; Executive Vice President and
Nassau, Bahamas Director, Templeton Worldwide, Inc.; officer of 21 of the
investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
John R. Kay (58) Vice President Vice President and Treasurer, Templeton Worldwide, Inc.; Assistant
500 East Broward Blvd. Vice President, Franklin Templeton Distributors, Inc.; officer
Fort Lauderdale, FL of 25 of the investment companies in the Franklin Templeton Group
33394-3091 Group of Funds; and FORMERLY, Vice President and Controller,
Keystone Group, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Samuel J. Forester, Jr. (50) Vice President Managing Director, Templeton Worldwide, Inc.; Vice President of 10
500 East Broward Blvd. of the investment companies in the Franklin Templeton Group of
Fort Lauderdale, FL Funds; Director, Closed Joint-Stock Company Templeton and Templeton
33394-3091 Trust Services Pvt. Ltd.; and FORMERLY, President, Templeton Global
Bond Managers, a division of Templeton Investment Counsel, Inc.,
Founder and Partner, Forster, Hairston Investment Management, Inc.
(1989-1990), Managing Director (Mid-East Region), Merrill Lynch,
Pierce, Fenner & Smith Inc. (1987-1988), and Advisor for Saudi
Arabian Monetary Agency (1982-1987).
- -----------------------------------------------------------------------------------------------------------------------------------
Neil S. Devlin (41) Vice President Executive Vice President and Chief Investment Officer, Templeton
500 East Broward Blvd. Global Bond Managers, a division of Templeton Investment Counsel,
Fort Lauderdale, FL Inc.; officer of 4 of the investment companies in the Franklin
33394-3091 Templeton Group of Funds; and FORMERLY, Portfolio Manager and Bond
Analyst, Constitution Capital Management (1985-1987) and Bond
Trader and Research Analyst, Bank of New England (1982-1985).
- -----------------------------------------------------------------------------------------------------------------------------------
15
PAGE
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabeth M. Knoblock (43) Vice President- General Counsel, Secretary and Senior Vice President, Templeton
500 East Broward Blvd. Compliance Investment Counsel, Inc.; Senior Vice President, Templeton Global
Fort Lauderdale, FL Investors, Inc.; officer of 21 of the investment companies in the
33394-3091 Franklin Templeton Group of Funds; and FORMERLY, Vice President
and Associate General Counsel, Kidder Peabody & Co.; (1989-1990),
Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton
Inc. (1988), Vice President and Assistant General Counsel, E.F.
Hutton & Co. Inc. (1986-1988), and Special Counsel of the Division
of Investment Management, U.S. Securities and Exchange Commission
(1984-1986).
- -----------------------------------------------------------------------------------------------------------------------------------
James R. Baio (44) Treasurer Certified Public Accountant; Treasurer, Franklin Mutual Advisers,
500 East Broward Blvd. Inc.; Senior Vice President, Templeton Worldwide, Inc., Templeton
Fort Lauderdale, FL Global Investors, Inc. and Templeton Funds Trust Company; officer
33394-3091 of 22 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Senior Tax Manager, Ernst & Young
(certified public accountants) (1977-1989).
- -----------------------------------------------------------------------------------------------------------------------------------
Barbara J. Green (51) Secretary Senior Vice President, Templeton Worldwide, Inc. and Templeton
500 East Broward Blvd. Global Investors, Inc.; officer of 21 of the investment companies
Fort Lauderdale, FL in the Franklin Templeton Group of Funds; and FORMERLY, Deputy
33394-3091 Director of the Division of Investment Management, Executive
Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and
Exchange Commission (1986-1995), Attorney, Roger & Wells, and
Judicial Clerk, U.S. District Court (District of Massachusetts).
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
* This board member is considered an "interested person" under federal
securities laws. Mr. Brady's status as an interested person results from his
business affiliations with Franklin Resources, Inc. and Templeton Global
Advisors Limited. Mr. Brady and Franklin Resources, Inc. are both limited
partners of Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby
Overseas and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
</FN>
</TABLE>
The trust pays noninterested board members and Mr. Brady an annual retainer of
$2,000 and a fee of $200 per board meeting attended. Board members who serve on
the audit committee of the trust and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the trust. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Noninterested
board members may also serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the trust and by the Franklin
Templeton Group of Funds.
