File Nos. 33-06510 and 811-04706
As filed with the Securities and Exchange Commission on November 28, 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 31 [X]
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PART A
TEMPLETON GLOBAL BOND FUND
CLASS A, C & ADVISOR
PROSPECTUS
DECEMBER 3, 2007
The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
PROSPECTUS CLASS A, C & ADVISOR
TEMPLETON GLOBAL BOND FUND
Templeton Income Trust
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CONTENTS
THE FUND
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INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
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Goal and Strategies 2 Main Risks 4 Performance 8 Fees and Expenses 10 Management 12 Distributions and Taxes 15 Financial Highlights 20 |
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS
AND SERVICES
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Choosing a Share Class 23 Buying Shares 33 Investor Services 36 Selling Shares 40 Exchanging Shares 43 Account Policies 51 Questions 61 |
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
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Back Cover
THE FUND
GOAL AND STRATEGIES
GOAL
The Fund's investment goal is current income with capital appreciation and growth of income.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, the Fund invests at least 80% of its net assets in "bonds." "Bonds" include debt securities of any maturity, such as bonds, notes, bills and debentures. Shareholders will be given at least 60 days' advance notice of any change to the 80% policy. In addition, the Fund's assets will be invested in issuers located in at least three countries (including the U.S.).
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The Fund invests predominantly in bonds issued by companies, governments and
government agencies located around the world.
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Bonds represent an obligation of the issuer to repay a loan of money to it, and generally provide for the payment of interest. Although the Fund may buy bonds rated in any category, it focuses on "investment grade" bonds. These are issues rated in the top four rating categories by independent rating agencies such as Standard & Poor's (S&P(R)) or Moody's Investors Service (Moody's) or, if unrated, determined by the Fund's manager to be comparable. The Fund may invest up to 25% of its total assets in bonds that are rated below investment grade. Generally, lower rated securities pay higher yields than more highly rated securities to compensate investors for the higher risk. The Fund is a non-diversified fund. The Fund may invest a significant portion of its assets in emerging markets.
The Fund may invest, from time to time, in forward currency contracts, including engaging in cross-hedging, to try to hedge (protect) against currency exchange rate fluctuations or to generate income for the Fund. A forward currency contract is an agreement to buy or sell a specific currency at a future date and at a price set at the time of the contract. Cross-hedging is the practice of entering into a forward contract to sell an amount of a foreign currency when the Fund believes that foreign currency may suffer or enjoy a substantial movement against another currency.
The Fund may also enter into currency and interest rate futures to try to hedge against currency exchange rate fluctuations, or to generate income for the Fund.
PORTFOLIO SELECTION
The manager allocates the Fund's assets based upon its assessment of changing market, political and economic conditions. It will consider various factors, including evaluation of interest and currency exchange rate changes and credit risks.
TEMPORARY INVESTMENTS
When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, short-term bank time deposits, bankers' acceptances and money market fund shares. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities, to maintain liquidity or to segregate on the Fund's books in connection with its forward currency, currency or interest rate futures positions. In these circumstances, the Fund may be unable to achieve its investment goal.
MAIN RISKS
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Changes in interest rates affect the prices of the Fund's bonds. If rates
rise, the value of the Fund's bonds will fall and so too will the Fund's
share price. You could lose money.
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INTEREST RATE
When interest rates rise, bond prices fall. The opposite is also true: bond prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to these price changes.
FOREIGN SECURITIES
Investing in foreign securities, including securities of foreign governments, typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars.
CURRENCY MANAGEMENT STRATEGIES. Currency management strategies, including cross-hedging, may substantially change the Fund's exposure to currency exchange rates and could result in losses to the Fund if currencies do not perform as the manager expects. In addition, currency management strategies, to the extent that they reduce the Fund's exposure to currency risks, may also reduce the Fund's ability to benefit from favorable changes in currency exchange rates. There is no assurance that the manager's use of currency management strategies will benefit the Fund or that they will be, or can be, used at appropriate times. Furthermore, there may not be perfect correlation between the amount of exposure to a particular currency and the amount of securities in the portfolio denominated in that currency.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries, and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign issuers may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign issuers than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices.
EMERGING MARKETS. The risks of foreign investments typically are greater in less developed countries, sometimes referred to as emerging markets. For example, political and economic structures in these countries may be less established and may change rapidly. These countries also are more likely to experience high levels of inflation, deflation or currency devaluation, which can harm their economies and securities markets and increase volatility. In fact, short-term volatility in these markets and declines of 50% or more are not uncommon. Restrictions on currency trading that may be imposed by emerging market countries will have an adverse effect on the value of the securities of companies that trade or operate in such countries.
CREDIT
An issuer of bonds may be unable to make interest payments and repay principal when due. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes called "junk bonds," generally have more credit risk than higher-rated securities.
Issuers issuing high yield, fixed-income securities are not as strong financially as those issuing securities with higher credit ratings. These issuers are more likely to encounter financial difficulties and are more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates, that could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, payments on the securities may never resume. These securities may be worthless and the Fund could lose its entire investment.
The prices of high yield, fixed-income securities fluctuate more than higher-quality securities. Prices are especially sensitive to developments affecting the issuer's business and to changes in the ratings assigned by rating agencies. Prices often are closely linked with the issuer's stock prices and typically rise and fall in response to factors that affect stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, stock market activity, large sustained sales by major investors, a high-profile default, or other factors.
High yield securities generally are less liquid than higher-quality securities. Many of these securities do not trade frequently, and when they do their prices may be significantly higher or lower than expected. At times, it may be difficult to sell these securities promptly at an acceptable price, which may limit the Fund's ability to sell securities in response to specific economic events or to meet redemption requests.
INCOME
Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall.
NON-DIVERSIFICATION
The Fund is a non-diversified fund. It may invest a greater portion of its assets in the securities of one or more issuers than a diversified fund. The Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund's shares. The Fund, however, intends to meet certain tax diversification requirements.
PORTFOLIO TURNOVER
The manager's attempt to keep the Fund's portfolio of bonds at an optimum level of interest rate sensitivity may cause the Fund's portfolio turnover rate to be high. High turnover will increase the Fund's transaction costs and may increase your tax liability.
More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI).
A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com.
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
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PERFORMANCE
This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. All Fund performance assumes reinvestment of dividends and capital gains.
CLASS A ANNUAL TOTAL RETURNS(1)
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1.83% 5.40% -4.83% 2.79% 4.18% 20.03% 21.29% 14.62% -3.07% 13.51%
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97 98 99 00 01 02 03 04 05 06
YEAR
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Best Quarter: Q4 '04 10.37% Worst Quarter: Q2 '04 -3.30%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 2006
1 YEAR 5 YEARS 10 YEARS
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Templeton Global Bond Fund - Class A(2)
Return Before Taxes 8.66% 11.95% 6.76%
Return After Taxes on Distributions 6.60% 9.93% 4.62%
Return After Taxes on Distributions 5.66% 9.14% 4.44%
and Sale of Fund Shares
Citigroup World Government Bond Index 6.12% 8.41% 5.24%
(WGBI)(3)
(index reflects no deductions for
fees, expenses, or taxes)
1 YEAR 5 YEARS 10 YEARS
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Templeton Global Bond Fund - Class C(2) 12.05% 12.44% 6.79%
Citigroup World Government Bond 6.12% 8.41% 5.24%
Index(WGBI)(3)
1 YEAR 5 YEARS 10 YEARS
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Templeton Global Bond Fund - Advisor 13.72% 13.18% 7.53%
Class
Citigroup World Government Bond 6.12% 8.41% 5.24%
Index(WGBI)(3)
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After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown.
These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future.
After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary.
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 2007, the Fund's year-to-date return was 9.39% for Class
A.
2. Figures reflect sales charges.
3. Source: Standard & Poor's Micropal (Citigroup World Government Bond
Index). The unmanaged Citigroup World Government Bond Index (WGBI) is market
capitalization weighted and tracks total returns of government bonds in 22
developed countries globally. Local bond market returns are from country
subindexes of the Citigroup WGBI. It includes reinvested interest. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS C ADVISOR
CLASS
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Maximum sales charge (load) as a 4.25%(2) 1.00% None
percentage of offering price
Load imposed on purchases 4.25%(2) None None
Maximum deferred sales charge (load) None(3) 1.00% None
Redemption fee on shares sold within 2.00% 2.00% 2.00%
7 calendar days following their
purchase date(1)
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Please see "Choosing a Share Class" on page 23 for an explanation of how and when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS C ADVISOR
CLASS
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Management fees 0.42% 0.42% 0.42%
Distribution and service (12b-1) fees 0.25% 0.65% None
Other expenses (including 0.32% 0.32% 0.32%
administration fees)
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Total annual Fund operating expenses 0.99% 1.39% 0.74%
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1. The redemption fee is calculated as a percentage of the amount redeemed
(using standard rounding criteria), and may be charged when you sell or
exchange your shares or if your shares are involuntarily redeemed. The fee
is retained by the Fund and generally withheld from redemption proceeds. For
more details, see "Redemption Fee" section.
2. The dollar amount of the sales charge is the difference between the
offering price of the shares purchased (which factors in the applicable sales
charge in this table) and the net asset value of those shares. Since the
offering price is calculated to two decimal places using standard rounding
criteria, the number of shares purchased and the dollar amount of the sales
charge as a percentage of the offering price and of your net investment may
be higher or lower depending on whether there was a downward or upward
rounding.
3. There is a 1% contingent deferred sales charge that applies to investments
of $1 million or more (see page 28) and purchases by certain retirement plans
without an initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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If you sell your shares at
the end of the period:
CLASS A $522(1) $727 $949 $1,586
CLASS C $242 $440 $761 $1,669
ADVISOR CLASS $76 $237 $411 $918
If you do not sell your
shares:
CLASS C $142 $440 $761 $1,669
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1. Assumes a contingent deferred sales charge (CDSC) will not apply.
MANAGEMENT
Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $669 billion in assets.
The portfolio manager responsible for the Fund's management is:
MICHAEL HASENSTAB PH.D. SENIOR VICE PRESIDENT OF ADVISERS
Mr. Hasenstab has been a manager of the Fund since 2001. He has primary
responsibility for the investments of the Fund. He has final authority over
all aspects of the Fund's investment portfolio, including but not limited to,
purchases and sales of individual securities, portfolio risk assessment, and
the management of daily cash balances in accordance with anticipated
management requirements. The degree to which he may perform these functions,
and the nature of these functions, may change from time to time. Mr.
Hasenstab joined Franklin Templeton Investments in 1995.
The Fund's SAI provides additional information about the portfolio manager's compensation, other accounts that he manages and his ownership of Fund shares.
The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year ended August 31, 2007, the Fund paid 0.42% of its average daily net assets to the manager for its services.
A discussion regarding the basis for the board of trustees approving the investment management contract of the Fund is available in the Fund's annual report to shareholders for the fiscal year ended August 31.
On August 2, 2004, Franklin Resources, Inc. announced that Advisers) (investment manager to many of the funds within Franklin Templeton Investments, and an affiliate of the investment manager to the other funds) reached a settlement with the Securities and Exchange Commission (SEC) that resolved the issues resulting from the SEC's investigation of market timing activity in the Franklin Templeton Investments funds. Under the terms of the settlement and the SEC's administrative order, pursuant to which Advisers neither admitted nor denied any of the findings contained therein, Advisers agreed, among other matters, to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. Such a distribution plan has been prepared and submitted to the SEC for approval. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, in accordance with the terms and conditions of the settlement and plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors have been named in multiple lawsuits in different courts alleging violations of various federal securities and state laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, investment managers, administrators, and distributors, rescission of management contracts and 12b-1 plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, allegedly resulting in market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the SEC's findings as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc.
To date, more than 400 similar lawsuits against at least 19 different mutual fund companies, among other defendants, have been filed in federal district courts throughout the country. Because these cases involve common questions of fact, the Judicial Panel on Multidistrict Litigation (the Judicial Panel) ordered the creation of a multidistrict litigation in the United States District Court for the District of Maryland, entitled "In re Mutual Funds Investment Litigation" (the MDL). The Judicial Panel then transferred similar cases from different districts to the MDL for coordinated or consolidated pretrial proceedings.
On December 13, 2004, Franklin Templeton Distributors, Inc. (Distributors)
(the principal underwriter of shares of the Franklin Templeton mutual funds)
and Advisers reached an agreement with the SEC, resolving the issues
resulting from the SEC's investigation concerning marketing support payments
to securities dealers who sell fund shares. In connection with that
agreement, in which Advisers and Distributors neither admitted nor denied any
of the findings contained therein, they agreed to pay the funds a penalty of
$20 million and disgorgement of $1 (one dollar), in accordance with a plan to
be developed by an independent distribution consultant to be paid for by
Advisers and Distributors. The SEC approved the independent distribution
consultant's proposed plan of distribution arising from this SEC order, and
disbursement of the settlement monies to the designated funds under this plan
was completed in September 2006, in accordance with the terms and conditions
of the SEC's order and the plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors, have also been named in multiple lawsuits alleging violations of federal securities and state laws relating to the disclosure of marketing support payments and/or payment of allegedly excessive commissions and/or advisory or distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named investment managers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds.
Franklin Resources, Inc. previously disclosed these issues as matters under investigation by government authorities and the subject of an internal company inquiry as well as private lawsuits in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on Franklin Resources, Inc.'s website at franklintempleton.com under "Statement on Current Industry Issues."
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN DISTRIBUTIONS
The Fund intends to qualify as a regulated investment company under the Internal Revenue Code (Code). As a regulated investment company, the Fund generally will pay no federal income tax on the income and gains it distributes to you. The Fund intends to pay an income dividend monthly from its net investment income. Capital gains, if any, may be distributed at least annually. The amount of any distributions will vary, and there is no guarantee the Fund will pay either income dividends or a capital gain distribution. Your income dividends and capital gain distribution will be automatically reinvested in additional shares at net asset value unless you elect to receive cash payments.
ANNUAL STATEMENTS. Every January, you will receive a statement that shows the tax status of distributions you received the previous year, including, for U.S. investors, the amount of any qualified dividend income subject to tax at capital gains rates and, for non-U.S. investors, the amount of your ordinary dividends that have been exempt from nonresident alien withholding taxes because they are interest-related or short-term capital gain dividends. Distributions declared in December but paid in January are taxable as if they were paid in December.
The Fund may at times find it necessary to reclassify income after it issues your tax reporting statement. This can result from rules in the Code that effectively prevent regulated investment companies such as the Fund from ascertaining with certainty until after the calendar year end, the final amount and character of distributions the Fund has received on its investments during the prior calendar year. Prior to issuing your statement, Franklin Templeton Investments makes every effort to search for reclassified income to reduce the number of corrected forms mailed to shareholders. However, when necessary, the Fund will send you a corrected Form 1099-DIV to reflect reclassified information. If you receive a corrected Form 1099-DIV, use the information on this Form, and not the information on your original statement, in completing your tax returns.
AVOID "BUYING A DIVIDEND." If you invest in the Fund shortly before it makes a capital gain distribution, you may receive some of your investment back in the form of a taxable distribution. For example, if you buy 500 shares in the Fund on December 10th at the Fund's net asset value (NAV) of $10 per share, and the Fund makes a capital gain distribution on December 15th of $1 per share, your shares will then have an NAV of $9 per share (disregarding any change in the Fund's market value), and you will have to pay a tax on what is essentially a return of your investment of $1 per share. This tax treatment is required even if you reinvest the $1 per share capital gain distribution in additional Fund shares.
TAX CONSIDERATIONS
In general, if you are a taxable investor, Fund distributions are taxable to you at either ordinary income or capital gains tax rates. This is true whether you reinvest your distributions in additional Fund shares or receive them in cash.
DIVIDEND INCOME. A portion of the income dividends paid to you by the Fund may be qualified dividends subject to taxation at the long-term capital gain rates. In general, income dividends from portfolio investments in the stock of domestic corporations and qualified foreign corporations are permitted this favored federal tax treatment. Income dividends from interest earned by the Fund on debt securities and dividends received from unqualified foreign corporations continue to be taxed at the higher ordinary income tax rates. Because the Fund has a higher percentage of its investments in debt securities, it is anticipated that none or only a small portion of the income dividends paid to you by the Fund may be qualified dividends eligible for taxation by individuals at long-term capital gain rates.
DISTRIBUTIONS OF CAPITAL GAINS. Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term capital gains are taxable as long-term capital gains no matter how long you have owned your shares. Long-term capital gain distributions to individuals qualify for the 15% tax rate. For individuals in the 10% and 15% tax brackets, the tax rate is 5% on capital gain distributions from gains realized in calendar year 2007 and 0% on distributions from gains realized in calendar years 2008 through 2010. These reduced rates of taxation of capital gain dividends and net long-term capital gains are scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
SALES OF FUND SHARES. When you sell your shares in the Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale, and will normally generate a gain or loss that will be reported to you in your year-end tax information. An exchange of your shares in one class in the Fund for shares of another class in the SAME Fund is not a taxable event, and no gain or loss will be reported on such a transaction.
If you have owned your Fund shares from more than one year, any gains reportable on the sale of your shares will also qualify for the reduced rates of taxation on capital gains as discussed above.
BACKUP WITHHOLDING. If you do not provide the Fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding at a rate of 28% on any distributions of income, capital gains or proceeds from the sale of your shares. The Fund also must withhold if the Internal Revenue Service (IRS) instructs it to do so.
STATE, LOCAL AND FOREIGN TAXES. Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. If the Fund qualifies to pass through to you the tax benefits from foreign taxes it pays on its investments, and elects to do so, then any foreign taxes it pays on these investments may be passed through to you as a foreign tax credit.
RECEIPT OF EXCESS INCLUSION INCOME BY THE FUND. Income received by the Fund from certain equity interests in mortgage pooling vehicles or residual interests in Real Estate Mortgage Investment Conduits (REMICs) is treated as "excess inclusion income." The Fund may derive such income either as a result of its direct investment in such interests or, indirectly, through its investment in Real Estate Investment Trusts (REITs) that hold such interests or otherwise qualify as taxable mortgage pools. In general, the Fund must allocate this income to Fund shareholders in proportion to dividends paid with the same consequences as if the shareholders directly received the excess inclusion income, and the Fund must pay a tax on any of this income that is allocable to "disqualified organizations," which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income (UBTI).
The rules concerning excess inclusion income are complex and unduly burdensome in their current form, and the Fund's manager is awaiting further guidance from the IRS on how these rules are to be implemented. Shareholders should talk to their tax advisors about whether an investment in the Fund is a suitable investment given the potential tax consequences of the Fund's receipt and distribution of excess inclusion income.
NON-U.S. INVESTORS. Non-U.S. investors may be subject to a U.S. withholding tax at a 30% or lower treaty rate on all Fund dividends of ordinary income. Non-U.S. investors may also be subject to U.S. estate tax on their investment in the Fund. They also have special certification requirements that, if not met, can subject them to backup withholding on any dividends, distributions and redemption proceeds that they receive from the Fund. Each of these subjects is discussed in greater detail in the "Distributions and Taxes - Non-U.S. investors" section of the Statement of Additional Information.
Exemptions from withholding are currently provided for distributions designated as long-term capital gains and for ordinary dividends designated as short-term capital gains or interest-related dividends. The exemptions from withholding on ordinary dividends designated as short-term capital gains or interest-related dividends are due to sunset on August 31, 2008. Any distributions of any qualified net interest income (interest-related dividends) or net short-term capital gains earned by the Fund after this date will again be subject to nonresident withholding taxes, unless these exemptions are extended or made permanent before the sunset provisions become effective.
The Fund may invest in equity securities of corporations that invest in U.S. real property, including REITs. The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes a non-U.S. person subject to U.S. tax on disposition of a U.S. real property interest as if he or she were a U.S. person. However, because the Fund does not expect to have more than 50% of its assets invested in REITs or real property corporations, it does not expect to pay any dividends that would be subject to FIRPTA reporting and tax withholding. For a more detailed discussion on investment in U.S. real property, see the section, "Distributions and Taxes - Non-U.S. investors - Investments in U.S. real property" in the Statement of Additional Information.
OTHER TAX INFORMATION. This discussion of "Distributions and Taxes" is not written to provide you with tax advice, and does not purport to deal with all of the tax consequences that may be applicable to your investment in the Fund. You should consult your own tax advisor regarding your particular circumstances before making an investment in the Fund, or about the federal, state, local and foreign tax consequences of your investment in the Fund.
FINANCIAL HIGHLIGHTS
This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request.
---------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS A 2007 2006 2005 2004 2003
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 10.78 $ 10.47 $ 10.00 $ 9.39 $ 8.40
---------------------------------------------------------------
Income from investment operations/a:
Net investment income/b ........................................ 0.46 0.38 0.36 0.38 0.38
Net realized and unrealized gains (losses) ..................... 0.55 0.43 0.62 0.85 1.11
---------------------------------------------------------------
Total from investment operations .................................. 1.01 0.81 0.98 1.23 1.49
---------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign currency gains .. (0.63) (0.50) (0.51) (0.62) (0.50)
Net realized gains ............................................. (0.01) -- -- -- --
---------------------------------------------------------------
Total distributions ............................................... (0.64) (0.50) (0.51) (0.62) (0.50)
---------------------------------------------------------------
Redemption fees ................................................... --/d --/d --/d --/d --
---------------------------------------------------------------
Net asset value, end of year ...................................... $ 11.15 $ 10.78 $ 10.47 $ 10.00 $ 9.39
===============================================================
Total return/c .................................................... 9.57% 7.95% 9.86% 13.24% 18.03%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................................... 0.99%/e 1.03%/e 1.05%/e 1.13%/e 1.10%
Net investment income ............................................. 4.17% 3.59% 3.41% 3.80% 4.11%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $3,853,706 $1,858,368 $1,279,144 $575,480 $351,771
Portfolio turnover rate ........................................... 44.33% 39.14% 27.92% 31.48% 63.64%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
-------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS C 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 10.79 $ 10.48 $ 10.01 $ 9.40 $ 8.41
-------------------------------------------------------------
Income from investment operations/a:
Net investment income/b ........................................ 0.42 0.34 0.32 0.34 0.34
Net realized and unrealized gains (losses) ..................... 0.56 0.43 0.62 0.85 1.11
-------------------------------------------------------------
Total from investment operations .................................. 0.98 0.77 0.94 1.19 1.45
-------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign currency gains .. (0.59) (0.46) (0.47) (0.58) (0.46)
Net realized gains ............................................. (0.01) -- -- -- --
-------------------------------------------------------------
Total distributions ............................................... (0.60) (0.46) (0.47) (0.58) (0.46)
-------------------------------------------------------------
Redemption fees ................................................... --/d --/d --/d --/d --
-------------------------------------------------------------
Net asset value, end of year ...................................... $ 11.17 $ 10.79 $ 10.48 $ 10.01 $ 9.40
=============================================================
Total return/c .................................................... 9.22% 7.52% 9.42% 12.66% 17.67%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................................... 1.39%/e 1.42%/e 1.45%/e 1.53%/e 1.50%
Net investment income ............................................. 3.77% 3.20% 3.01% 3.40% 3.71%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $993,769 $467,302 $351,391 $141,485 $74,102
Portfolio turnover rate ........................................... 44.33% 39.14% 27.92% 31.48% 63.64%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
---------------------------------------------------------------
YEAR ENDED AUGUST 31,
ADVISOR CLASS 2007 2006 2005 2004 2003
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 10.75 $ 10.45 $ 9.98 $ 9.38 $ 8.39
---------------------------------------------------------------
Income from investment operations/a:
Net investment income/b ........................................ 0.49 0.41 0.39 0.40 0.40
Net realized and unrealized gains (losses) ..................... 0.56 0.42 0.62 0.84 1.11
---------------------------------------------------------------
Total from investment operations .................................. 1.05 0.83 1.01 1.24 1.51
---------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign currency gains .. (0.66) (0.53) (0.54) (0.64) (0.52)
Net realized gains ............................................. (0.01) -- -- -- --
---------------------------------------------------------------
Total distributions ............................................... (0.67) (0.53) (0.54) (0.64) (0.52)
---------------------------------------------------------------
Redemption fees ................................................... --/c --/c --/c --/c --
---------------------------------------------------------------
Net asset value, end of year ...................................... $ 11.13 $ 10.75 $ 10.45 $ 9.98 $ 9.38
===============================================================
Total return ...................................................... 9.97% 8.14% 10.16% 13.43% 18.35%
RATIOS TO AVERAGE NET ASSETS
Expenses .......................................................... 0.74%/d 0.78%/d 0.80%/d 0.88%/d 0.85%
Net investment income ............................................. 4.42% 3.84% 3.66% 4.05% 4.36%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $1,156,962 $444,064 $268,413 $117,398 $50,480
Portfolio turnover rate ........................................... 44.33% 39.14% 27.92% 31.48% 63.64%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
YOUR ACCOUNT
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to choose the class that best meets your situation. Your investment representative can help you decide. Investors may purchase Class C shares only for Fund accounts on which they have appointed an investment representative (financial advisor) of record. Investors who have not appointed an investment representative (financial advisor) to existing Class C share Fund accounts, may not make additional purchases to those accounts but may exchange their shares to a Franklin Templeton fund that offers Class C shares. Dividend and capital gain distributions may continue to be reinvested in existing Class C share Fund accounts. These provisions do not apply to Employer Sponsored Retirement Plans.
CLASS A CLASS C ADVISOR CLASS ----------------------------------------------- o Initial o No o For sales initial qualified charge of sales investors, 4.25% or charge see page 31 less o Deferred o Deferred sales sales charge of charge of 1% on 1% on purchases shares you of $1 sell million or within 12 more sold months within 18 months o Lower o Higher annual annual expenses expenses than Class than Class C due to A due to lower higher distribution distribution fees fees |
[Begin callout]
FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments and the Franklin Mutual Recovery Fund. They do
not include the funds in the Franklin Templeton Variable Insurance Products
Trust.
[End callout]
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING % OF YOUR NET
PRICE* INVESTMENT*
--------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 2.00 2.04
million
|
*The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding.
SALES CHARGE REDUCTIONS AND WAIVERS
QUANTITY DISCOUNTS. We offer two ways for you to combine your current purchase of Class A Fund shares with other existing Franklin Templeton fund share holdings that might enable you to qualify for a lower sales charge with your current purchase. You can qualify for a lower sales charge when you reach certain "sales charge breakpoints." This quantity discount information is also available free of charge at www.franklintempleton.com retail/jsp_cm/fund_perf/pub/quantity_discount.jsp. This web page can also be reached at franklintempleton.com by clicking the "Funds & Performance" tab and then choosing "Quantity Discounts."1. CUMULATIVE QUANTITY DISCOUNT - lets you combine certain existing holdings of Franklin Templeton fund shares - referred to as "cumulative quantity discount eligible shares" - with your current purchase of Class A shares to determine if you qualify for a sales charge breakpoint.
Cumulative quantity discount eligible shares are shares:
(i) Registered to (or held for):
o You, individually;
o Your spouse or domestic partner, as recognized by applicable state law;
o You jointly with your spouse or domestic partner;
o You jointly with another unrelated (not a spouse or domestic partner) person if that other person has not included the value of the shares as cumulative quantity discount eligible shares for purposes of that person's separate investments in Franklin Templeton fund shares;
o A trustee/custodian of a Coverdell Education Savings account for which you are the identified responsible person on the records of the "current purchase broker-dealer" (as defined below) or its affiliate;
o A trustee/custodian of your IRA (which includes a Roth IRA and an
employer sponsored IRA such as a SIMPLE IRA) or your non-ERISA covered
403(b), if the shares are registered with the Fund (or in the current
purchase broker-dealer's brokerage account) under your Social Security
number or the trustee/custodian is providing IRA custody services for
clients of the current purchase broker-dealer as an affiliate of, or
under contract with, the firm; or
o Any entity over which you or your spouse or domestic partner have
individual or shared authority, as principal, to buy and sell shares for
the account (for example, an UGMA/UTMA account for a child on which you
or your spouse or domestic partner are the custodian, a trust on which
you or your spouse or domestic partner are the trustee, a business
account [not to include retirement plans] for your solely owned business
[or the solely owned business of your spouse or domestic partner] on
which you [or your spouse or domestic partner] are the authorized
signer); THAT ARE
(ii) in one or more accounts maintained by the transfer agent for the Franklin Templeton funds on which your "current purchase broker-dealer" (as defined below) is the broker-dealer of record or one or more brokerage accounts maintained with your "current purchase broker-dealer." Your current purchase broker-dealer is the broker-dealer (financial advisor) for the Fund account (or brokerage account) that will hold the shares from your current purchase. If you do not select a broker-dealer (financial advisor) for your current purchase, we will consider the distributor of the Fund's shares to be your current purchase broker-dealer for purposes of identifying cumulative quantity discount eligible shares that might be combined with your current purchase.
If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase to achieve a sales charge breakpoint, you must, at the time of your purchase (including at the time of any future purchase) specifically identify those shares to your current purchase broker-dealer.
The value of cumulative quantity discount eligible shares equals the cost or current value of those shares, whichever is higher. The current value of shares is determined by multiplying the number of shares by their highest current public offering price. You should retain any records necessary to substantiate historical share costs because your current purchase broker-dealer may not have or maintain this information.
If there are cumulative quantity discount eligible shares that would qualify for combining with your current purchase and you do not tell your current purchase broker-dealer at the time of your current purchase or any future purchase, you may not receive the benefit of a reduced sales charge that might otherwise be available.
Franklin Templeton fund shares held as follows cannot be combined with your current purchase for purposes of the cumulative quantity discount:
o Shares held indirectly through financial intermediaries other than your current purchase broker-dealer (for example, shares held in a different broker-dealer's brokerage account or with a bank, an insurance company separate account or an investment advisor); or
o Shares held through an administrator or trustee/custodian of an Employer Sponsored Retirement Plan (for example, a 401(k) plan); or
o Shares held in a 529 college savings plan; or
o Shares held directly in a Franklin Templeton fund account on which the broker-dealer (financial advisor) of record is different than your current purchase broker-dealer.
Franklin Templeton fund assets held in multiple Employer Sponsored Retirement Plans may be combined in order to qualify for sales charge breakpoints at the plan level if the plans are sponsored by the same employer.
A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing plan that qualifies under section 401(a) of the Internal Revenue Code, including 401(k), money purchase pension, profit sharing and defined benefit plans.
An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs.
2. LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount of "cumulative quantity discount eligible shares" (as defined in the "Cumulative quantity discount" section above) over a 13-month period and lets you receive the same sales charge as if all shares had been purchased at one time. We will reserve 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. Please refer to the SAI for more LOI details.
To sign up for these programs, complete the appropriate section of your account application.
SALES CHARGE WAIVERS. Class A shares may be purchased without an initial sales charge or contingent deferred sales charge (CDSC) by certain investors or for certain payments. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/632-2301. A list of available sales charge waivers also may be found in the SAI.
INVESTMENTS OF $1 MILLION OR MORE
If you invest $1 million or more, either as a lump sum or through our cumulative quantity discount or letter of intent programs, you can buy Class A shares without an initial sales charge. However, there is a 1% CDSC on any shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see page 29).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up to 0.25% per year to those who sell and distribute Class A shares and provide other services to shareholders. Because these fees are paid out of Class A's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
With Class C shares, there is no initial sales charge.
We place any investment of $1 million or more in Class A shares, since Class A's annual expenses are lower.
CDSC
There is a 1% CDSC on any Class C shares you sell within 12 months of purchase. The way we calculate the CDSC is the same for each class (please see page 29).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class C has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 0.65% per year for the sale of Class C shares and for services provided to shareholders. Because these fees are paid out of Class C's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C
The CDSC for each class is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gain distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. If there are not enough of these to meet your request, we will sell the shares in the order they were purchased. We will use this same method if you exchange your shares into another Franklin Templeton fund (please see page 43 for exchange information).
REINSTATEMENT PRIVILEGE
If you sell shares of a Franklin Templeton fund that were held indirectly for
your benefit in an account with your investment representative's firm or your
bank's trust department or that were registered to you directly by the Fund's
transfer agent (or, to an affiliated custodian or trustee of the Fund's
transfer agent), you may reinvest all or a portion of the proceeds from that
sale within 90 days of the sale without an initial sales charge. This
Reinstatement Privilege does not apply to: (i) a purchase of Fund shares made
through a regularly scheduled automatic investment plan such as a purchase by
a regularly scheduled payroll deduction or transfer from a bank account, or
(ii) a purchase of Fund shares with proceeds from the sale of Franklin
Templeton fund shares that were held indirectly through an Employer Sponsored
Retirement Plan that is not a DCS Plan or a non-Franklin Templeton individual
or employer sponsored IRA.
In order to take advantage of this Reinstatement Privilege, you must inform your investment representative or the Fund's transfer agent of this privilege at the time of your investment. The proceeds from the earlier sale must also be invested within the same share class as that of the sold shares, except proceeds will be reinvested in Class A shares if the proceeds are from the sale of (i) Class B shares; or (ii) Class C shares or Class R shares if at the time of investment you have not appointed an investment representative (financial advisor) of record for the Fund account(s) in which the purchased shares will be held. Proceeds from the earlier sale of Class Z shares may also be invested in Class A shares under this Reinstatement Privilege.
If you paid a CDSC when you sold your Class A or C shares, we will credit back to you the CDSC paid on the amount you are reinvesting within 90 days of the sale by adding it to the amount of your reinvestment (for example, if you are reinvesting $10,000 within 90 days of an earlier $10,000 sale on which you paid a $100 CDSC, the amount of your reinvestment will equal $10,100). The new shares issued with your reinvestment WILL BE subject to any otherwise applicable CDSC. If, however, you (except Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B shares; or (2) Class C shares held at the time of sale in a Franklin Templeton fund account without an investment representative (financial advisor) appointed by you and invest the proceeds from that sale in Class A shares within 90 days of the sale, you will not be credited with any CDSC paid at the time of sale. In this case, the new Class A shares issued with your reinvestment WILL NOT BE subject to any otherwise applicable CDSC.
Proceeds immediately placed in a Franklin Templeton Bank Certificate of Deposit (CD) also may be reinvested without an initial sales charge if you reinvest them within 90 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange program. Shares purchased with the proceeds from a money fund may be subject to a sales charge.
A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level recordkeeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level recordkeeping related to those DCS services.
QUALIFIED INVESTORS - ADVISOR CLASS
The following investors or investments may qualify to buy Advisor Class shares of the Fund:
o Shares acquired by a financial intermediary in connection with its mutual fund trading platform that the intermediary holds, directly or indirectly, on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with any broker-dealer, trust company or registered investment advisor (RIA) that is not an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. Minimum initial investment: $50,000 for individual or multiple clients.
o Shares acquired by a financial intermediary that the intermediary holds on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with the financial intermediary or an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. No minimum initial investment.
o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Minimum initial investment: $1 million in Advisor Class or Class Z shares of any Franklin Templeton fund.
o Current and former officers, trustees, directors, full-time employees (and their family members) of both Franklin Templeton Investments and Franklin Templeton Funds, consistent with our then-current policies. Minimum initial investment: $100 ($50 for accounts with an automatic investment plan).
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.: (1) under an advisory agreement (including sub-advisory agreements); and/or (2) as Trustee of an inter vivos or testamentary trust.
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o An Employer Sponsored Retirement Plan (Plan) with Plan assets of $1
million or more that is not an Existing DCS Plan. An "Employer Sponsored
Retirement Plan" includes (a) an employer sponsored pension or profit
sharing plan that qualifies (Qualified Plan) under section 401(a) of the
Internal Revenue Code (Code), including Code section 401(k), money purchase
pension, profit sharing and defined benefit plans; (b) an ERISA covered
403(b); and (c) certain non-qualified deferred compensation arrangements
that operate in a similar manner to a Qualified Plan, such as 457 plans and
executive deferred compensation arrangements, but not including employer
sponsored IRAs. An "Existing DCS Plan" is an Employer Sponsored Retirement
Plan that has contracted on or before May 1, 2006 for participant level
recordkeeping with an affiliate of Distributors (the Recordkeeping
Affiliate) or with the entity identified in the Recordkeeping Affiliate's
small business plan promotional materials. An Existing DCS Plan became
eligible to purchase Advisor Class shares on May 1, 2007.
o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code, provided that Distributors or an affiliate of Distributors has entered into a contract with the state sponsor of the program to provide certain services relating to the operation of the program. No initial minimum investment.
o An individual or entity associated with a current customer of Franklin Templeton Institutional, LLC (FTI, LLC) if approved by FTI, LLC in consultation with its customer.
BUYING SHARES
Regular accounts $1,000 ----------------------------------------------------- Automatic investment plans $50 ----------------------------------------------------- UGMA/UTMA accounts $100 ----------------------------------------------------- Employer Sponsored Retirement Plans, no minimum SIMPLE-IRAs, SEP-IRAs, SARSEPs or 403(b) plan accounts ----------------------------------------------------- IRAs, IRA rollovers, Coverdell Education Savings Plans or Roth IRAs $250 ----------------------------------------------------- Broker-dealer sponsored wrap account no minimum programs ----------------------------------------------------- Current and former full-time $100 employees, officers, trustees and directors of Franklin Templeton entities, and their family members ----------------------------------------------------- |
Please note that you may only buy shares of a fund eligible for sale in your state or jurisdiction.
ACCOUNT APPLICATION
If you are opening a new account, please complete and sign the enclosed account application. Make sure you indicate the share class you have chosen. If you do not indicate a class, we will place your purchase in Class A shares. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page 36). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, non-bank money orders or travelers checks as forms of payment to purchase shares.
BUYING SHARES
----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
----------------------------------------------------------------------
THROUGH YOUR Contact your investment Contact your investment
INVESTMENT representative representative
REPRESENTATIVE
----------------------------------------------------------------------
If you have another Before requesting a
Franklin Templeton fund telephone or online
BY PHONE/ONLINE account with your bank purchase into an
account information on existing account,
(Up to $100,000 file, you may open a new please make sure we
per shareholder account by phone. At have your bank account
per day) this time, a new account information on file. If
may not be opened we do not have this
1-800/632-2301 online. information, you will
need to send written
To make a same day instructions with your
franklintempleton. investment, your phone bank's name and address
com order must be received and a voided check or
NOTE: (1) CERTAIN and accepted by us by savings account deposit
ACCOUNT TYPES ARE 1:00 p.m. Pacific time slip. If the bank and
NOT AVAILABLE FOR or the close of the New Fund accounts do not
ONLINE ACCOUNT York Stock Exchange, have at least one
ACCESS AND (2) whichever is earlier. common owner, your
THE AMOUNT MAY BE written request must be
HIGHER FOR signed by ALL fund AND
MEMBERS OF bank account owners,
FRANKLIN and each individual
TEMPLETON VIP must have his or her
SERVICES/TM. signature guaranteed.