16
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<TABLE>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME THE TRUST(1) GROUP OF FUNDS(2) EACH SERVES(3)
- ------------------------------ --------------- -------------------- ------------------
<S> <C> <C> <C>
Harris J. Ashton ............. $3,675 $361,157 49
Nicholas F. Brady ............ 3,675 140,975 21
S. Joseph Fortunato .......... 3,675 367,835 51
John Wm. Galbraith ........... 3,485 134,425 20
Andrew H. Hines, Jr. ......... 3,685 208,075 22
Betty P. Krahmer ............. 3,675 141,075 21
Gordon S. Macklin ............ 3,675 361,157 49
Fred R. Millsaps ............. 3,685 210,075 22
<FN>
- -------------------------
1. For the fiscal year ended August 31, 1998. During the period from September
1, 1997 through February 27, 1998, an annual retainer of $2,500 and fees at the
rate of $200 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 168 U.S. based
funds or series.
</FN>
</TABLE>
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Templeton Investment
Counsel, Inc., through its Global Bond Managers division. The manager is wholly
owned by Franklin Resources, Inc. (Resources), a publicly owned company engaged
in the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, Australia, Bahamas, Bermuda,
Brazil, the British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong
Kong, India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands,
Poland, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan,
United Kingdom and the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to
17
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recommend, buy or sell, or to refrain from recommending, buying or selling any
security that the manager and access persons, as defined by applicable federal
securities laws, may buy or sell for its or their own account or for the
accounts of any other fund. The manager is not obligated to refrain from
investing in securities held by the fund or other funds it manages. Of course,
any transactions for the accounts of the manager and other access persons will
be made in compliance with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
/bullet/ 0.50% of the value of average daily net assets up to and including $200
million;
/bullet/ 0.45% of the value of average daily net assets over $200 million and up
to and including $1.3 billion; and
/bullet/ 0.40% of the value of average daily net assets over $1.3 billion.
The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended August 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- -----------------------------
1998 ......... 1,139,351
1997 ......... 1,046,390
1996 ......... 968,182
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the trust to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of:
/bullet/ 0.15% of the fund's average daily net assets up to $200 million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
/bullet/ 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended August 31, the fund paid the following
administration fees:
ADMINISTRATION
FEES PAID ($)
- ------------------------------
1998 ......... 340,429
1997 ......... 309,301
1996 ......... 278,143
For the periods prior to October 1, 1996, Templeton Global Investors, Inc.
provided administrative services to the fund.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the fund's assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign
18
PAGE
depositories, and monitors and furnishes information relevant to the selection
of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
fund's independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Since most purchases by the fund are principal transactions at net prices, the
fund incurs little or no brokerage costs. The fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. The fund seeks to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to
dealers in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the trust's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended August 31, the fund paid the following
brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- -------------------------------
1998 ......... 5,681
1997 ......... 14,015
1996 ......... 0
As of August 31, 1998, the fund owned securities issued by Morgan Stanley, Inc.
valued in the aggregate at $10,414,000. Except as noted, the fund did not own
any securities issued by its regular broker-dealers as of the end of the fiscal
year.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of interest on its investments. This income, less expenses incurred in the
operation of the fund, constitutes the fund's net investment income from which
dividends may be paid to you. Any distributions by the fund from such income
will be taxable to you as ordinary income, whether you take them in cash or in
additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be
19
PAGE
taxable to you as ordinary income. Distributions from net long-term capital
gains will be taxable to you as long-term capital gain, regardless of how long
you have held your shares in the fund. Any net capital gains realized by the
fund generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income taxes
on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from the
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January, to be treated by you as received in December) to avoid
these excise taxes, but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In
20
PAGE
doing so, all or a portion of the sales charge that you paid for your original
shares in the fund will be excluded from your tax basis in the shares sold (for
the purpose of determining gain or loss upon the sale of such shares). The
portion of the sales charge excluded will equal the amount that the sales charge
is reduced on your reinvestment. Any portion of the sales charge excluded from
your tax basis in the shares sold will be added to the tax basis of the shares
you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 1.22% of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction. In
some circumstances, you will be allowed to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with respect
to dividends designated by the fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculations.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND
PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The fund is a nondiversified series of Templeton Income Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on June 16, 1986, and is registered
with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The fund currently offers three classes of shares, Class A, Class C and Advisor
Class. Before January 1, 1999, Class A shares were designated Class I and Class
C shares were designated Class II. The fund may offer additional classes of
shares in the future. The full title of each class is:
/bullet/ Templeton Income Trust, Templeton Global Bond Fund - Class A
/bullet/ Templeton Income Trust, Templeton Global Bond Fund - Class C
/bullet/ Templeton Income Trust, Templeton Global Bond Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than
21
PAGE
50% of the shares voting the ability to elect all of the members of the board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, the fund is
required to help you communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion.