PLEASE SEE PAGE
39 FOR MORE To make a same day
INFORMATION investment, your phone
REGARDING or online order must be
ELIGIBILITY. received and accepted
by us by 1:00 p.m.
Pacific time or the
close of the New York
Stock Exchange,
whichever is earlier.
----------------------------------------------------------------------
Make your check payable Make your check payable
to Templeton Global Bond to Templeton Global
Fund. Bond Fund. Include your
BY MAIL account number on the
Mail the check and your check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip,
include a note with
your name, the Fund
name, and your account
number.
Mail the check and
deposit slip or note to
Investor Services.
----------------------------------------------------------------------
Call to receive a wire Call to receive a wire
control number and wire control number and wire
instructions. instructions.
BY WIRE Wire the funds and mail To make a same day wire
your signed application investment, the wired
1-800/632-2301 to Investor Services. funds must be received
(or Please include the wire and accepted by us by
1-650/312-2000 control number or your 1:00 p.m. Pacific time
collect) new account number on or the close of the New
the application. York Stock Exchange,
whichever is earlier.
To make a same day wire
investment, the wired
funds must be received
and accepted by us by
1:00 p.m. Pacific time
or the close of the New
York Stock Exchange,
whichever is earlier.
----------------------------------------------------------------------
Call Shareholder Call Shareholder
Services at Services at
BY EXCHANGE 1-800/632-2301, or send 1-800/632-2301, or send
signed written signed written
instructions. You also instructions. You also
may place an online may place an online
franklintempleton. exchange order. The exchange order.
com automated telephone
system cannot be used to
open a new account. (Please see page 43 for
information on
(Please see page 43 for exchanges.)
information on
exchanges.)
----------------------------------------------------------------------
|
FRANKLIN TEMPLETON INVESTOR SERVICES
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY
5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK,
AT FRANKLINTEMPLETON.COM
INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN
This plan offers a convenient way for you to invest in the Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include your minimum initial investment with your application.
AUTOMATIC PAYROLL DEDUCTION
You may invest in the Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit.
AUTOMATED TELEPHONE SYSTEM
Our automated system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available by dialing any of the following numbers from a touch-tone phone:
SHAREHOLDER SERVICES 1-800/632-2301 ADVISOR SERVICES 1-800/524-4040 RETIREMENT SERVICES 1-800/527-2020 |
DISTRIBUTION OPTIONS
You may reinvest distributions you receive from the Fund in an existing account in the same share class* of the Fund or another Franklin Templeton fund. Initial sales charges and CDSCs will not apply to reinvested distributions. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer.
If you received a distribution and chose to return it to purchase additional shares in Class A shares of another Franklin Templeton fund, you will not be charged an initial sales charge if you invest the distribution within 90 days of the distribution date.
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For retirement plans for which Franklin Templeton Bank & Trust is the trustee
or custodian, special forms may be needed to receive distributions in cash.
Please call 1-800/527-2020 for information.
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Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund.
*Class C shareholders may reinvest their distributions in Class A shares of any Franklin Templeton money fund. Advisor Class shareholders may reinvest in Advisor Class or Class A shares of another Franklin Templeton fund. To reinvest your distributions in Advisor Class shares of another Franklin Templeton fund, you must be a current shareholder in Advisor Class or otherwise qualify to buy that fund's Advisor Class shares.
RETIREMENT PLANS
Franklin Templeton Investments offers a variety of retirement plans for individuals and businesses. These plans require separate applications and their policies and procedures may be different than those described in this prospectus. For more information, including a free retirement plan brochure or application, please call Retirement Services at 1-800/527-2020.
TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans).
To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks.
As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. OF COURSE, YOU CAN DECLINE TELEPHONE BUY, SELL, OR EXCHANGE PRIVILEGES ON YOUR ACCOUNT APPLICATION, OR CHOOSE NOT TO REGISTER FOR ONLINE PRIVILEGES. IF YOU HAVE TELEPHONE/ONLINE PRIVILEGES ON YOUR ACCOUNT AND WANT TO DISCONTINUE THEM, PLEASE CONTACT US FOR INSTRUCTIONS. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges.
NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality.
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to automatically sell your shares and receive regular payments from your account. A CDSC may apply to withdrawals that exceed certain amounts. Certain terms and minimums apply. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application.
FRANKLIN TEMPLETON VIP SERVICES/TM
You may be eligible for Franklin Templeton VIP Services/TM if you are currently eligible for the $250,000 sales charge breakpoint based solely on shares registered directly with the Franklin Templeton funds' transfer agent and excluding shares held indirectly through brokerage accounts. Franklin Templeton VIP Services/TM shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING
Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if:
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A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
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o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect the Fund against potential claims based on the instructions received.
The amount may be higher for members of Franklin Templeton VIP Services/TM. Please see page 39 for more information regarding eligibility.
SELLING RECENTLY PURCHASED SHARES
If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more.
REDEMPTION PROCEEDS
Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency.
RETIREMENT PLANS
You may need to complete additional forms to sell shares in a Franklin Templeton Bank & Trust retirement plan. For participants under age 591/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for details.
THROUGH YOUR Contact your investment representative
INVESTMENT
REPRESENTATIVE
---------------------------------------------------------------
Send written instructions and endorsed
share certificates (if you hold share
BY MAIL certificates) to Investor Services.
Corporate, partnership or trust
accounts may need to send additional
documents.
Specify the Fund, the account number
and the dollar value or number of
shares you wish to sell. Be sure to
include all necessary signatures and
any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s)
and address on the account, or
otherwise according to your written
instructions.
---------------------------------------------------------------
As long as your transaction is for
BY PHONE/ONLINE $100,000 or less, you do not hold share
certificates and you have not changed
1-800/632-2301 your address by phone or online within
the last 15 days, you can sell your
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franklintempleton.com shares by phone or online. The amount may be higher for members of Franklin Templeton VIP Services/TM. Please see page 39 for more information regarding eligibility.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption
proceeds sent to a bank account, please
make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and a voided check or savings
account deposit slip. If the bank and
Fund accounts do not have at least one
common owner, you must provide written
instructions signed by ALL fund AND
bank account owners, and each
individual must have his or her
signature guaranteed.
If we receive your request in proper
form by 1:00 p.m. Pacific time,
proceeds sent by ACH generally will be
available within two to three business
days.
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Obtain a current prospectus for the
fund you are considering. Prospectuses
BY EXCHANGE are available online at
franklintempleton.com.
Call Shareholder Services at the number
below or send signed written
instructions. You also may place an
exchange order online. See the
policies at left for selling shares by
mail, phone, or online.
If you hold share certificates, you
will need to return them to the Fund
before your exchange can be processed.
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FRANKLIN TEMPLETON INVESTOR SERVICES
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK,
AT FRANKLINTEMPLETON.COM
EXCHANGING SHARES
EXCHANGE PRIVILEGE
CLASS A & C
You can exchange shares between most Franklin Templeton funds within the same class,* generally without paying any additional sales charges. If you exchange shares held for less than six months, however, you may be charged the difference between the initial sales charge of the two funds if the difference is more than 0.25%. If you exchange shares from a money fund or another fund that does not have a sales charge, a sales charge may apply no matter how long you have held the shares.
Any CDSC will continue to be calculated from the date of your initial investment and will not be charged at the time of the exchange. The purchase price for determining a CDSC on exchanged shares will be the price you paid for the original shares. If you exchange shares subject to a CDSC into a Class A money fund, the time your shares are held in the money fund will not count towards the CDSC holding period.
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge.
ADVISOR CLASS
You can exchange your Advisor Class shares for Advisor Class shares of other
Franklin Templeton funds. You also may exchange your Advisor Class shares for
Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you are a current shareholder in
Advisor Class or you otherwise qualify to buy the fund's Advisor Class
shares.
ALL CLASSES
The remainder of the "Exchanging Shares" section applies to all classes.
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An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
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Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee.
REJECTED EXCHANGES. If the Fund rejects an exchange request involving the sale of Fund shares, the rejected exchange request will also mean rejection of the request to purchase shares of another fund with the proceeds of the sale. Of course, you may generally redeem shares of the Fund at any time.
EXCHANGES THROUGH FINANCIAL INTERMEDIARIES. If you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains a master account (an Omnibus Account) with the Fund for trading on behalf of its customers, different exchange and/or transfer limit guidelines and restrictions may apply. The financial intermediary through whom you are investing may choose to adopt different trading restrictions designed to discourage short-term or excessive trading. Consult with your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) to determine what trading restrictions, including exchange/transfer limitations, may be applicable to you.
FUND EXCHANGE PRIVILEGE CHANGES/WAIVER. The Fund may terminate or modify (temporarily or permanently) this exchange privilege in the future. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
OTHER FUNDS' EXCHANGE PRIVILEGES. If there is a conflict between the exchange privileges of two funds involved in an exchange transaction, the stricter policy will apply to the transaction. Other Franklin Templeton funds may have different exchange restrictions. Check each fund's prospectus for details.
MARKET TIMING TRADING POLICY
The Fund's board of trustees has adopted the following policies and procedures with respect to market timing (Market Timing Trading Policy).
MARKET TIMING GENERALLY. The Fund discourages and does not intend to accommodate short-term or frequent purchases and redemptions of Fund shares, often referred to as "market timing." It intends to seek to restrict or reject such trading or take other action, as described below, if in the judgment of the Fund manager or transfer agent such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs, administrative costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders.
MARKET TIMING CONSEQUENCES. If information regarding your trading activity in this Fund or in any other Franklin Templeton fund or non-Franklin Templeton fund is brought to the attention of the Fund's manager or transfer agent and based on that information the Fund or its manager or transfer agent in its sole discretion concludes that your trading may be detrimental to the Fund as described in this Market Timing Trading Policy, the Fund may temporarily or permanently bar your future purchases into the Fund or, alternatively, may limit the amount, number or frequency of any future purchases and/or the method by which you may request future purchases and redemptions (including purchases and/or redemptions by an exchange or transfer between the Fund and any other mutual fund).
In considering an investor's trading activity, the Fund may consider, among other factors, the investor's trading history both directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, "Investment by asset allocators" in the Statement of Additional Information).
MARKET TIMING THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this Market Timing Trading Policy whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary (such as a broker-dealer, a bank, trust company, an insurance company separate account, an investment advisor, or an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan) that maintains an Omnibus Account with the Fund for trading on behalf of its customers.
While the Fund will encourage financial intermediaries to apply the Fund's Market Timing Trading Policy to their customers who invest indirectly in the Fund, the Fund is limited in its ability to monitor the trading activity or enforce the Fund's Market Timing Trading Policy with respect to customers of financial intermediaries. For example, should it occur, the Fund may not be able to detect market timing that may be facilitated by financial intermediaries or made difficult to identify in the Omnibus Accounts used by those intermediaries for aggregated purchases, exchanges and redemptions on behalf of all their customers. More specifically, unless the financial intermediaries have the ability to apply the Fund's Market Timing Trading Policy to their customers (for example, participants in a 401(k) retirement plan) through such methods as implementing short-term trading limitations or restrictions, imposing the Fund's redemption fee and monitoring trading activity for what might be market timing, the Fund may not be able to determine whether trading by customers of financial intermediaries is contrary to the Fund's Market Timing Trading Policy.
RISKS FROM MARKET TIMERS. Depending on various factors, including the size of the Fund, the amount of assets the portfolio manager typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades and the types of securities in which the Fund typically invests, short-term or frequent trading may interfere with the efficient management of the Fund's portfolio, increase the Fund's transaction costs, administrative costs and taxes and/or impact Fund performance.
In addition, if the nature of the Fund's portfolio holdings exposes the Fund to "arbitrage market timers," the value of the Fund's shares may be diluted if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices. Arbitrage market timing occurs when an investor seeks to take advantage of the possible delay between the change in the value of a mutual fund's portfolio holdings and the reflection of the change in the fund's net asset value per share. Since the Fund invests significantly in foreign securities, it may be particularly vulnerable to arbitrage market timing. Arbitrage market timing in foreign investments may occur because of time zone differences between the foreign markets on which the Fund's international portfolio securities trade and the time as of which the Fund's NAV is calculated. Arbitrage market timers may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before calculation of the Fund's NAV. One of the objectives of the Fund's fair value pricing procedures is to minimize the possibilities of this type of arbitrage market timing (please see "Valuation - Foreign Securities - Potential Impact of Time Zones and Market Holidays").
Since the Fund may invest significantly in securities that are, or may be, restricted, unlisted, traded infrequently, thinly traded, or relatively illiquid ("relatively illiquid securities"), it may be particularly vulnerable to arbitrage market timing. An arbitrage market timer may seek to take advantage of a possible differential between the last available market prices for one or more of those relatively illiquid securities that are used to calculate the Fund's net asset value and the latest indications of market values for those securities. One of the objectives of the Fund's fair value pricing procedures is to minimize the possibilities of this type of arbitrage market timing (please see "Fair Valuation - Individual Securities").
The Fund is currently using several methods to reduce the risks associated with market timing. These methods include:
o committing staff to selectively review on a continuing basis recent trading activity in order to identify trading activity that may be contrary to the Fund's Market Timing Trading Policy;
o imposing a redemption fee for short-term trading;
o monitoring potential price differentials following the close of trading in foreign markets and changes in indications of value for relatively illiquid traded securities to determine whether the application of fair value pricing procedures is warranted;
o seeking the cooperation of financial intermediaries to assist the Fund in identifying market timing activity.
Though these methods involve judgments that are inherently subjective and involve some selectivity in their application, the Fund seeks to make judgments and applications that are consistent with the interests of the Fund's shareholders. There is no assurance that the Fund or its agents will gain access to any or all information necessary to detect market timing in Omnibus Accounts. While the Fund will seek to take actions (directly and with the assistance of financial intermediaries) that will detect market timing, the Fund cannot represent that such trading activity can be minimized or completely eliminated.
REVOCATION OF MARKET TIMING TRADES. Transactions placed in violation of the Fund's Market Timing Trading Policy are not necessarily deemed accepted by the Fund and may be cancelled or revoked by the Fund following receipt by the Fund.
REDEMPTION FEE
REDEMPTION FEE ASSESSMENT. A short-term trading redemption fee will be imposed (with some exceptions) on any Fund shares in a Fund account that are sold (by redemption, whether voluntary or involuntary, or exchange) within seven (7) calendar days following their purchase date. This redemption fee will equal 2% of the amount redeemed (using standard rounding criteria) and shares held the longest will be treated as being redeemed first and shares held shortest as being redeemed last. The redemption fee may be collected by deduction from the redemption proceeds or, if imposed after the redemption transaction, by billing you.
This redemption fee is imposed to discourage short-term trading and is paid to the Fund to help offset any cost associated with such short-term trading. This redemption fee is not intended to accommodate short-term trading and the Fund will monitor the assessment of redemption fees against your account. Based on the frequency of redemption fees assessed against your account in the Fund and/or in your other Franklin Templeton fund accounts, the Fund manager or transfer agent may in its sole discretion determine that your trading activity may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy" section and elect to (i) reject or limit the amount, number, frequency or method for requesting future purchases into the Fund and/or (ii) reject or limit the amount, number, frequency or method for requesting future exchanges or redemptions out of the Fund.
REDEMPTIONS THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this 2% short-term trading redemption fee whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains an Omnibus Account with the Fund for trading on behalf of its customers. Currently, only certain intermediaries have the ability to collect the Fund's redemption fee on the Fund's behalf from their customers' accounts. Even in the case of these intermediaries who are collecting the redemption fee, due to policy, operational and/or systems' requirements and limitations, these intermediaries may use criteria and methods for tracking, applying and/or calculating the fee that may differ in some respects from that of the Fund. The Fund will continue to encourage all financial intermediaries to develop the capability to begin imposing the redemption fee from their customers who invest in the Fund. If you are investing in Fund shares through a financial intermediary, you should contact your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) for more information on any differences in how the redemption fee is applied to your investments in the Fund.
WAIVER/EXCEPTIONS/CHANGES. The Fund reserves the right to waive the redemption fee at its discretion if the Fund's transfer agent believes such waiver is consistent with the best interests of the Fund and to the extent permitted or required by applicable law. The Fund's transfer agent may also, at its discretion and upon receipt of a shareholder's written request, waive the redemption fee because of a bona fide and unanticipated financial emergency. The redemption fee does not apply to redemptions by other mutual funds, Omnibus Account owners and certain comprehensive fee programs where investment instructions are given at the firm level of Fund approved broker-dealers on behalf of their clients invested in Franklin Templeton funds. In addition, the Fund reserves the right to modify or eliminate the redemption fee or waivers at any time. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
LIMITATIONS ON COLLECTION. Currently, the Fund is very limited in its ability to ensure that the redemption fee is imposed by financial intermediaries on behalf of their customers. For example, where a financial intermediary is not able to determine if the redemption fee applies and/or is not able to impose or collect the fee, or omits to collect the fee at the time of a redemption, the Fund will not receive the redemption fees. Further, if Fund shares are redeemed by a financial intermediary at the direction of its customer(s), the Fund may not know: (1) whether a redemption fee is applicable; and/or (2) the identity of the customer who should pay the redemption fee.
INVOLUNTARY REDEMPTIONS. The Fund reserves the right to close your account if the account value falls below $500 ($125 for individual retirement accounts; $50 for employee and UGMA/UTMA accounts), or you are deemed to engage in activities that are illegal (such as late trading) or otherwise believed to be detrimental to the Fund (such as market timing).
ACCOUNT POLICIES
CALCULATING SHARE PRICE
CLASS A & C
When you buy shares, you pay the "offering price" for the shares. The
"offering price" is determined by dividing the NAV per share by an amount
equal to 1 minus the sales charge applicable to the purchase (expressed in
decimals), calculated to two decimal places using standard rounding
criteria. The number of Fund shares you will be issued will equal the amount
invested divided by the applicable offering price for those shares,
calculated to three decimal places using standard rounding criteria. For
example, if the NAV per share is $10.25 and the applicable sales charge for
the purchase is 5.75%, the offering price would be calculated as follows:
10.25 divided by 1.00 minus 0.0575 [10.25/0.9425] equals 10.87533, which,
when rounded to two decimal points, equals 10.88. The offering price per
share would be $10.88.
When you sell shares, you receive the NAV minus any applicable CDSC.
ALL CLASSES
The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The NAV per share is determined by dividing the total net asset value of each fund's share class by the applicable number of shares outstanding per share class.
The Fund calculates the NAV per share each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, President's 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. The Fund generally utilizes two independent pricing services to assist in determining a current market value for each security. If market quotations are readily available for portfolio securities listed on a securities exchange, the Fund values those securities at the last quoted sale price or the official closing price of the day, respectively, 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 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.
Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form.
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. The Fund relies on third party pricing vendors to monitor for events materially affecting the value of these securities during this period. If an event occurs, the third party pricing vendors will provide revised values to the Fund.
FAIR VALUATION - INDIVIDUAL SECURITIES
Since the Fund may invest in securities that are restricted, unlisted, traded
infrequently, thinly traded, or relatively illiquid, there is the possibility
of a differential between the last available market prices for one or more of
those securities and the latest indications of market values for those
securities. The Fund has procedures, approved by the board of trustees, to
determine the fair value of individual securities and other assets for which
market prices are not readily available (such as certain restricted or
unlisted securities and private placements) or which may not be reliably
priced (such as in the case of trade suspensions or halts, price movement
limits set by certain foreign markets, and thinly traded or illiquid
securities). Some methods for valuing these securities may include:
fundamental analysis (earnings multiple, etc.), matrix pricing, discounts
from market prices of similar securities, or discounts applied due to the
nature and duration of restrictions on the disposition of the securities. The
board of trustees oversees the application of fair value pricing procedures.
The application of fair value pricing procedures represents a good faith determination based upon specifically applied procedures. There can be no assurance that the Fund could obtain the fair value assigned to a security if it were able to sell the security at approximately the time at which the Fund determines its NAV per share.
SECURITY VALUATION - CORPORATE DEBT SECURITIES
Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may value these portfolio securities by utilizing quotations from bond dealers, information with respect to bond and note transactions and may rely on independent pricing services to assist in determining a current market value for each security. The Fund's pricing services may utilize independent quotations from bond dealers and bond market activity to determine current value.
SECURITY VALUATION - OPTIONS
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.
SECURITY VALUATION - FOREIGN SECURITIES - COMPUTATION OF U.S. EQUIVALENT VALUE
The Fund generally determines the value of a foreign security as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of the close of trading on the NYSE, if earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE (generally 1:00 p.m. Pacific time) on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. Occasionally events (such as repatriation limits or restrictions) may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the board of trustees.
VALUATION - FOREIGN SECURITIES - POTENTIAL IMPACT OF TIME ZONES AND MARKET HOLIDAYS
Trading in securities on foreign securities stock exchanges and over-the-counter markets, such as those in Europe and Asia, may be completed well before the close of business on the NYSE on each day that the NYSE is open. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a foreign portfolio security held by the Fund. As a result, the Fund may be susceptible to what is referred to as "time zone arbitrage." Certain investors in the Fund may seek to take advantage of discrepancies in the value of the Fund's portfolio securities as determined by the foreign market at its close and the latest indications of value attributable to the portfolio securities at the time the Fund's NAV is computed. Trading by these investors, often referred to as "arbitrage market timers," may dilute the value of the Fund's shares, if such discrepancies in security values actually exist. To attempt to minimize the possibilities for time zone arbitrage, and in accordance with procedures established and approved by the Fund's board of trustees, the manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds).
These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that might call into question the availability (including the reliability) of the values of foreign securities between the times at which they are determined and the close of the NYSE. If such an event occurs, the foreign securities may be valued using fair value procedures established and approved by the board of trustees. In certain circumstances these procedures include the use of independent pricing services. The intended effect of applying fair value pricing is to compute an NAV that accurately reflects the value of the Fund's portfolio at the time that the NAV is calculated, to discourage potential arbitrage market timing in Fund shares, to mitigate the dilutive impact of such attempted arbitrage market timing and to be fair to purchasing, redeeming and existing shareholders. However, the application of fair value pricing procedures may, on occasion, worsen rather than mitigate the potential dilutive impact of shareholder trading.
In addition, trading in foreign portfolio securities generally, or in securities markets 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 foreign portfolio securities used in the calculation. If events affecting the last determined values of these foreign securities occur (determined through the monitoring process described above), the securities will be valued at fair value determined in good faith in accordance with the Fund's fair value procedures established and approved by the board of trustees.
ACCOUNTS WITH LOW BALANCES
If your account has been open for more than one year and its value falls below $500 ($125 for individual retirement accounts; $50 for employee and UGMA/UTMA accounts), we will mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we will close your account and mail the proceeds to the address of record. You will not be charged a CDSC if your account is closed for this reason. This policy does not apply to certain broker-controlled accounts established through the National Securities Clearing Corporation's Networking system.
STATEMENTS, REPORTS AND PROSPECTUSES
You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement).
You also will receive the Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website.
If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page 37).
INVESTMENT REPRESENTATIVE ACCOUNT ACCESS
If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS
You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Distributors. We will process the transfer after we receive authorization in proper form from your delivering securities dealer.
JOINT ACCOUNTS
Unless you specify a different registration, shares issued to two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to jointly owned shares, or to sever a joint tenancy in jointly owned shares, all owners must agree in writing.
JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow the Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to:
o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares;
o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise;
o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you;
o Purchase Fund shares by debiting a bank account that may be owned by you; and
o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you.
If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to the Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to the Fund in a written instruction signed by all registered owners.
ADDITIONAL POLICIES
Please note that the Fund maintains additional policies and reserves certain rights, including:
o The Fund may restrict, reject or cancel any purchase orders, including an exchange request.
o The Fund may modify, suspend, or terminate telephone/online privileges at any time.
o The Fund may make material changes to or discontinue the exchange privilege on 60 days' notice or as otherwise provided by law.
o The Fund may stop offering shares completely or may offer shares only on a limited basis, for a period of time or permanently.
o Normally, redemptions are processed by the next business day, but may take up to seven days to be processed if making immediate payment would adversely affect the Fund.
o In unusual circumstances, we may temporarily suspend redemptions or postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund may pay redemption proceeds in securities or other assets rather than cash if the manager determines it is in the best interest of the Fund, consistent with applicable law.
o You may only buy shares of a fund (including the purchase side of an exchange) eligible for sale in your state or jurisdiction.
o To permit investors to obtain the current price, dealers are responsible for transmitting all orders to the Fund promptly.
DEALER COMPENSATION
CLASS A & C
Qualifying dealers who sell Fund shares may receive sales commissions and
other payments. These are paid by Distributors from sales charges received
from purchasing or redeeming shareholders, from distribution and service
(12b-1) fees from the Fund and from Distributors' other financial resources.
Dealers may also receive shareholder servicing fees for servicing investors
who indirectly hold Franklin Templeton fund shares through dealer-maintained
brokerage accounts as more fully described under "Shareholder servicing and
transfer agent" in the SAI. These fees are paid by the Fund's transfer agent
from payments it receives under its agreement with the Fund.
Class A Class C
-------------------------------------------------------
Commission (%) --- 1.00(2)
Investment under $100,000 4.00 ---
$100,000 but under $250,000 2.80 ---
$250,000 but under $500,000 2.00 ---
$500,000 but under $1 1.60 ---
million
$1 million or more up to 0.75(1) ---
12b-1 fee to dealer 0.25(1) 0.65(3)
|
On accounts established prior to May 1, 2006, a dealer commission of up to 1% may be paid on Class A NAV purchases by Employer Sponsored Retirement Plans.(1) For certain retirement plans that do not qualify to buy Class A shares at NAV but that qualify to buy Class A shares with a maximum initial sales charge of 4%, a dealer commission of 3.2% may be paid.
If any dealer commissions are paid in connection with a purchase which is subsequently rejected or results in any trading restriction placed on the purchaser as a result of a determination by the Fund's manager or transfer agent that the purchase may be connected with trading activity that may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy," the dealer shall, upon demand, refund such commissions to Distributors.
1. For purchases at NAV where Distributors paid a prepaid commission, dealers
may start to receive the 12b-1 fee in the 13th month after purchase. For
purchases at NAV where Distributors did not pay a prepaid commission, dealers
may start to receive the 12b-1 fee at the time of purchase.
2. Commission includes advance of the first year's 0.15% 12b-1 service fee.
Distributors may pay a prepaid commission. However, Distributors does not pay
a prepaid commission on any purchases by Employer Sponsored Retirement Plans.
3.Dealers may be eligible to receive up to 0.15% at the time of purchase and
may be eligible to receive 0.65% starting in the 13th month. During the first
12 months, the full 12b-1 fee will be paid to Distributors to partially
offset the commission and the prepaid service fee paid at the time of
purchase. For purchases at NAV where Distributors did not pay a prepaid
commission, dealers may start to receive the 12b-1 fee at the time of
purchase.
OTHER DEALER COMPENSATION. Distributors may make payments from its own financial resources to certain dealers who have sold shares of the Franklin Templeton mutual funds. In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds, and 0.05% (or 0.03%) of the total assets of equity (or fixed income) funds attributable to that dealer, on an annual basis. Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed this limitation. Distributors makes these payments in connection with the qualifying dealers' efforts to educate financial advisors about the Franklin Templeton funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates, and the quality of the dealer's relationship with Distributors. Distributors will, on an annual basis, determine the advisability of continuing these payments.
To the extent permitted by SEC and NASD rules and other applicable laws and regulations, Distributors may pay or allow other promotional incentives or payments to dealers.
Sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, is not considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Accordingly, the allocation of portfolio transactions for execution by broker-dealers that sell Fund shares is not considered marketing support payments to such broker-dealers.
You can find further details in the SAI about the payments made by Distributors and the services provided by your financial advisor. Your financial advisor may charge you additional fees or commissions other than those disclosed in this prospectus. You should ask your financial advisor for information about any payments it receives from Distributors and any services it provides, as well as about fees and/or commissions it charges.
ADVISOR CLASS
Qualifying dealers who sell Advisor Class shares may receive up to 0.25% of the amount invested. This amount is paid by Distributors from its own resources.
QUESTIONS
If you have any questions about the Fund or your account, you can write to us at P.O. Box 33030, St. Petersburg, FL 33733-8030. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
---------------------------------------------------------------------
SHAREHOLDER SERVICES 1-800/632-2301 5:30 a.m. to 5:00 p.m.
FUND INFORMATION 1-800/DIAL BEN(R) 5:30 a.m. to 5:00 p.m.
(1-800/342-5236)
RETIREMENT SERVICES 1-800/527-2020 5:30 a.m. to 5:00 p.m.
ADVISOR SERVICES 1-800/524-4040 5:30 a.m. to 5:00 p.m.
INSTITUTIONAL SERVICES 1-800/321-8563 6:00 a.m. to 4:00 p.m.
TDD (HEARING IMPAIRED) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
AUTOMATED TELEPHONE SYSTEM 1-800/632-2301 ( around-the-clock access)
1-800/524-4040
1-800/527-2020
|
FOR MORE INFORMATION
You can learn more about the Fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and Fund strategies that significantly affected Fund performance during its last fiscal year, financial statements, detailed performance information, portfolio holdings and, in the annual report only, the independent registered public accounting firm's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please contact your investment representative or call us at the number below. You also can view the current annual/semiannual report and the SAI online through franklintempleton.com.
You also can obtain information about the Fund by visiting the SEC's Public
Reference Room in Washington, DC
(phone 1-202/551-8090) or the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, DC 20549-0102 or by electronic request at the following email
address: publicinfo@sec.gov.
[Insert FRANKLIN TEMPLETON INVESTMENTS logo]
One Franklin Parkway, San Mateo, CA 94403-1906
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
FRANKLINTEMPLETON.COM
GAIN FROM OUR PERSPECTIVE(R)
2309 Investment Company Act file #811-04706 406P 12/07
TEMPLETON INTERNATIONAL BOND FUND
CLASS A, C, R & ADVISOR
PROSPECTUS
DECEMBER 3, 2007
The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
PROSPECTUS CLASS A, C, R & Advisor
TEMPLETON INTERNATIONAL BOND FUND
Templeton Income Trust
Insert FRANKLIN TEMPLETON INVESTMENTS logo]
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout] Goal and Strategies 2 Main Risks 4 Performance 8 Fees and Expenses 8 Management 10 Distributions and Taxes 13 YOUR ACCOUNT |
[Begin callout]
INFORMATION ABOUT SALES CHARGES, QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND
SERVICES
[End callout] Choosing a Share Class 18 Buying Shares 29 Investor Services 32 Selling Shares 36 Exchanging Shares 39 Account Policies 47 Questions 58 FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT THE FUND [End callout] |
Back Cover
THE FUND
GOAL AND STRATEGIES
GOAL
The Fund's investment goal is current income with capital appreciation and growth of income.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, the Fund invests at least 80% of its net assets in "bonds." "Bonds" include debt securities of any maturity, such as bonds, notes, bills and debentures. Shareholders will be given at least 60 days' advance notice of any change to the 80% policy.
[Begin callout]
The Fund invests predominantly in non-U.S. bonds.
[End callout]
Bonds represent an obligation of the issuer to repay a loan of money to it, and generally provide for the payment of interest. Although the Fund may buy bonds rated in any category, it focuses on "investment grade" bonds. These are issues rated in the top four rating categories by independent rating agencies such as Standard & Poor's (S&P(R)) or Moody's Investors Service (Moody's) or, if unrated, determined by the Fund's manager to be comparable. The Fund may invest up to 35% of its total assets in bonds that are rated below investment grade. Generally, lower rated securities pay higher yields than more highly rated securities to compensate investors for the higher risk. The Fund is a non-diversified fund. The Fund may invest a significant portion of its assets in emerging markets.
The Fund may invest, from time to time, in forward currency contracts, including engaging in cross-hedging, to try to hedge (protect) against currency exchange rate fluctuations or to generate income for the Fund. A forward currency contract is an agreement to buy or sell a specific currency at a future date and at a price set at the time of the contract. Cross-hedging is the practice of entering into a forward contract to sell an amount of a foreign currency when the Fund believes that foreign currency may suffer or enjoy a substantial movement against another currency.
The Fund may also enter into currency and interest rate futures to try to hedge against currency exchange rate fluctuations, or to generate income for the Fund.
PORTFOLIO SELECTION
The manager allocates the Fund's assets based upon its assessment of changing market, political and economic conditions. It will consider various factors, including evaluation of interest and currency exchange rate changes and credit risks.
TEMPORARY INVESTMENTS
When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, commercial paper, short-term bank time deposits, bankers' acceptances and money market fund shares. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities, to maintain liquidity or to segregate on the Fund's books in connection with its forward currency, currency or interest rate futures positions. In these circumstances, the Fund may be unable to achieve its investment goal.
MAIN RISKS
[Begin callout]
Changes in interest rates affect the prices of the Fund's bonds. If rates rise,
the value of the Fund's bonds will fall and so too will the Fund's share price.
You could lose money.
[End callout]
INTEREST RATE
When interest rates rise, bond prices fall. The opposite is also true: bond prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to these price changes.
FOREIGN SECURITIES
Investing in foreign securities, including securities of foreign governments, typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars.
CURRENCY MANAGEMENT STRATEGIES. Currency management strategies, including cross-hedging, may substantially change the Fund's exposure to currency exchange rates and could result in losses to the Fund if currencies do not perform as the manager expects. In addition, currency management strategies, to the extent that they reduce the Fund's exposure to currency risks, may also reduce the Fund's ability to benefit from favorable changes in currency exchange rates. There is no assurance that the manager's use of currency management strategies will benefit the Fund or that they will be, or can be, used at appropriate times. Furthermore, there may not be perfect correlation between the amount of exposure to a particular currency and the amount of securities in the portfolio denominated in that currency.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign issuers may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign issuers than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices.
EMERGING MARKETS. The risks of foreign investments typically are greater in less developed countries, sometimes referred to as emerging markets. For example, political and economic structures in these countries may be less established and may change rapidly. These countries also are more likely to experience high levels of inflation, deflation or currency devaluation, which can harm their economies and securities markets and increase volatility. In fact, short-term volatility in these markets and declines of 50% or more are not uncommon. Restrictions on currency trading that may be imposed by emerging market countries will have an adverse effect on the value of the securities of companies that trade or operate in such countries.
CREDIT
An issuer of bonds may be unable to make interest payments and repay principal when due. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes called "junk bonds," generally have more credit risk than higher-rated securities.
Issuers issuing high yield, fixed-income securities are not as strong financially as those issuing securities with higher credit ratings. These issuers are more likely to encounter financial difficulties and are more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates that could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, payments on the securities may never resume. These securities may be worthless and the Fund could lose its entire investment.
The prices of high yield, fixed-income securities fluctuate more than higher-quality securities. Prices are especially sensitive to developments affecting the isser's business and to changes in the ratings assigned by rating agencies. Prices often are closely linked with the issuer's stock prices and typically rise and fall in response to factors that affect stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, stock market activity, large sustained sales by major investors, a high-profile default, or other factors.
High yield securities generally are less liquid than higher-quality securities. Many of these securities do not trade frequently, and when they do their prices may be significantly higher or lower than expected. At times, it may be difficult to sell these securities promptly at an acceptable price, which may limit the Fund's ability to sell securities in response to specific economic events or to meet redemption requests.
INCOME
Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall.
NON-DIVERSIFICATION
The Fund is a non-diversified fund. It may invest a greater portion of its assets in the securities of one or more issuers than a diversified fund. The Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund's shares. The Fund, however, intends to meet certain tax diversification requirements.
PORTFOLIO TURNOVER
The manager's attempt to keep the Fund's portfolio of bonds at an optimum level of interest rate sensitivity may cause the Fund's portfolio turnover rate to be high. High turnover will increase the Fund's transaction costs and may increase your tax liability.
More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI).
A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout]
PERFORMANCE
Because the Fund is new, it has no performance history.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR
CLASS A CLASS C CLASS R CLASS
-------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25%(2) 1.00% None None
Load imposed on purchases 4.25%(2) None None None
Maximum deferred sales charge
(load) None(3) 1.00% None None
Redemption fee on shares sold
within 7 calendar days following
their purchase date(1) 2.00% 2.00% 2.00% 2.00%
|
Please see "Choosing a Share Class" on page 18 for an explanation of how and when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)(4)
ADVISOR
CLASS A CLASS C CLASS R CLASS
-------------------------------------------------------------------------------
Management fees(5) 0.50% 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.35% 0.65% 0.50% None
Other expenses (including
administration fees) 0.72% 0.72% 0.72% 0.72%
----------------------------------------
Total annual Fund operating
expenses(5) 1.57% 1.87% 1.72% 1.22%
----------------------------------------
Management and administration fee
reduction and expense limitation -0.48% -0.48% -0.48% -0.48%
----------------------------------------
Net annual Fund operating expenses 1.09% 1.39% 1.24% 0.74%
----------------------------------------
|
1. The redemption fee is calculated as a percentage of the amount redeemed (using standard rounding criteria), and may be charged when you sell or exchange your shares or if your shares are involuntarily redeemed. The fee is retained by the Fund and generally withheld from redemption proceeds. For more details, see "Redemption Fee" section.
2. The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding.
3. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 23) and purchases by certain retirement plans without an initial sales charge.
4. The management fees and applicable distribution and service (12b-1) fees shown are based on the Fund's maximum contractual amount. Other expenses are estimated.
5. The investment manager and administrator have contractually agreed to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the Fund so that total annual Fund operating expenses do not exceed 1.09% for Class A, 1.39% for Class C, and 1.24% for Class R and 0.74% for Advisor Class (other than certain non-routine expenses or costs, including those relating to litigation and indemnification, reorganizations and liquidations) until December 31, 2008.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
------------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $531(1) $757
CLASS C $242 $440
CLASS R $126 $393
ADVISOR CLASS $76 $237
If you do not sell your shares:
CLASS C $142 $440
|
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
MANAGEMENT
Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage over $669 billion in assets.
The Fund is managed by a dedicated professional focused on investments in non-U.S. fixed income securities. The portfolio manager of the Fund's portfolio is:
MICHAEL HASENSTAB PH.D. SENIOR VICE PRESIDENT OF ADVISERS
Mr. Hasenstab has been a manager of the Fund since its inception. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund's investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. Mr. Hasenstab first joined Franklin Templeton Investments in 1995, rejoining again in 2001 after a three-year leave to obtain his Ph.D.
The Fund's SAI provides additional information about the portfolio manager's compensation and other accounts that he manages.
The Fund pays Advisers a fee for managing the Fund's assets equal to an annual rate of:
o 0.50% of the value of its net assets up to and including $200 million;
o 0.45% of the value of its net assets over $200 million up to and including
$1.3 billion;
o 0.40% of the value of its net assets over $1.3 billion.