As of December 14, 1998, the principal shareholders of the fund, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ----------------------- ------------- ------------------
Franklin Templeton Fund
Allocator-
Moderate Target Fund
1810 Gateway, 3rd Floor
San Mateo, CA
94404-2470 ........... Advisor 34.48
Franklin Templeton
Trust Company
Trustee for ValuSelect
Franklin Templeton 401K
P.O. Box 2438
Rancho Cordova, CA
95741-2438 ........... Advisor 28.75
Templeton Investment
Counsel, Inc.
ACNA
1850 Gateway, 6th Floor
San Mateo, CA
94404-2470 ........... Advisor 19.10
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of December 14, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have his legal and investment advisors determine, the applicable
laws and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A and
1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
22
PAGE
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
/bullet/ You authorize Distributors to reserve 5% of your total intended
purchase in Class A shares registered in your name until you fulfill
your LOI. Your periodic statements will include the reserved shares in
the total shares you own, and we will pay or reinvest dividend and
capital gain distributions on the reserved shares according to the
distribution option you have chosen.
/bullet/ You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
/bullet/ Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
/bullet/ Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI may also qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charges for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are
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these plans entitled to receive retroactive adjustments in price for investments
made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
/bullet/ Was formed at least six months ago,
/bullet/ Has a purpose other than buying fund shares at a discount,
/bullet/ Has more than 10 members,
/bullet/ Can arrange for meetings between our representatives and group members,
/bullet/ Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
/bullet/ Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
/bullet/ Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased the fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
/bullet/ Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
the fund's Class A shares. This waiver category also applies to Class C
shares.
/bullet/ Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
/bullet/ Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
/bullet/ Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12
months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
/bullet/ Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a
Templeton Global Strategy Fund, a new CDSC will apply to your purchase
of fund shares and the CDSC holding period will begin again. We will,
however, credit your fund account with additional shares based on the
CDSC you previously paid and the amount of the redemption proceeds that
you reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
/bullet/ Distributions from an existing retirement plan invested in the Franklin
Templeton Funds.
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
/bullet/ Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer
24
PAGE
directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the
order.
/bullet/ Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for
you and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
/bullet/ Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs.
/bullet/ Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors.
/bullet/ Registered securities dealers and their affiliates, for their
investment accounts only.
/bullet/ Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer.
/bullet/ Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies.
/bullet/ Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer.
/bullet/ Accounts managed by the Franklin Templeton Group.
/bullet/ Certain unit investment trusts and their holders reinvesting
distributions from the trusts.
/bullet/ Group annuity separate accounts offered to retirement plans.
/bullet/ Chilean retirement plans that meet the requirements described under
"Retirement plans" below.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
sales charge. We may enter into a special arrangement with a securities dealer,
based on criteria established by the fund, to add together certain small
qualified retirement plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
Any retirement plan that does not meet the requirements to buy Class A shares
without an initial sales charge and that was a shareholder of the fund on or
before February 1, 1995, may buy shares of the fund subject to a maximum initial
sales charge of 4% of the offering price, 3.2% of which will be retained by
securities dealers.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE (%)
- ---------------------------------------------------
Under $30,000........................... 3.0
$30,000 but less than $100,000.......... 2.0
$100,000 but less than $400,000......... 1.0
$400,000 or more........................ 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency
25
PAGE
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 0.75% on sales of $1 million to $2 million, plus
0.60% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial sales
charge: 1% on sales of $500,000 to $2 million, plus 0.80% on sales over $2
million to $3 million, plus 0.50% on sales over $3 million to $50 million, plus
0.25% on sales over $50 million to $100 million, plus 0.15% on sales over $100
million. Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the securities dealer or set off against
other payments due to the dealer if shares are sold within 12 months of the
calendar month of purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or one of its affiliates,
and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply to any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
/bullet/ Account fees.
/bullet/ Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before
May 1, 1997, or (ii) the securities dealer of record received a payment
from Distributors of 0.25% or less, or (iii) Distributors did not make
any payment in connection with the purchase, or (iv) the securities
dealer of record has entered into a supplemental agreement with
Distributors.
/bullet/ Redemptions by the fund when an account falls below the minimum
required account size.
/bullet/ Redemptions following the death of the shareholder or beneficial owner.
/bullet/ Redemptions through a systematic withdrawal plan set up before February
1, 1995.
/bullet/ Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or
12% annually of your account's net asset value depending on the
frequency of your plan.
26
PAGE
/bullet/ Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R).
/bullet/ Distributions from individual retirement accounts (IRAs) due to death
or disability or upon periodic distributions based on life expectancy.
/bullet/ Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts.