On August 2, 2004, Franklin Resources, Inc. announced that Advisers (investment manager to many of the funds within Franklin Templeton Investments, and an affiliate of the investment manager to the other funds) reached a settlement with the Securities and Exchange Commission (SEC) that resolved the issues resulting from the SEC's investigation of market timing activity in the Franklin Templeton Investments funds. Under the terms of the settlement and the SEC's administrative order, pursuant to which Advisers neither admitted nor denied any of the findings contained therein, Advisers agreed, among other matters, to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. Such a distribution plan has been prepared and submitted to the SEC for approval. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, in accordance with the terms and conditions of the settlement and plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors have been named in multiple lawsuits in different courts alleging violations of various federal securities and state laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, investment managers, administrators, and distributors, rescission of management contracts and 12b-1 plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, allegedly resulting in market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the SEC's findings as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc.
To date, more than 400 similar lawsuits against at least 19 different mutual fund companies, among other defendants, have been filed in federal district courts throughout the country. Because these cases involve common questions of fact, the Judicial Panel on Multidistrict Litigation (the Judicial Panel) ordered the creation of a multidistrict litigation in the United States District Court for the District of Maryland, entitled "In re Mutual Funds Investment Litigation" (the MDL). The Judicial Panel then transferred similar cases from different districts to the MDL for coordinated or consolidated pretrial proceedings.
On December 13, 2004, Franklin Templeton Distributors, Inc. (Distributors) (the principal underwriter of shares of the Franklin Templeton mutual funds) and Advisers reached an agreement with the SEC, resolving the issues resulting from the SEC's investigation concerning marketing support payments to securities dealers who sell fund shares. In connection with that agreement, in which Advisers and Distributors neither admitted nor denied any of the findings contained therein, they agreed to pay the funds a penalty of $20 million and disgorgement of $1 (one dollar), in accordance with a plan to be developed by an independent distribution consultant to be paid for by Advisers and Distributors. The SEC approved the independent distribution consultant's proposed plan of distribution arising from this SEC order, and disbursement of the settlement monies to the designated funds under this plan was completed in September 2006, in accordance with the terms and conditions of the SEC's order and the plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors, have also been named in multiple lawsuits alleging violations of federal securities and state laws relating to the disclosure of marketing support payments and/or payment of allegedly excessive commissions and/or advisory or distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named investment managers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds.
Franklin Resources, Inc. previously disclosed these issues as matters under investigation by government authorities and the subject of an internal company inquiry as well as private lawsuits in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on Franklin Resources, Inc.'s website at franklintempleton.com under "Statement on Current Industry Issues."
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN DISTRIBUTIONS
The Fund intends to qualify as a regulated investment company under the Internal Revenue Code (Code). As a regulated investment company, the Fund generally will pay no federal income tax on the income and gains it distributes to you. The Fund intends to pay an income dividend monthly from its net investment income. Capital gains, if any, may be distributed at least annually. The amount of any distributions will vary, and there is no guarantee the Fund will pay either income dividends or a capital gain distribution. Your income dividends and capital gain distribution will be automatically reinvested in additional shares at net asset value unless you elect to receive cash payments.
ANNUAL STATEMENTS. Every January, you will receive a statement that shows the tax status of distributions you received the previous year, including, for U.S. investors, the amount of any qualified dividend income subject to tax at capital gains rates and, for non-U.S. investors, the amount of your ordinary dividends that have been exempt from nonresident alien withholding taxes because they are interest-related or short-term capital gain dividends. Distributions declared in December but paid in January are taxable as if they were paid in December.
The Fund may at times find it necessary to reclassify income after it issues your tax reporting statement. This can result from rules in the Code that effectively prevent regulated investment companies such as the Fund from ascertaining with certainty until after the calendar year end, the final amount and character of distributions the Fund has received on its investments during the prior calendar year. Prior to issuing your statement, Franklin Templeton Investments makes every effort to search for reclassified income to reduce the number of corrected forms mailed to shareholders. However, when necessary, the Fund will send you a corrected Form 1099-DIV to reflect reclassified information. If you receive a corrected Form 1099-DIV, use the information on this Form, and not the information on your original statement, in completing your tax returns.
AVOID "BUYING A DIVIDEND." If you invest in the Fund shortly before it makes a capital gain distribution, you may receive some of your investment back in the form of a taxable distribution. For example, if you buy 500 shares in the Fund on December 10th at the Fund's net asset value (NAV) of $10 per share, and the Fund makes a capital gain distribution on December 15th of $1 per share, your shares will then have an NAV of $9 per share (disregarding any change in the Fund's market value), and you will have to pay a tax on what is essentially a return of your investment of $1 per share. This tax treatment is required even if you reinvest the $1 per share capital gain distribution in additional Fund shares.
TAX CONSIDERATIONS
In general, if you are a taxable investor, Fund distributions are taxable to you at either ordinary income or capital gains tax rates. This is true whether you reinvest your distributions in additional Fund shares or receive them in cash.
DIVIDEND INCOME. A portion of the income dividends paid to you by the Fund may be qualified dividends subject to taxation at the long-term capital gain rates. In general, income dividends from portfolio investments in the stock of domestic corporations and qualified foreign corporations are permitted this favored federal tax treatment. Income dividends from interest earned by the Fund on debt securities and dividends received from unqualified foreign corporations continue to be taxed at the higher ordinary income tax rates. Because the Fund has a higher percentage of its investments in debt securities, it is anticipated that none or only a small portion of the income dividends paid to you by the Fund may be qualified dividends eligible for taxation by individuals at long-term capital gain rates.
DISTRIBUTIONS OF CAPITAL GAINS. Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term capital gains are taxable as long-term capital gains no matter how long you have owned your shares. Long-term capital gain distributions to individuals qualify for the 15% tax rate. For individuals in the 10% and 15% tax brackets, the tax rate is 5% on capital gain distributions from gains realized in calendar year 2007 and 0% on distributions from gains realized in calendar years 2008 through 2010. These reduced rates of taxation of capital gain dividends and net long-term capital gains are scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
SALES OF FUND SHARES. When you sell your shares in the Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale, and will normally generate a gain or loss that will be reported to you in your year-end tax information. An exchange of your shares in one class in the Fund for shares of another class in the SAME Fund is not a taxable event, and no gain or loss will be reported on such a transaction.
If you have owned your Fund shares from more than one year, any gains reportable on the sale of your shares will also qualify for the reduced rates of taxation on capital gains as discussed above.
BACKUP WITHHOLDING. If you do not provide the Fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding at a rate of 28% on any distributions of income, capital gains or proceeds from the sale of your shares. The Fund also must withhold if the Internal Revenue Service (IRS) instructs it to do so.
STATE, LOCAL AND FOREIGN TAXES. Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. If the Fund qualifies to pass through to you the tax benefits from foreign taxes it pays on its investments, and elects to do so, then any foreign taxes it pays on these investments may be passed through to you as a foreign tax credit.
RECEIPT OF EXCESS INCLUSION INCOME BY THE FUND. Income received by the Fund from certain equity interests in mortgage pooling vehicles or residual interests in Real Estate Mortgage Investment Conduits (REMICs) is treated as "excess inclusion income." The Fund may derive such income either as a result of its direct investment in such interests or, indirectly, through its investment in REITs that hold such interests or otherwise qualify as taxable mortgage pools. In general, the Fund must allocate this income to Fund shareholders in proportion to dividends paid with the same consequences as if the shareholders directly received the excess inclusion income, and the Fund must pay a tax on any of this income that is allocable to "disqualified organizations," which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income (UBTI).
The rules concerning excess inclusion income are complex and unduly burdensome in their current form, and the Fund's manager is are awaiting further guidance from the IRS on how these rules are to be implemented. Shareholders should talk to their tax advisors about whether an investment in the Fund is a suitable investment given the potential tax consequences of the Fund's receipt and distribution of excess inclusion income.
NON-U.S. INVESTORS. Non-U.S. investors may be subject to a U.S. withholding tax at a 30% or lower treaty rate on all Fund dividends of ordinary income. Non-U.S. investors may also be subject to U.S. estate tax on their investment in the Fund. They also have special certification requirements that, if not met, can subject them to backup withholding on any dividends, distributions and redemption proceeds that they receive from the Fund. Each of these subjects is discussed in greater detail in the "Distributions and Taxes - Non-U.S. investors" section of the Statement of Additional Information.
Exemptions from withholding are currently provided for distributions designated as long-term capital gains and for ordinary dividends designated as short-term capital gains or interest-related dividends. The exemptions from withholding on ordinary dividends designated as short-term capital gains or interest-related dividends are due to sunset on August 31, 2008. Any distributions of any qualified net interest income (interest-related dividends) or net short-term capital gains earned by the Fund after this date will again be subject to nonresident withholding taxes, unless these exemptions are extended or made permanent before the sunset provisions become effective.
The Fund may invest in equity securities of corporations that invest in U.S. real property, including REITs. The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes a non-U.S. person subject to U.S. tax on disposition of a U.S. real property interest as if he or she were a U.S. person. However, because the Fund does not expect to have more than 50% of its assets invested in REITs or real property corporations, it does not expect to pay any dividends that would be subject to FIRPTA reporting and tax withholding. For a more detailed discussion on investment in U.S. real property, see the section, "Distributions and Taxes - Non-U.S. investors - Investments in U.S. real property" in the Statement of Additional Information.
OTHER TAX INFORMATION. This discussion of "Distributions and Taxes" is not written to provide you with tax advice, and does not purport to deal with all of the tax consequences that may be applicable to your investment in the Fund. You should consult your own tax advisor regarding your particular circumstances before making an investment in the Fund, or about the federal, state, local and foreign tax consequences of your investment in the Fund.
YOUR ACCOUNT
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to choose the class that best meets your situation. Your investment representative can help you decide. Investors may purchase Class C or Class R shares only for Fund accounts on which they have appointed an investment representative (financial advisor) of record. These provisions do not apply to Employer Sponsored Retirement Plans.
CLASS A CLASS C CLASS R ADVISOR CLASS
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o Initial sales o No initial o No initial o For qualified
charge of 4.25% sales charge sales charge investors,
or less see page 26
o Deferred sales o Deferred o Deferred sales
charge of 1% on sales charge of charge is not
purchases of $1 1% on shares you applicable
million or more sell within 12
sold within 18 months
months
o Lower annual o Higher annual o Higher annual
expenses than expenses than expenses than Class
Class C or R due Class A due A due to higher
to lower to higher distribution fees
distribution fees distribution fees (lower than Class
s C).
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The Fund began offering shares on December 3, 2007.
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FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments and the Franklin Mutual Recovery Fund. They do
not include the funds in the Franklin Templeton Variable Insurance Products
Trust.
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CLASS A, C & R
SALES CHARGES - CLASS A
THE SALES
CHARGE MAKES UP
WHICH EQUALS
THIS % OF THE THIS % OF YOUR
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE* NET INVESTMENT*
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Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
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*The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding.
SALES CHARGE REDUCTIONS AND WAIVERS
QUANTITY DISCOUNTS. We offer two ways for you to combine your current purchase
of Class A Fund shares with other existing Franklin Templeton fund share
holdings that might enable you to qualify for a lower sales charge with your
current purchase. You can qualify for a lower sales charge when you reach
certain "sales charge breakpoints." This quantity discount information is also
available free of charge at
www.franklintempleton.com/retail/jsp_cm/fund_perf/pub/quantity_discount.jsp.
This web page can also be reached at franklintempleton.com by clicking the
"Funds & Performance" tab and then choosing "Quantity Discounts."
1. CUMULATIVE QUANTITY DISCOUNT - lets you combine certain existing holdings of Franklin Templeton fund shares - referred to as "cumulative quantity discount eligible shares" - with your current purchase of Class A shares to determine if you qualify for a sales charge breakpoint.
Cumulative quantity discount eligible shares are shares:
(i) Registered to (or held for):
o You, individually;
o Your spouse or domestic partner, as recognized by applicable state law;
o You jointly with your spouse or domestic partner;
o You jointly with another unrelated (not a spouse or domestic partner) person if that other person has not included the value of the shares as cumulative quantity discount eligible shares for purposes of that person's separate investments in Franklin Templeton fund shares;
o A trustee/custodian of a Coverdell Education Savings account for which you are the identified responsible person on the records of the "current purchase broker-dealer" (as defined below) or its affiliate;
o A trustee/custodian of your IRA (which includes a Roth IRA and an employer sponsored IRA such as a SIMPLE IRA) or your non-ERISA covered 403(b), if the shares are registered with the Fund (or in the current purchase broker-dealer's brokerage account) under your Social Security number or the trustee/custodian is providing IRA custody services for clients of the current purchase broker-dealer as an affiliate of, or under contract with, the firm; or
o Any entity over which you or your spouse or domestic partner have individual or shared authority, as principal, to buy and sell shares for the account (for example, an UGMA/UTMA account for a child on which you or your spouse or domestic partner are the custodian, a trust on which you or your spouse or domestic partner are the trustee, a business account [not to include retirement plans] for your solely owned business [or the solely owned business of your spouse or domestic partner] on which you [or your spouse or domestic partner] are the authorized signer); THAT ARE
(ii) in one or more accounts maintained by the transfer agent for the Franklin Templeton funds on which your "current purchase broker-dealer" (as defined below) is the broker-dealer of record or one or more brokerage accounts maintained with your "current purchase broker-dealer." Your current purchase broker-dealer is the broker-dealer (financial advisor) for the Fund account (or brokerage account) that will hold the shares from your current purchase. If you do not select a broker-dealer (financial advisor) for your current purchase, we will consider the distributor of the Fund's shares to be your current purchase broker-dealer for purposes of identifying cumulative quantity discount eligible shares that might be combined with your current purchase.
If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase to achieve a sales charge breakpoint, you must, at the time of your purchase (including at the time of any future purchase) specifically identify those shares to your current purchase broker-dealer.
The value of cumulative quantity discount eligible shares equals the cost or current value of those shares, whichever is higher. The current value of shares is determined by multiplying the number of shares by their highest current public offering price. You should retain any records necessary to substantiate historical share costs because your current purchase broker-dealer may not have or maintain this information.
If there are cumulative quantity discount eligible shares that would qualify for combining with your current purchase and you do not tell your current purchase broker-dealer at the time of your current purchase or any future purchase, you may not receive the benefit of a reduced sales charge that might otherwise be available.
Franklin Templeton fund shares held as follows cannot be combined with your current purchase for purposes of the cumulative quantity discount:
o Shares held indirectly through financial intermediaries other than your current purchase broker-dealer (for example, shares held in a different broker-dealer's brokerage account or with a bank, an insurance company separate account or an investment advisor); or
o Shares held through an administrator or trustee/custodian of an Employer Sponsored Retirement Plan (for example, a 401(k) plan); or
o Shares held in a 529 college savings plan; or
o Shares held directly in a Franklin Templeton fund account on which the broker-dealer (financial advisor) of record is different than your current purchase broker-dealer.
Franklin Templeton fund assets held in multiple Employer Sponsored Retirement Plans may be combined in order to qualify for sales charge breakpoints at the plan level if the plans are sponsored by the same employer.
A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing
plan that qualifies under section 401(a) of the Internal Revenue Code, including
401(k), money purchase pension, profit sharing and defined benefit plans.
An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs.
2. LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount of "cumulative quantity discount eligible shares" (as defined in the "Cumulative quantity discount" section above) over a 13-month period and lets you receive the same sales charge as if all shares had been purchased at one time. We will reserve 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. Please refer to the SAI for more LOI details.
To sign up for these programs, complete the appropriate section of your account application.
SALES CHARGE WAIVERS. Class A shares may be purchased without an initial sales charge or contingent deferred sales charge (CDSC) by certain investors or for certain payments. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/632-2301. A list of available sales charge waivers also may be found in the SAI.
INVESTMENTS OF $1 MILLION OR MORE
If you invest $1 million or more, either as a lump sum or through our cumulative quantity discount or letter of intent programs, you can buy Class A shares without an initial sales charge. However, there is a 1% CDSC on any shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see page 24).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up to 0.35% per year to those who sell and distribute Class A shares and provide other services to shareholders. Because these fees are paid out of Class A's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
With Class C shares, there is no initial sales charge.
We place any investment of $1 million or more in Class A shares, since Class A's annual expenses are lower.
CDSC
There is a 1% CDSC on any Class C shares you sell within 12 months of purchase. The way we calculate the CDSC is the same for each class (please see page 24).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class C has a distribution plan, sometimes known as a Rule 12b-1 plan that allows the Fund to pay distribution and other fees of up to 0.65% per year for the sale of Class C shares and for services provided to shareholders. Because these fees are paid out of Class C's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS R
With Class R shares, there is no initial sales charge.
RETIREMENT PLANS
Class R shares are available to the following investors:
o Employer Sponsored Retirement Plans
o Any trust or plan established as part of a qualified tuition program under
Section 529 of the Internal Revenue Code
o Health Reimbursement Accounts and Health Savings Accounts, either as a direct investment or as a separate or managed account.
DISTRIBUTION AND SERVICE (12B-1) FEES
Class R has a distribution plan, sometimes known as a Rule 12b-1 plan that allows the Fund to pay distribution and other fees of up to 0.50% per year for the sale of Class R shares and for services provided to shareholders. Because these fees are paid out of Class R's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C
The CDSC for each class is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gain distributions.
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The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. If there are not enough of these to meet your request, we will sell the shares in the order they were purchased. We will use this same method if you exchange your shares into another Franklin Templeton fund (please see page 39 for exchange information).
REINSTATEMENT PRIVILEGE
If you sell shares of a Franklin Templeton fund that were held indirectly for your benefit in an account with your investment representative's firm or your bank's trust department or that were registered to you directly by the Fund's transfer agent (or, to an affiliated custodian or trustee of the Fund's transfer agent), you may reinvest all or a portion of the proceeds from that sale within 90 days of the sale without an initial sales charge. This Reinstatement Privilege does not apply to: (i) a purchase of Fund shares made through a regularly scheduled automatic investment plan such as a purchase by a regularly scheduled payroll deduction or transfer from a bank account, or (ii) a purchase of Fund shares with proceeds from the sale of Franklin Templeton fund shares that were held indirectly through an Employer Sponsored Retirement Plan that is not a DCS Plan or a non-Franklin Templeton individual or employer sponsored IRA.
In order to take advantage of this Reinstatement Privilege, you must inform your investment representative or the Fund's transfer agent of this privilege at the time of your investment. The proceeds from the earlier sale must also be invested within the same share class as that of the sold shares, except proceeds will be reinvested in Class A shares if the proceeds are from the sale of (i) Class B shares; or (ii) Class C shares or Class R shares if at the time of investment you have not appointed an investment representative (financial advisor) of record for the Fund account(s) in which the purchased shares will be held. Proceeds from the earlier sale of Class Z shares may also be invested in Class A shares under this Reinstatement Privilege.
If you paid a CDSC when you sold your Class A or C shares, we will credit back to you the CDSC paid on the amount you are reinvesting within 90 days of the sale by adding it to the amount of your reinvestment (for example, if you are reinvesting $10,000 within 90 days of an earlier $10,000 sale on which you paid a $100 CDSC, the amount of your reinvestment will equal $10,100). The new shares issued with your reinvestment WILL BE subject to any otherwise applicable CDSC. If, however, you (except Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B shares; or (2) Class C shares held at the time of sale in a Franklin Templeton fund account without an investment representative (financial advisor) appointed by you and invest the proceeds from that sale in Class A shares within 90 days of the sale, you will not be credited with any CDSC paid at the time of sale. In this case, the new Class A shares issued with your reinvestment WILL NOT BE subject to any otherwise applicable CDSC.
Proceeds immediately placed in a Franklin Templeton Bank Certificate of Deposit (CD) also may be reinvested without an initial sales charge if you reinvest them within 90 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange program. Shares purchased with the proceeds from a money fund may be subject to a sales charge.
A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level recordkeeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level recordkeeping related to those DCS services.
QUALIFIED INVESTORS - ADVISOR CLASS
The following investors or investments may qualify to buy Advisor Class shares of the Fund:
o Shares acquired by a financial intermediary in connection with its mutual fund trading platform that the intermediary holds, directly or indirectly, on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with any broker-dealer, trust company or registered investment advisor (RIA) that is not an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. Minimum initial investment: $50,000 for individual or multiple clients.
o Shares acquired by a financial intermediary that the intermediary holds on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with the financial intermediary or an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. No minimum initial investment.
o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Minimum initial investment: $1 million in Advisor Class or Class Z shares of any Franklin Templeton fund.
o Current and former officers, trustees, directors, full-time employees (and their family members) of both Franklin Templeton Investments and Franklin Templeton Funds, consistent with our then-current policies. Minimum initial investment: $100 ($50 for accounts with an automatic investment plan).
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.:
(1) under an advisory agreement (including sub-advisory agreements); and/or
(2) as Trustee of an inter vivos or testamentary trust.
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o An Employer Sponsored Retirement Plan (Plan) with Plan assets of $1 million or
more that is not an Existing DCS Plan. An "Employer Sponsored Retirement
Plan" includes (a) an employer sponsored pension or profit sharing plan
that qualifies (Qualified Plan) under section 401(a) of the Internal
Revenue Code (Code), including Code section 401(k), money purchase pension,
profit sharing and defined benefit plans; (b) an ERISA covered 403(b); and
(c) certain non-qualified deferred compensation arrangements that operate
in a similar manner to a Qualified Plan, such as 457 plans and executive
deferred compensation arrangements, but not including employer sponsored
IRAs. An "Existing DCS Plan" is an Employer Sponsored Retirement Plan that
has contracted on or before May 1, 2006 for participant level recordkeeping
with an affiliate of Distributors (the Recordkeeping Affiliate) or with the
entity identified in the Recordkeeping Affiliate's small business plan
promotional materials. An Existing DCS Plan became eligible to purchase
Advisor Class shares on May 1, 2007.
o Any trust or plan established as part of a qualified tuition program under
Section 529 of the Internal Revenue Code, provided that Distributors or an
affiliate of Distributors has entered into a contract with the state
sponsor of the program to provide certain services relating to the
operation of the program. No initial minimum investment.
o An individual or entity associated with a current customer of Franklin Templeton Institutional, LLC (FTI, LLC) if approved by FTI, LLC in consultation with its customer.
BUYING SHARES
Regular accounts $1,000 ------------------------------------------------------------------------------ Automatic investment plans $50 ------------------------------------------------------------------------------ UGMA/UTMA accounts $100 ------------------------------------------------------------------------------ Employer Sponsored Retirement Plans, SIMPLE-IRAs, SEP-IRAs, no minimum SARSEPs or 403(b) plan accounts ------------------------------------------------------------------------------ IRAs, IRA rollovers, Coverdell Education Savings Plans or Roth IRAs $250 ------------------------------------------------------------------------------ Broker-dealer sponsored wrap account programs no minimum ------------------------------------------------------------------------------ Current and former full-time employees, officers, trustees and $100 directors of Franklin Templeton entities, and their family members ------------------------------------------------------------------------------ Please note that you may only buy shares of a fund eligible for sale in your state or jurisdiction. |
ACCOUNT APPLICATION
If you are opening a new account, please complete and sign the enclosed account application. Make sure you indicate the share class you have chosen. If you do not indicate a class, we will place your purchase in Class A shares. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page 32). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, non-bank money orders or travelers checks as forms of payment to purchase shares.
BUYING SHARES
------------------------------- ------------------------------------------- -------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------------------- ------------------------------------------- -------------------------------------------
THROUGH YOUR INVESTMENT Contact your investment Contact your investment representative
REPRESENTATIVE representative
------------------------------- ------------------------------------------- -------------------------------------------
If you have another Franklin Before requesting a telephone or online
BY PHONE/ONLINE Templeton fund account with your purchase into an existing account, please
(Up to $100,000 per bank account information on file, make sure we have your bank account
shareholder per day) you may open a new account by phone. information on file. If we do not have
1-800/632-2301 At this time, a new account may not this information, you will need to send
franklintempleton.com be opened online. written instructions with your bank's
Note:(1) certain account name and address and a voided check or
types are not available To make a same day investment, your savings account deposit slip. If the bank
for online account access phone order must be received and and Fund accounts do not have at least
and (2) THE AMOUNT MAY BE accepted by us by 1:00 p.m. Pacific one common owner, your written request
HIGHER FOR MEMBERS OF time or the close of the New York must be signed by ALL fund AND bank
FRANKLIN TEMPLETON VIP Stock Exchange, whichever is account owners, and each individual must
SERVICES/TM. PLEASE SEE earlier. have his or her signature guaranteed.
PAGE 35 FOR MORE
INFORMATION REGARDING To make a same day investment, your phone
ELIGIBILITY. or online order must be received and
accepted by us by 1:00 p.m. Pacific time
or the close of the New York Stock
Exchange, whichever is earlier.
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Make your check payable to Make your check payable to Templeton
Templeton International Bond Fund. International Bond Fund. Include your
account number on the check.
BY MAIL Mail the check and your signed
application to Investor Services. Fill out the deposit slip from your account
statement. If you do not havea slip,
include a note with your name, the Fund name,
and your account number.
Mail the check and deposit slip or note to
Investor Services.
------------------------------- ------------------------------------------- -------------------------------------------
Call to receive a wire control number Call to receive a wire control number and
and wire instructions. wire instructions.
Wire the funds and mail your signed To make a same day wire investment, the
BY WIRE application to Investor Services. wired funds must be received and accepted
Please include the wire control number by us by 1:00 p.m. Pacific time or the
1-800/632-2301 or your new account number on the close of the New York Stock Exchange,
(or 1-650/312-2000 collect) application. whichever is earlier.
To make a same day wire investment,
the wired funds must be received and
accepted by us by 1:00 p.m. Pacific
time or the close of the New York
Stock Exchange, whichever is earlier.
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Call Shareholder Services at Call Shareholder Services at 1-800/632-2301,
BY EXCHANGE 1-800/632-2301, or send signed or send signed written instructions. You also
writtern instructions. You also may may place an online exchange order.
place an online exchange order. The
automated telephone system cannot be (Please see page 39 for information on
franklintempleton.com used to open a new account. exchanges.)
(Please see page 39 for information on
exchanges.)
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Franklin Templeton Investor Services P.O. Box 33030, St. Petersburg, FL 33733-8030 Call toll-free: 1-800/632-2301
(Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time)
or visit us online 24 hours a day, 7 days a week, at franklintempleton.com
INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN
This plan offers a convenient way for you to invest in the Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include your minimum initial investment with your application.
AUTOMATIC PAYROLL DEDUCTION
You may invest in the Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit.
AUTOMATED TELEPHONE SYSTEM
Our automated system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available by dialing any of the following numbers from a touch-tone phone:
SHAREHOLDER SERVICES 1-800/632-2301 ADVISOR SERVICES 1-800/524-4040 RETIREMENT SERVICES 1-800/527-2020 |
DISTRIBUTION OPTIONS
You may reinvest distributions you receive from the Fund in an existing account in the same share class* of the Fund or another Franklin Templeton fund. Initial sales charges and CDSCs will not apply to reinvested distributions. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer.
If you received a distribution and chose to return it to purchase additional shares in Class A shares of another Franklin Templeton fund, you will not be charged an initial sales charge if you invest the distribution within 90 days of the distribution date.
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For retirement plans for which Franklin Templeton Bank & Trust is the trustee or
custodian, special forms may be needed to receive distributions in cash. Please
call 1-800/527-2020 for information.
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Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund.
*Class C shareholders may reinvest their distributions in Class A shares of any Franklin Templeton money fund. Advisor Class shareholders may reinvest in Advisor Class or Class A shares of another Franklin Templeton fund. To reinvest your distributions in Advisor Class shares of another Franklin Templeton fund, you must be a current shareholder in Advisor Class or otherwise qualify to buy that fund's Advisor Class shares. DCS Plans may direct distributions to Class A shares if Class R shares are not offered by that fund.
RETIREMENT PLANS
Franklin Templeton Investments offers a variety of retirement plans for individuals and businesses. These plans require separate applications and their policies and procedures may be different than those described in this prospectus. For more information, including a free retirement plan brochure or application, please call Retirement Services at 1-800/527-2020.
TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans).
To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks.
As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. OF COURSE, YOU CAN DECLINE TELEPHONE BUY, SELL, OR EXCHANGE PRIVILEGES ON YOUR ACCOUNT APPLICATION, OR CHOOSE NOT TO REGISTER FOR ONLINE PRIVILEGES. IF YOU HAVE TELEPHONE/ONLINE PRIVILEGES ON YOUR ACCOUNT AND WANT TO DISCONTINUE THEM, PLEASE CONTACT US FOR INSTRUCTIONS. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges.
NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality.
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to automatically sell your shares and receive regular payments from your account. A CDSC may apply to withdrawals that exceed certain amounts. Certain terms and minimums apply. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application.
FRANKLIN TEMPLETON VIP SERVICES/TM
You may be eligible for Franklin Templeton VIP Services/TM if you are currently eligible for the $250,000 sales charge breakpoint based solely on shares registered directly with the Franklin Templeton funds' transfer agent and excluding shares held indirectly through brokerage accounts. Franklin Templeton VIP Services/TM shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING
Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if:
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A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
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o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect the Fund against potential claims based on the instructions received.
The amount may be higher for members of Franklin Templeton VIP Services/TM. Please see page 35 for more information regarding eligibility.
SELLING RECENTLY PURCHASED SHARES
If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more.
REDEMPTION PROCEEDS
Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency.
RETIREMENT PLANS
You may need to complete additional forms to sell shares in a Franklin Templeton Bank & Trust retirement plan. For participants under age 591/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for details.
SELLING SHARES
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TO SELL SOME OR ALL OF YOUR SHARES
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THROUGH YOUR INVESTMENT
REPRESENTATIVE Contact your investment representative
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Send written instructions and endorsed
share certificates (if you hold share
certificates) to Investor Services.
Corporate, partnership or trust accounts
may need to send additional documents.
Specify the Fund, the account number and
the dollar value or number of shares you
BY MAIL wish to sell. Be sure to include all
necessary signatures and any additional
documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
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As long as your transaction is for
BY PHONE/ONLINE $100,000 or less, you do not hold share
certificates and you have not changed
your address by phone or online within
the last 15 days, you can sell your shares
1-800/632-2301 by phone or online. The amount may be
higher for members of Franklin Templeton
franklintempleton.com VIP Services/TM. Please see page 35 for
more information regarding eligibility.
A check will be mailed to the name(s) and
address on the account, or a
pre-authorized secondary address. Written
instructions, with a signature guarantee,
are required to send the check to another
address or to make it payable to another
person.
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You can call, write, or visit us online to
have redemption proceeds sent to a bank
account. See the policies at left for
selling shares by mail, phone, or online.
BY ELECTRONIC FUNDS TRANSFER (ACH)
Before requesting to have redemption
proceeds sent to a bank account, please
make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's name
and a voided check or savings account
deposit slip. If the bank and Fund
accounts do not have at least one common
owner, you must provide written
instructions signed by ALL fund AND bank
account owners, and each individual must
have his or her signature guaranteed.
If we receive your request in proper form
by 1:00 p.m. Pacific time, proceeds sent
by ACH generally will be available within
two to three business days.
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BY EXCHANGE Obtain a current prospectus for the fund
you are considering. Prospectuses are
available online at franklintempleton.com.
Call Shareholder Services at the number
below or send signed written instructions.
You also may place an exchange order
online. See the policies at left for
selling shares by mail, phone, or online.
If you hold share certificates, you will
need to return them to the Fund before
your exchange can be processed.
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|
Franklin Templeton Investor Services P.O. Box 33030, St. Petersburg, FL 33733-8030 Call toll-free: 1-800/632-2301
(Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time)
or visit us online 24 hours a day, 7 days a week, at franklintempleton.com
EXCHANGING SHARES
EXCHANGE PRIVILEGE
CLASS A, C & R
You can exchange shares between most Franklin Templeton funds within the same class,* generally without paying any additional sales charges. If you exchange shares held for less than six months, however, you may be charged the difference between the initial sales charge of the two funds if the difference is more than 0.25%. If you exchange shares from a money fund or another fund that does not have a sales charge, a sales charge may apply no matter how long you have held the shares.
Any CDSC will continue to be calculated from the date of your initial investment and will not be charged at the time of the exchange. The purchase price for determining a CDSC on exchanged shares will be the price you paid for the original shares. If you exchange shares subject to a CDSC into a Class A money fund, the time your shares are held in the money fund will not count towards the CDSC holding period.
DCS Plans may exchange Class R shares for Class A shares of another Franklin Templeton fund if that fund does not offer Class R shares.
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge.
ADVISOR CLASS
You can exchange your Advisor Class shares for Advisor Class shares of other Franklin Templeton funds. You also may exchange your Advisor Class shares for Class A shares of a fund that does not currently offer an Advisor Class (without any sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc. *If you exchange into Class A shares and you later decide you would like to exchange into a fund that offers an Advisor Class, you may exchange your Class A shares for Advisor Class shares if you are a current shareholder in Advisor Class or you otherwise qualify to buy the fund's Advisor Class shares.
ALL CLASSES
The remainder of the "Exchanging Shares" section applies to all classes.
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An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
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Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee.
REJECTED EXCHANGES. If the Fund rejects an exchange request involving the sale of Fund shares, the rejected exchange request will also mean rejection of the request to purchase shares of another fund with the proceeds of the sale. Of course, you may generally redeem shares of the Fund at any time.
EXCHANGES THROUGH FINANCIAL INTERMEDIARIES. If you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains a master account (an Omnibus Account) with the Fund for trading on behalf of its customers, different exchange and/or transfer limit guidelines and restrictions may apply. The financial intermediary through whom you are investing may choose to adopt different trading restrictions designed to discourage short-term or excessive trading. Consult with your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) to determine what trading restrictions, including exchange/transfer limitations, may be applicable to you.
FUND EXCHANGE PRIVILEGE CHANGES/WAIVER. The Fund may terminate or modify (temporarily or permanently) this exchange privilege in the future. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
OTHER FUNDS' EXCHANGE PRIVILEGES. If there is a conflict between the exchange privileges of two funds involved in an exchange transaction, the stricter policy will apply to the transaction. Other Franklin Templeton funds may have different exchange restrictions. Check each fund's prospectus for details.
MARKET TIMING TRADING POLICY
The Fund's board of trustees has adopted the following policies and procedures with respect to market timing (Market Timing Trading Policy).
MARKET TIMING GENERALLY. The Fund discourages and does not intend to accommodate short-term or frequent purchases and redemptions of Fund shares, often referred to as "market timing." It intends to seek to restrict or reject such trading or take other action, as described below, if in the judgment of the Fund manager or transfer agent such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs, administrative costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders.
MARKET TIMING CONSEQUENCES. If information regarding your trading activity in this Fund or in any other Franklin Templeton fund or non-Franklin Templeton fund is brought to the attention of the Fund's manager or transfer agent and based on that information the Fund or its manager or transfer agent in its sole discretion concludes that your trading may be detrimental to the Fund as described in this Market Timing Trading Policy, the Fund may temporarily or permanently bar your future purchases into the Fund or, alternatively, may limit the amount, number or frequency of any future purchases and/or the method by which you may request future purchases and redemptions (including purchases and/or redemptions by an exchange or transfer between the Fund and any other mutual fund).
In considering an investor's trading activity, the Fund may consider, among other factors, the investor's trading history both directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, "Investment by asset allocators" in the Statement of Additional Information).
MARKET TIMING THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this Market Timing Trading Policy whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary (such as a broker-dealer, a bank, trust company, an insurance company separate account, an investment advisor, or an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan) that maintains an Omnibus Account with the Fund for trading on behalf of its customers.
While the Fund will encourage financial intermediaries to apply the Fund's Market Timing Trading Policy to their customers who invest indirectly in the Fund, the Fund is limited in its ability to monitor the trading activity or enforce the Fund's Market Timing Trading Policy with respect to customers of financial intermediaries. For example, should it occur, the Fund may not be able to detect market timing that may be facilitated by financial intermediaries or made difficult to identify in the Omnibus Accounts used by those intermediaries for aggregated purchases, exchanges and redemptions on behalf of all their customers. More specifically, unless the financial intermediaries have the ability to apply the Fund's Market Timing Trading Policy to their customers (for example, participants in a 401(k) retirement plan) through such methods as implementing short-term trading limitations or restrictions, imposing the Fund's redemption fee and monitoring trading activity for what might be market timing, the Fund may not be able to determine whether trading by customers of financial intermediaries is contrary to the Fund's Market Timing Trading Policy.
RISKS FROM MARKET TIMERS. Depending on various factors, including the size of the Fund, the amount of assets the portfolio manager typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades and the types of securities in which the Fund typically invests, short-term or frequent trading may interfere with the efficient management of the Fund's portfolio, increase the Fund's transaction costs, administrative costs and taxes and/or impact Fund performance.
In addition, if the nature of the Fund's portfolio holdings exposes the Fund to "arbitrage market timers," the value of the Fund's shares may be diluted if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices. Arbitrage market timing occurs when an investor seeks to take advantage of the possible delay between the change in the value of a mutual fund's portfolio holdings and the reflection of the change in the fund's net asset value per share. Since the Fund invests significantly in foreign securities, it may be particularly vulnerable to arbitrage market timing. Arbitrage market timing in foreign investments may occur because of time zone differences between the foreign markets on which the Fund's international portfolio securities trade and the time as of which the Fund's NAV is calculated. Arbitrage market timers may purchase shares of the Fund based on events occurring after foreign market closing prices are established, but before calculation of the Fund's NAV. One of the objectives of the Fund's fair value pricing procedures is to minimize the possibilities of this type of arbitrage market timing (please see "Valuation - Foreign Securities - Potential Impact of Time Zones and Market Holidays").
Since the Fund may invest significantly in securities that are, or may be, restricted, unlisted, traded infrequently, thinly traded, or relatively illiquid ("relatively illiquid securities"), it may be particularly vulnerable to arbitrage market timing. An arbitrage market timer may seek to take advantage of a possible differential between the last available market prices for one or more of those relatively illiquid securities that are used to calculate the Fund's net asset value and the latest indications of market values for those securities. One of the objectives of the Fund's fair value pricing procedures is to minimize the possibilities of this type of arbitrage market timing (please see "Fair Valuation - Individual Securities").
The Fund is currently using several methods to reduce the risks associated with market timing. These methods include:
o committing staff to selectively review on a continuing basis recent trading activity in order to identify trading activity that may be contrary to the Fund's Market Timing Trading Policy;
o imposing a redemption fee for short-term trading;
o monitoring potential price differentials following the close of trading in foreign markets and changes in indications of value for relatively illiquid traded securities to determine whether the application of fair value pricing procedures is warranted;
o seeking the cooperation of financial intermediaries to assist the Fund in identifying market timing activity.