/bullet/ Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities
27
PAGE
distributed would be valued at the price used to compute the fund's net assets
and you may incur brokerage fees in converting the securities to cash. The fund
does not intend to redeem illiquid securities in kind. If this happens, however,
you may not be able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- --------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of
28
PAGE
the portfolio. The net asset value per share is determined by dividing the net
asset value of the fund by the number of shares outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Trading in securities on European, Far Eastern and some other securities
exchanges and over-the-counter markets is normally completed well before the
close of business of the NYSE on each day that the NYSE is open. Trading in
European or Far Eastern securities generally, or in a particular country or
countries, may not take place on every NYSE business day. Furthermore, trading
takes place in various foreign markets on days that are not business days for
the NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination of
the prices of many of the portfolio securities used in the calculation and, if
events materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- --------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended August 31:
29
PAGE
AMOUNT RECEIVED IN
TOTAL AMOUNT CONNECTION WITH
COMMISSIONS RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
- ------------------------------------------------------------------
1998 467,836 777 12,258
1997 608,587 (2,666) 4,182
1996 453,128 21,650 1,894
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12b-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among others,
distribution or service fees paid to securities dealers or others who have
executed a servicing agreement with the fund, Distributors or its affiliates; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year of Class A's average daily net assets, payable quarterly.
Expenses not reimbursed in any quarter may be reimbursed in future quarters or
years. This includes expenses not reimbursed because they exceeded the
applicable limit under the plan. As of August 31, 1998, expenses under the Class
A plan that may be reimbursable in future quarters or years totaled $73,567, or
0.04% of Class A's net assets.
THE CLASS C PLAN. Under the Class C plan, the fund pays Distributors up to 0.50%
per year of the class's average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund may also pay a servicing fee of
up to 0.15% per year of the class's average daily net assets, payable quarterly.
This fee may be used to pay securities dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.
The expenses relating to the Class C plan are also used to pay Distributors for
advancing the commission costs to securities dealers with respect to the initial
sale of Class C shares.
THE CLASS A AND C PLANS. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
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The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended August 31, 1998, the amounts paid by the fund pursuant
to the plans were:
CLASS A ($) CLASS C ($)
- -----------------------------------------------------
Advertising ............. 5,821 4,966
Printing and mailing
prospectuses other
than to current
shareholders .......... 73,616 16,312
Payments to
underwriters .......... 11,755 9,256
Payments to
broker-dealers ........ 418,492 94,552
Other ................... 0 0
------- -------
Total ................... 509,684 125,086
======= =======
PERFORMANCE
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
nonstandardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended August 31,
1998, were:
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------
Class A ......... -1.58% 4.86% 7.39%
SINCE
INCEPTION
1 YEAR (05/01/95)
- ---------------------------------------------
Class C ......... 0.44% 7.13%
These figures were calculated according to the SEC formula:
P (1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gains distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended August 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------
Class A ......... -1.58% 26.77% 103.96%
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PAGE
SINCE
INCEPTION
1 YEAR (05/01/95)
- -----------------------------------
Class C 0.44% 25.84%
CURRENT YIELD Current yield shows the income per share earned by the fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the base
period. The yields for the 30-day period ended August 31, 1998, were:
CLASS A CLASS C
- -------------------
4.55% 4.30%
These figures were obtained using the following SEC formula:
Yield = 2 [(a-b + 1)6 - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum offering price. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rates for the 30-day period ended August 31, 1998, were:
CLASS A CLASS C
- -------------------
6.05% 5.83%
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS The fund may also quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do
32
PAGE
not reflect deductions for administrative and management costs and expenses.
From time to time, the fund and the manager may also refer to the following
information:
/bullet/ The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic
Insight or a similar statistical organization.
/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.
/bullet/ The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.
/bullet/ The geographic and industry distribution of the fund's portfolio and
the fund's top ten holdings.
/bullet/ The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to
a liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries
as published by various statistical organizations.
/bullet/ To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical
returns of various investments and published indices (E.G., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).
/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
/bullet/ Allegorical stories illustrating the importance of persistent long-term
investing.
/bullet/ The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
/bullet/ A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued
or "bargain" securities and its diversification by industry, nation and
type of stocks or other securities.
/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.
- -------------------------
* Sir John Templeton sold the Templeton organization to Franklin Resources,
Inc. in October 1992 and resigned from the board on April 16, 1995. He is no
longer involved with the investment management process.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, as well as the value of its shares that
are based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of the fund's
shares can be expected to increase. CDs are frequently insured by an agency of
the U.S. government. An investment in the fund is not insured by any federal,
state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start
33
PAGE
a retirement savings program. Of course, an investment in the fund cannot
guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $216 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
34
PAGE
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
35