Though these methods involve judgments that are inherently subjective and involve some selectivity in their application, the Fund seeks to make judgments and applications that are consistent with the interests of the Fund's shareholders. There is no assurance that the Fund or its agents will gain access to any or all information necessary to detect market timing in Omnibus Accounts. While the Fund will seek to take actions (directly and with the assistance of financial intermediaries) that will detect market timing, the Fund cannot represent that such trading activity can be minimized or completely eliminated.
REVOCATION OF MARKET TIMING TRADES. Transactions placed in violation of the Fund's Market Timing Trading Policy are not necessarily deemed accepted by the Fund and may be cancelled or revoked by the Fund following receipt by the Fund.
REDEMPTION FEE
REDEMPTION FEE ASSESSMENT. A short-term trading redemption fee will be imposed (with some exceptions) on any Fund shares in a Fund account that are sold (by redemption, whether voluntary or involuntary, or exchange) within seven (7) calendar days following their purchase date. This redemption fee will equal 2% of the amount redeemed (using standard rounding criteria) and shares held the longest will be treated as being redeemed first and shares held shortest as being redeemed last. The redemption fee may be collected by deduction from the redemption proceeds or, if imposed after the redemption transaction, by billing you.
This redemption fee is imposed to discourage short-term trading and is paid to the Fund to help offset any cost associated with such short-term trading. This redemption fee is not intended to accommodate short-term trading and the Fund will monitor the assessment of redemption fees against your account. Based on the frequency of redemption fees assessed against your account in the Fund and/or in your other Franklin Templeton fund accounts, the Fund manager or transfer agent may in its sole discretion determine that your trading activity may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy" section and elect to (i) reject or limit the amount, number, frequency or method for requesting future purchases into the Fund and/or (ii) reject or limit the amount, number, frequency or method for requesting future exchanges or redemptions out of the Fund.
REDEMPTIONS THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this 2% short-term trading redemption fee whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains an Omnibus Account with the Fund for trading on behalf of its customers. Currently, only certain intermediaries have the ability to collect the Fund's redemption fee on the Fund's behalf from their customers' accounts. Even in the case of these intermediaries who are collecting the redemption fee, due to policy, operational and/or systems' requirements and limitations, these intermediaries may use criteria and methods for tracking, applying and/or calculating the fee that may differ in some respects from that of the Fund. The Fund will continue to encourage all financial intermediaries to develop the capability to begin imposing the redemption fee from their customers who invest in the Fund. If you are investing in Fund shares through a financial intermediary, you should contact your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) for more information on any differences in how the redemption fee is applied to your investments in the Fund.
WAIVER/EXCEPTIONS/CHANGES. The Fund reserves the right to waive the redemption fee at its discretion if the Fund's transfer agent believes such waiver is consistent with the best interests of the Fund and to the extent permitted or required by applicable law. The Fund's transfer agent may also, at its discretion and upon receipt of a shareholder's written request, waive the redemption fee because of a bona fide and unanticipated financial emergency. The redemption fee does not apply to redemptions by other mutual funds, Omnibus Account owners and certain comprehensive fee programs where investment instructions are given at the firm level of Fund approved broker-dealers on behalf of their clients invested in Franklin Templeton funds. In addition, the Fund reserves the right to modify or eliminate the redemption fee or waivers at any time. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
LIMITATIONS ON COLLECTION. Currently, the Fund is very limited in its ability to ensure that the redemption fee is imposed by financial intermediaries on behalf of their customers. For example, where a financial intermediary is not able to determine if the redemption fee applies and/or is not able to impose or collect the fee, or omits to collect the fee at the time of a redemption, the Fund will not receive the redemption fees. Further, if Fund shares are redeemed by a financial intermediary at the direction of its customer(s), the Fund may not know: (1) whether a redemption fee is applicable; and/or (2) the identity of the customer who should pay the redemption fee.
INVOLUNTARY REDEMPTIONS. The Fund reserves the right to close your account if the account value falls below $500 ($125 for individual retirement accounts; $50 for employee and UGMA/UTMA accounts), or you are deemed to engage in activities that are illegal (such as late trading) or otherwise believed to be detrimental to the Fund (such as market timing).
ACCOUNT POLICIES
CALCULATING SHARE PRICE
CLASS A & C
When you buy shares, you pay the "offering price" for the shares. The "offering
price" is determined by dividing the NAV per share by an amount equal to 1 minus
the sales charge applicable to the purchase (expressed in decimals), calculated
to two decimal places using standard rounding criteria. The number of Fund
shares you will be issued will equal the amount invested divided by the
applicable offering price for those shares, calculated to three decimal places
using standard rounding criteria. For example, if the NAV per share is $10.25
and the applicable sales charge for the purchase is 5.75%, the offering price
would be calculated as follows: 10.25 divided by 1.00 minus 0.0575
[10.25/0.9425] equals 10.87533, which, when rounded to two decimal points,
equals 10.88. The offering price per share would be $10.88.
When you sell shares, you receive the NAV minus any applicable CDSC.
ALL CLASSES
The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The NAV per share is determined by dividing the total net asset value of each fund's share class by the applicable number of shares outstanding per share class.
The Fund calculates the NAV per share each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, President's 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. The Fund generally utilizes two independent pricing services to assist in determining a current market value for each security. If market quotations are readily available for portfolio securities listed on a securities exchange, the Fund values those securities at the last quoted sale price or the official closing price of the day, respectively, 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 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.
Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form.
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. The Fund relies on third party pricing vendors to monitor for events materially affecting the value of these securities during this period. If an event occurs, the third party pricing vendors will provide revised values to the Fund.
FAIR VALUATION - INDIVIDUAL SECURITIES
Since the Fund may invest in securities that are restricted, unlisted, traded infrequently, thinly traded, or relatively illiquid, there is the possibility of a differential between the last available market prices for one or more of those securities and the latest indications of market values for those securities. The Fund has procedures, approved by the board of trustees, to determine the fair value of individual securities and other assets for which market prices are not readily available (such as certain restricted or unlisted securities and private placements) or which may not be reliably priced (such as in the case of trade suspensions or halts, price movement limits set by certain foreign markets, and thinly traded or illiquid securities). Some methods for valuing these securities may include: fundamental analysis (earnings multiple, etc.), matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. The board of trustees oversees the application of fair value pricing procedures.
The application of fair value pricing procedures represents a good faith determination based upon specifically applied procedures. There can be no assurance that the Fund could obtain the fair value assigned to a security if it were able to sell the security at approximately the time at which the Fund determines its NAV per share.
SECURITY VALUATION - PASS-THROUGH SECURITIES, CMO, ABS, MBS
Mortgage pass-through securities (such as Ginnie Mae, Fannie Mae and Freddie Mac), other mortgage-backed securities (MBS), collateralized mortgage obligations (CMOs) and asset-backed securities (ABS), generally trade in the over-the-counter market rather than on a securities exchange. The Fund may value these portfolio securities by utilizing quotations from bond dealers, information with respect to bond and note transactions and may rely on independent pricing services. The Fund's pricing services use valuation models or matrix pricing to determine current value. In general, they use information with respect to comparable bond and note transactions, quotations from bond dealers or by reference to other securities that are considered comparable in such characteristics as rating, interest rate, maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves. Matrix pricing is considered a form of fair value pricing.
SECURITY VALUATION - CORPORATE DEBT SECURITIES
Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may value these portfolio securities by utilizing quotations from bond dealers, information with respect to bond and note transactions and may rely on independent pricing services to assist in determining a current market value for each security. The Fund's pricing services may utilize independent quotations from bond dealers and bond market activity to determine current value.
SECURITY VALUATION - OPTIONS
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.
SECURITY VALUATION - FOREIGN SECURITIES - COMPUTATION OF U.S. EQUIVALENT VALUE
The Fund generally determines the value of a foreign security as of the close of trading on the foreign stock exchange on which the security is primarily traded, or as of the close of trading on the NYSE, if earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE (generally 1:00 p.m. Pacific time) on the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. Occasionally events (such as repatriation limits or restrictions) may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the board of trustees.
VALUATION - FOREIGN SECURITIES - POTENTIAL IMPACT OF TIME ZONES AND MARKET HOLIDAYS
Trading in securities on foreign securities stock exchanges and over-the-counter markets, such as those in Europe and Asia, may be completed well before the close of business on the NYSE on each day that the NYSE is open. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a foreign portfolio security held by the Fund. As a result, the Fund may be susceptible to what is referred to as "time zone arbitrage." Certain investors in the Fund may seek to take advantage of discrepancies in the value of the Fund's portfolio securities as determined by the foreign market at its close and the latest indications of value attributable to the portfolio securities at the time the Fund's NAV is computed. Trading by these investors, often referred to as "arbitrage market timers," may dilute the value of the Fund's shares, if such discrepancies in security values actually exist. To attempt to minimize the possibilities for time zone arbitrage, and in accordance with procedures established and approved by the Fund's board of trustees, the manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds).
These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that might call into question the availability (including the reliability) of the values of foreign securities between the times at which they are determined and the close of the NYSE. If such an event occurs, the foreign securities may be valued using fair value procedures established and approved by the board of trustees. In certain circumstances these procedures include the use of independent pricing services. The intended effect of applying fair value pricing is to compute an NAV that accurately reflects the value of the Fund's portfolio at the time that the NAV is calculated, to discourage potential arbitrage market timing in Fund shares, to mitigate the dilutive impact of such attempted arbitrage market timing and to be fair to purchasing, redeeming and existing shareholders. However, the application of fair value pricing procedures may, on occasion, worsen rather than mitigate the potential dilutive impact of shareholder trading.
In addition, trading in foreign portfolio securities generally, or in securities markets 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 foreign portfolio securities used in the calculation. If events affecting the last determined values of these foreign securities occur (determined through the monitoring process described above), the securities will be valued at fair value determined in good faith in accordance with the Fund's fair value procedures established and approved by the board of trustees.
ACCOUNTS WITH LOW BALANCES
If your account has been open for more than one year and its value falls below $500 ($125 for individual retirement accounts; $50 for employee and UGMA/UTMA accounts), we will mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we will close your account and mail the proceeds to the address of record. You will not be charged a CDSC if your account is closed for this reason. This policy does not apply to certain broker-controlled accounts established through the National Securities Clearing Corporation's Networking system.
STATEMENTS, REPORTS AND PROSPECTUSES
You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement).
You also will receive the Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website.
If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page 33).
INVESTMENT REPRESENTATIVE ACCOUNT ACCESS
If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS
You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Distributors. We will process the transfer after we receive authorization in proper form from your delivering securities dealer.
JOINT ACCOUNTS
Unless you specify a different registration, shares issued to two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to jointly owned shares, or to sever a joint tenancy in jointly owned shares, all owners must agree in writing.
JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow the Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to:
o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares;
o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise;
o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you;
o Purchase Fund shares by debiting a bank account that may be owned by you; and
o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you.
If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to the Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to the Fund in a written instruction signed by all registered owners.
ADDITIONAL POLICIES
Please note that the Fund maintains additional policies and reserves certain rights, including:
o The Fund may restrict, reject or cancel any purchase orders, including an
exchange request.
o The Fund may modify, suspend, or terminate telephone/online privileges at any
time.
o The Fund may make material changes to or discontinue the exchange privilege on
60 days' notice or as otherwise provided by law.
o The Fund may stop offering shares completely or may offer shares only on a
limited basis, for a period of time or permanently.
o Normally, redemptions are processed by the next business day, but may take up
to seven days to be processed if making immediate payment would adversely
affect the Fund.
o In unusual circumstances, we may temporarily suspend redemptions or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund may pay redemption proceeds in
securities or other assets rather than cash if the manager determines it is
in the best interest of the Fund, consistent with applicable law.
o You may only buy shares of a fund (including the purchase side of an exchange)
eligible for sale in your state or jurisdiction.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the Fund promptly.
DEALER COMPENSATION
CLASS A, C & R
Qualifying dealers who sell Fund shares may receive sales commissions and other payments. These are paid by Distributors from sales charges received from purchasing or redeeming shareholders, from distribution and service (12b-1) fees from the Fund and from Distributors' other financial resources. Dealers may also receive shareholder servicing fees for servicing investors who indirectly hold Franklin Templeton fund shares through dealer-maintained brokerage accounts as more fully described under "Shareholder servicing and transfer agent" in the SAI. These fees are paid by the Fund's transfer agent from payments it receives under its agreement with the Fund.
CLASS A CLASS C CLASS R
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COMMISSION (%) --- 1.00(3) ---
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 0.75(1) --- ---
12B-1 FEE TO DEALER 0.25(1), (2) 0.65(4) 0.50
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If any dealer commissions are paid in connection with a purchase which is subsequently rejected or results in any trading restriction placed on the purchaser as a result of a determination by the Fund's manager or transfer agent that the purchase may be connected with trading activity that may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy," the dealer shall, upon demand, refund such commissions to Distributors.
1. For purchases at NAV where Distributors paid a prepaid commission, dealers may start to receive the 12b-1 fee in the 13th month after purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase.
2. The Fund may pay up to 0.35% to Distributors or others, out of which 0.10% generally will be retained by Distributors for its distribution expenses.
3. Commission includes advance of the first year's 0.15% 12b-1 service fee. Distributors may pay a prepaid commission. However, Distributors does not pay a prepaid commission on any purchases by Employer Sponsored Retirement Plans.
4. Dealers may be eligible to receive up to 0.15% at the time of purchase and may be eligible to receive 0.65% starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to Distributors to partially offset the commission and the prepaid service fee paid at the time of purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase.
OTHER DEALER COMPENSATION. Distributors may make payments from its own financial resources to certain dealers who have sold shares of the Franklin Templeton mutual funds. In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds, and 0.05% (or 0.03%) of the total assets of equity (or fixed income) funds attributable to that dealer, on an annual basis. Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed this limitation. Distributors makes these payments in connection with the qualifying dealers' efforts to educate financial advisors about the Franklin Templeton funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates, and the quality of the dealer's relationship with Distributors. Distributors will, on an annual basis, determine the advisability of continuing these payments.
To the extent permitted by SEC and NASD rules and other applicable laws and regulations, Distributors may pay or allow other promotional incentives or payments to dealers.
Sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, is not considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Accordingly, the allocation of portfolio transactions for execution by broker-dealers that sell Fund shares is not considered marketing support payments to such broker-dealers.
You can find further details in the SAI about the payments made by Distributors and the services provided by your financial advisor. Your financial advisor may charge you additional fees or commissions other than those disclosed in this prospectus. You should ask your financial advisor for information about any payments it receives from Distributors and any services it provides, as well as about fees and/or commissions it charges.
ADVISOR CLASS
Qualifying dealers who sell Advisor Class shares may receive up to 0.25% of the amount invested. This amount is paid by Distributors from its own resources.
QUESTIONS
If you have any questions about the Fund or your account, you can write to us at P.O. Box 33030, St. Petersburg, FL 33733-8030. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
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SHAREHOLDER SERVICES 1-800/632-2301 5:30 a.m. to 5:00 p.m.
FUND INFORMATION 1-800/DIAL BEN(R) 5:30 a.m. to 5:00 p.m.
(1-800/342-5236)
RETIREMENT SERVICES 1-800/527-2020 5:30 a.m. to 5:00 p.m.
ADVISOR SERVICES 1-800/524-4040 5:30 a.m. to 5:00 p.m.
INSTITUTIONAL SERVICES 1-800/321-8563 6:00 a.m. to 4:00 p.m.
TDD (HEARING IMPAIRED) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
AUTOMATED TELEPHONE SYSTEM 1-800/632-2301 (around-the-clock access)
1-800/524-4040
1-800/527-2020
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FOR MORE INFORMATION
You can learn more about the Fund in the following document:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current SAI, please contact your investment representative or call us at the number below. You also can view the SAI online through franklintempleton.com.
You also can obtain information about the Fund by visiting the SEC's Public Reference Room in Washington, DC (phone 1-202/551-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, DC 20549-0102 or by electronic request at the following email address: publicinfo@sec.gov.
[Insert FRANKLIN TEMPLETON INVESTMENTS logo]
One Franklin Parkway, San Mateo, CA 94403-1906
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
FRANKLINTEMPLETON.COM
[GAIN FROM OUR PERSPECTIVE(R)]
C557 Investment Company Act file #811-04706 447 P 12/07
PART B
TEMPLETON GLOBAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
TEMPLETON GLOBAL BOND FUND
TEMPLETON INCOME TRUST
CLASS A, C & ADVISOR
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 3, 2007
[Insert Franklin Templeton Investments logo]
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 December 3, 2007, 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 Report of Independent Registered Public Accounting Firm in the Fund's Annual Report to Shareholders, for the fiscal year ended August 31, 2007, 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(R) (1-800/342-5236).
CONTENTS
Goal, Strategies and Risks 2 Officers and Trustees 19 Fair Valuation and Liquidity 25 Proxy Voting Policies and Procedures 25 Management and Other Services 27 Portfolio Transactions 30 Distributions and Taxes 30 Organization, Voting Rights and Principal Holders 37 Buying and Selling Shares 38 The Underwriter 44 Performance 45 Miscellaneous Information 48 Description of Ratings 49 |
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation 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 will not be considered a violation of the restriction or limitation.
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 trying to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and
non-fundamental policies. A fundamental policy 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. A non-fundamental policy may be
changed by the board of trustees without the approval of shareholders.
FUNDAMENTAL INVESTMENT POLICIES
The Fund's investment goal is current income with capital appreciation and growth of income.
The Fund may not:
1. Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (1940 Act) or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the U.S. Securities and Exchange Commission (SEC).
2. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
4.Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans.
5.Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) engaging in transactions involving currencies and futures contracts and options thereon or (ii) investing in securities or other instruments that are secured by physical commodities.
6.Issue senior securities, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
7.Invest more than 25% of its net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies).
NON-FUNDAMENTAL INVESTMENT POLICIES
Under normal market conditions, the Fund invests at least 80% of its net assets in "bonds." "Bonds" include debt securities of any maturity, such as bonds, notes and debentures. Net assets for this 80% policy include the amount of borrowings for investment purposes.
INVESTMENTS, TECHNIQUES, STRATEGIES AND THEIR RISKS
Certain words or phrases may be used in descriptions of Fund investment policies and strategies to give investors a general sense of the Fund's levels of investment. They are broadly identified with, but not limited to, the following percentages of Fund total assets:
"small portion" less than 10% "portion" 10% to 25% "significant" 25% to 50% "substantial" 50% to 66% "primary" 66% to 80% "predominant" 80% or more |
If the Fund intends to limit particular investments or strategies to no more than specific percentages of Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are not limitations unless specifically stated as such in the Fund's prospectus or elsewhere in this SAI.
The value of your shares will increase as the value of the securities owned by the Fund increases and will decrease as the value of the Fund's investments decreases. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors that affect the value of any particular security that the Fund owns, the value of the Fund's shares may also change with movements in the stock and bond markets as a whole.
In trying to achieve its investment goals, the Fund may invest in the following types of securities or engage in the following types of transactions. These securities and transactions, and their associated risks, are described below. The Fund's manager is under no obligation to invest in any or all of these securities or engage in any or all of these types of transactions.
BORROWING Under the current version of the 1940 Act and the SEC's current rules, exemptions and interpretations thereunder, the Fund may borrow up to one-third of the value of its total assets (including the amount borrowed, but less all liabilities and indebtedness not represented by senior securities) from banks to increase its holdings of portfolio securities. Under the 1940 Act, the Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to reduce the amount of its borrowings (within three days) to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise. In the event that the Fund is required to reduce its borrowings, it may have to sell portfolio holdings, even if such sale of the Fund's holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances), which may or may not exceed the income or gains received from the securities purchased with borrowed funds.
Under the 1940 Act, the Fund may also borrow for temporary purposes in an amount not exceeding 5% of the value of its total assets at the time when the loan is made. A loan shall be presumed to be for temporary purposes if it is repaid within 60 days and is not extended or renewed.
BORROWING FROM AFFILIATED INVESTMENT COMPANIES. Subject to the Fund's fundamental restrictions on borrowing, the Fund may also borrow money from affiliated investment companies or other affiliated entities. In September 1999, the SEC granted an exemptive order to the Fund, together with other funds in Franklin Templeton Investments, permitting each fund to borrow money from other funds in Franklin Templeton Investments through a credit facility for temporary purposes (the Borrowing Order). The Borrowing Order permits the Fund to borrow money from other funds in Franklin Templeton Investments at rates that may be more favorable than the rates that the Fund would receive if it borrowed from banks or other lenders. The Borrowing Order also permits the Fund to borrow from other affiliated entities, such as the Investment Manager, under emergency market conditions should the SEC permit investment companies to engage in such borrowing in the future, such as it did in response to the emergency market conditions that existed immediately after the events of September 11, 2001.
The Borrowing Order permits the Fund to engage in borrowing and lending through the credit facilities in the following certain situations: (i) when the cash position of the Fund is insufficient to meet temporary cash requirements; or (ii) when a sale of securities "fails" due to circumstances such as a delay in the delivery of cash to the Fund's custodian or improper delivery instructions by the broker effecting the transaction.
According to the Borrowing Order, if the total outstanding borrowings of the Fund are less than 10% immediately after the borrowing, the amount borrowed may be unsecured. If the total outstanding borrowings of the Fund are more than 10% immediately after the borrowing, the amount borrowed must be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding loan that requires collateral. If the Fund has outstanding interfund borrowings that, through additional borrowings, cause its outstanding borrowings from all sources to exceed 10% of its total assets, the Fund must first secure each outstanding interfund loan by the pledge of segregated collateral with a market value at least equal to 102% of the outstanding principal value of the loan.
If the total outstanding borrowings of the Fund with outstanding interfund loans exceeds 10% of its total assets for any other reason (such as decline in net asset value or because of shareholder redemptions), the Fund will within one business day thereafter: (a) repay all of its outstanding interfund loan, (b) reduce its outstanding indebtedness to 10% or less of its total assets, or (c) secure each outstanding interfund loan by the pledge of segregated collateral with a market value at least equal to 102% of the outstanding principal value of the loan until the Fund's total outstanding borrowings cease to exceed 10% of its total assets, at which time the collateral shall no longer be required. Under these circumstances, until each outstanding interfund loan is repaid or the Fund's total outstanding borrowings cease to exceed 10% of its total assets, the Fund will mark the value of the collateral to market each day and will pledge such additional collateral as is necessary to maintain the market value of the collateral at least equal to 102% of the outstanding principal value of the loan.
The duration of interfund loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. The Fund's borrowings through the credit facility, as measured on the day the most recent loan was made, will not exceed the greater of 125% of the Fund's total net cash redemptions and 102% of sales fails for the preceding seven calendar days. The trustees of the Fund, including a majority of the independent trustees, will: (a) review no less frequently than quarterly the Fund's participation in the credit facility during the preceding quarter for compliance with the conditions with the Borrowing Order; (b) establish a bank loan rate formula used to determine the interest rate on interfund loans in accordance with the Borrowing Order and review no less frequently than annually the continuing appropriateness of the bank loan rate formula; and (c) review no less frequently than annually the continuing appropriateness of the Fund's participation in the credit facility.
CONVERTIBLE SECURITIES A convertible security is usually issued either by an operating company or by an investment bank. When issued by an operating company, a convertible security tends to be senior to common stock, but subordinate to other types of fixed-income securities issued by that company. When a convertible security issued by an operating company is "converted," the operating company often issues new stock to the holder of the convertible security but, if the parity price of the convertible security is less than the call price, the operating company may pay out cash instead of common stock. If the convertible security is issued by an investment bank, the security is an obligation of and is convertible through the issuing investment bank. The issuer of a convertible security may be important in determining the security's true value. This is because the holder of a convertible security will have recourse only to the issuer.
CONVERTIBLE DEBT SECURITIES. As with a straight fixed-income security, a convertible debt security tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible debt security also tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the underlying stock declines. Because its value can be influenced by both interest rate and market movements, a convertible debt security is not as sensitive to interest rates as a similar fixed-income security, nor is it as sensitive to changes in share price as its underlying stock. The Fund uses the same criteria to rate a convertible debt security that it uses to rate a more conventional debt security.
CONVERTIBLE PREFERRED STOCK. A convertible preferred stock is treated like a preferred stock for the Fund's financial reporting, credit rating and investment limitation purposes. A preferred stock is subordinated to all debt obligations in the event of insolvency, and an issuer's failure to make a dividend payment is generally not an event of default entitling the preferred shareholder to take action. A preferred stock generally has no maturity date, so that its market value is dependent on the issuer's business prospects for an indefinite period of time. In addition, distributions from preferred stock are dividends, rather than interest payments, and are usually treated as such for corporate tax purposes.
DEBT SECURITIES Debt securities represent an obligation of the issuer to repay a loan of money and generally provide for the payment of interest. These include bonds, notes, bills and debentures; commercial paper; time deposits; and bankers' acceptances. The Fund may also invest in collateralized mortgage obligations; when-issued securities; structured investments; and zero coupon and pay-in-kind bonds. A debt security typically has a fixed payment schedule that 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 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. Convertible bonds are exchangeable at the option of the holder for common stock of the issuer. See "Convertible securities" above for more information.
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 per share. 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.
Changes in interest rates in any country where the Fund invests 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.
BONDS. A bond is a debt security in which investors loan money to an entity that borrows for a defined period of time at a specified interest rate. Bonds can be rated by independent rating organizations based on an analysis of the fundamental soundness of the borrower. See "Investment grade debt securities," "Lower rated securities" and "Unrated debt securities" below for more information.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). CMOs are fixed-income securities that 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. Conversely, in periods of rising interest rates, prepayments decrease and the effective maturity of the pool increases.
COMMERCIAL PAPER. Commercial paper is an unsecured, short-term loan by a corporation, typically for financing accounts receivable and inventory. Investments in commercial paper are limited to obligations rated Prime-1 by Moody's Investors Service (Moody's) or A-1 by Standard & Poor's (S&P(R)) 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.
DEBENTURES. A debenture is an unsecured debt backed only by the credit-worthiness of the borrower, not by collateral.
FOREIGN BONDS. The Fund's investments in debt instruments may include U.S. and foreign government and corporate securities. These debt instruments may include Samurai bonds, Yankee bonds, Eurobonds and Global Bonds in order to gain exposure to investment capital in other countries in a certain currency. A Samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company. Eurobonds are generally issued in bearer form, carry a fixed or floating rate of interest, and typically amortize principal through a bullet payment with semiannual interest payments in the currency in which the bond was issued. Yankee bonds are foreign bonds denominated in U.S. dollars and registered with the SEC for sale in the U.S. A Global Bond is a certificate representing the total debt of an issue. Such bonds are created to control the primary market distribution of an issue in compliance with selling restrictions in certain jurisdictions or because definitive bond certificates are not available. A Global Bond is also known as a Global Certificate.
INVESTMENT GRADE DEBT SECURITIES. Various independent rating organizations publish ratings of some of the debt securities in which the Fund may invest based upon their assessment of the financial soundness of the issuer. Generally, a higher rating indicates less risk. Debt securities that are rated Baa by Moody's or BBB by S&P or above, or unrated securities deemed by the Fund's manager to be of comparable quality, are considered to be "investment grade." Debt securities in the lowest investment grade category may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt securities. If the rating on an issue held in the Fund's portfolio is changed by the rating service or the security goes into default, this event will be considered by the Fund in its evaluation of the overall investment merits of that security but will not generally result in an automatic sale of the security.
LOWER RATED SECURITIES. Higher yields are ordinarily available from securities in the lower rating categories, such as securities rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities deemed by the Fund's manager to be of comparable quality. Such high-yield securities are considered to be below "investment grade" and are sometimes referred to as "junk bonds." These ratings represent the opinions of the rating services with respect to the issuer's ability to pay interest and repay principal. They do not purport to reflect the risk of fluctuations in market value and are not absolute standards of quality. The Fund may not invest more than 25% of its total assets in lower rated securities.
The Fund may buy debt securities that are rated C or better by Moody's and S&P or unrated debt that the manager deems to be of comparable quality. Debt securities rated C by Moody's are the lowest rated debt securities and are regarded as having extremely poor prospects of ever attaining any real investment standing. Debt securities rated C by S&P are regarded as speculative and this rating typically applies to debt securities that are subordinate to senior debt securities that also have a speculative rating.
Although they may offer higher yields than do higher rated securities, lower rated and unrated debt securities generally involve greater volatility of price and risk to principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. These securities will have some quality and protective characteristics, but these are outweighed by large uncertainties or major risk exposures to adverse conditions.
The markets in which lower 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 lower rated or unrated debt securities may also make it more difficult for the Fund to obtain accurate market quotations for the purposes of valuing its portfolio. Market quotations are generally available on many lower 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 lower rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of lower 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 lower rated debt securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher rated securities.
Lower rated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of lower 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 lower 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 lower rated debt securities defaults, the Fund may incur additional expenses to seek recovery.
NOTES. A note is a medium- or short-term debt instrument, usually with a maturity of 10 years or less.
BILLS. A bill is a short-term debt instrument, usually with a maturity of 2 years or less.
STRUCTURED INVESTMENTS. Structured investments are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities typically are organized by investment banking firms that 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 generally will 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 instruments, the purchase will not be deemed to be leverage for purposes of the limitations placed on the extent of the Fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Fund's investment in these structured investments may be limited by the restrictions contained in the 1940 Act. Structured investments typically are sold in private placement transactions, and there currently is no active trading market for structured investments. However, the Fund will only invest in publicly distributed structured investments. To the extent such investments are illiquid, they will be subject to the Fund's restrictions on investments in illiquid securities.
TIME DEPOSITS. Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation.
UNRATED DEBT SECURITIES. The Fund may also invest in unrated debt securities, which are debt securities not yet rated by an independent rating organization. Unrated debt, while not necessarily of lower quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed by a Fund's manager to determine whether to purchase unrated debt securities and if it is of comparable quality to rated securities.
U.S. GOVERNMENT SECURITIES. 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.
WHEN-ISSUED, DELAYED DELIVERY AND TO--BE--ANNOUNCED SECURITIES. The Fund may purchase securities on a when-issued, delayed delivery or to--be--announced basis. These transactions involve a commitment by the Fund to purchase or sell particular securities with payment and delivery taking place at a future date, and permit the Fund to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates or market action. No income accrues to the purchaser of a security on a when-issued, delayed delivery or to--be--announced basis prior to delivery. Such securities are recorded as an asset and are subject to changes in value based upon changes in the general level of interest rates. Purchasing a security on a when-issued, delayed delivery or to--be--announced basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Fund will only make commitments to purchase securities on a when-issued, delayed delivery or to--be--announced basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable.
The Fund will segregate on the books of the Fund or the Fund's custodian an amount of liquid assets equal to 102% of the amount of its commitment to purchase securities on a when-issued, delayed delivery or to--be--announced basis. These assets will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to 102% of the amount of the Fund's commitments.
ZERO COUPON AND PAY-IN-KIND BONDS. Zero coupon and pay-in-kind bonds are debt securities that typically do not pay cash interest until the security's maturity or payment date. The Fund may accrue and report interest on high yield bonds structured as zero coupon bonds or pay-in-kind securities as income 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, the Fund must distribute substantially all of its income to shareholders. Thus, the Fund may have to dispose of portfolio securities under disadvantageous circumstances to generate cash in order to satisfy the distribution requirement.
DEPOSITARY RECEIPTS Depositary receipts are certificates that give their holders the right to receive securities of (a) a foreign issuer deposited in a U.S. bank or trust company (American Depositary Receipts, "ADRs"); or (b) a foreign or U.S. issuer deposited in a foreign bank or trust company (Global Depositary Receipts, "GDRs," or European Depositary Receipts, "EDRs"). For purposes of the Fund's investment policies, the Fund's investments in depositary receipts will be deemed to be investments in the underlying securities.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on exchanges or over-the-counter. While ADRs do not eliminate all the risks associated with foreign investments, by investing in ADRs rather than directly in the securities of foreign issuers, the Fund will avoid currency risks during the settlement period for either purchases or sales and certain foreign securities markets trading risks. In general, there is a large, liquid market in the U.S. for ADRs quoted on a national securities exchange or on the Nasdaq. The information available for ADRs is subject to the accounting, auditing, and financial reporting standards of the U.S. market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject.
Depositary receipts may be issued under sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities traded in the form of depositary receipts. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be less information available regarding issuers of securities underlying unsponsored programs, and there may not be a correlation between such information and the market value of the depositary receipts.
DERIVATIVE SECURITIES Derivative securities are securities or other instruments 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. To the extent that the Fund enters into these transactions, the successful use of such securities will depend upon the manager's ability to predict pertinent market movements. The Fund is subject to derivatives guidelines established by the board of trustees (the Derivatives Guidelines) regarding the use of derivatives. Under these guidelines, currently no more than 5% of the Fund's total assets may be invested in, or exposed to, futures, options, collars and swap agreements (as measured at the time of investment).
FUTURES CONTRACTS. A financial futures contract is an agreement between two parties to buy or sell a specified 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.
When the Fund enters into a futures contract, it must deliver to the futures commission merchant selected by the Fund, an amount referred to as "initial margin" that currently ranges from 1(1)/2% to 5% of the contract amount. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded. Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the Fund from, such account in accordance with controls set for such accounts, depending upon changes in the price of the underlying securities subject to the futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund's custodian on a daily basis.
At the time the Fund buys or sells a futures contract, an amount of cash, U.S. government securities, liquid debt securities or other liquid assets (including equity securities) equal to the market value of the contract, minus any initial margin or variation margin deposit, will be segregated on the books of the Fund or its custodian. Alternatively, the Fund may "cover" its position by owning the same futures contract, 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 segregated on the books of the Fund or its custodian). Any assets segregated on the books of the Fund or the Fund's custodian, will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are equal to the price of the contract, minus any initial margin or variation margin deposit.
EXCHANGE-TRADED STOCK INDEX FUTURES. The Fund may buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. The Fund may buy and sell stock index futures contracts traded on a recognized stock exchange or board of trade for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. 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 value of a unit is the current value of the stock index. For example, the S&P 500 Stock Index (S&P 500 Index) is composed of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 500 Index assigns relative weightings to the value of one share of each of these 500 common stocks included in the index, and the index fluctuates with changes in the market values of the shares of those common stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150, one contract would be worth $75,000 (500 units x $150).
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. For example, if the Fund enters into a futures contract to buy 500 units of the S&P 500 Index at a specified future date at a contract price of $150 and the S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a futures contract to sell 500 units of the stock index at a specified future date at a contract price of $150 and the S&P 500 Index is at $154 on that future date, the Fund will lose $2,000 (500 units x loss of $4).
When the Fund enters into a stock index futures contract, it must deliver to the futures commission merchant selected by the Fund, an amount referred to as "initial margin" that currently ranges from 1(1)/2% to 5% of the contract amount. Initial margin requirements are determined by the respective exchanges on which the stock index futures contracts are traded. Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the Fund from, such account in accordance with controls set for such accounts, depending upon changes in the price of the underlying securities subject to the stock index futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund's custodian on a daily basis.
At the time the Fund buys or sells a stock index futures contract, an amount of cash, U.S. government securities, highly liquid debt securities or other pledge (including equity securities) equal to the market value of the contract, minus any initial margin or variation margin deposit, will be segregated on the books of the Fund or its custodian. Alternatively, the Fund may "cover" its position by owning the same stock index futures contract, or holding a call option permitting the Fund to purchase the same stock index 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 segregated on the books of the Fund or its custodian). Any assets segregated on the books of the Fund or the Fund's custodian, will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are equal to the price of the contract, minus any initial margin or variation margin deposit.
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 will generally buy 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.
EXCHANGE-TRADED OPTIONS ON SECURITIES AND FUTURES. 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. The Fund must limit its purchase options to the extent that the total premiums it paid for all options are 5% or less of its total assets. Investments in options are subject to the Fund's Derivatives Guidelines.
The Fund may 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 or futures contract and the changes in value of the Fund's security holdings being hedged. In addition, the Fund will continue to receive interest or dividend income on the security. The Fund may sell a put option that it has previously purchased prior to the sale of the securities underlying that option. These sales will result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid for the put option that is sold. This gain or loss may be wholly or partially offset by a change in the value of the underlying security that the Fund owns or has the right to acquire.
A call option gives the holder the right to buy the underlying securities from the option writer at a stated exercise price. The Fund may buy call options on securities that it intends to buy in order to limit the risk of a substantial increase in the market price of this security. The Fund may also buy call options on securities held in its portfolio and on which it has written call options. Prior to its expiration, a call option may be sold in a closing sale transaction. Profit or loss from such a sale will depend on whether the amount received is more or less than the premium paid for the call option plus the related transaction costs. 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. 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 or futures contract does not rise.
The Fund may write options to generate additional income and to hedge its investment portfolio against anticipated adverse market and/or exchange rate movements. The Fund may write covered call and put options on any securities on which it may invest. The Fund may buy and write these options on securities that are listed on domestic or foreign securities exchanges or traded in the over-the-counter market. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a stated exercise price. Put options written by the Fund give the holder the right to sell the underlying security to the Fund at a stated exercise price.
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 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 consideration held in liquid assets segregated on the books of the Fund or 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 (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is maintained by the Fund in liquid securities segregated on the books of the Fund or its custodian. A put option on a security or futures contract written by the Fund is "covered" if the Fund maintains liquid assets segregated on the books of the Fund or its custodian with a value equal to the exercise price, or else holds a put on the same security or futures contract 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. All assets segregated on the books of the Fund or its custodian to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written.
The purpose of writing covered call options is to realize greater income than would be realized on portfolio securities alone. However, in writing covered call options for additional income, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
EXCHANGE-TRADED STOCK INDEX OPTIONS. Call and put options on stock indices are similar to options on securities except that, rather than the right to buy or sell particular securities at a specified price, options on a stock index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying stock index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the stock market generally (or in a particular industry or segment of the market) rather than price movements in individual securities.
The Fund may buy and sell put and call options on securities indices in standardized contracts traded on national securities exchanges, boards of trade, or similar entities or quoted on Nasdaq for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. 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.
The Fund may write call options and put options only if they are "covered." A written call option on an index is covered if the Fund maintains liquid assets segregated on the books of the Fund or its custodian with a value equal to the exercise price. A call option is also covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, if the difference is maintained by the Fund in liquid securities segregated on the books of the Fund or its custodian. The Fund may also 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. All assets segregated on the books of the Fund or its custodian to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written.
The Fund may "cover" put options on securities indices that it writes if it maintains liquid assets segregated on the books of the Fund or its custodian with a value equal to the exercise price, or else holds a put on the same securities index 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. A written put option is also "covered" if the Fund holds a put on the same index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, if the difference is maintained by the Fund in liquid securities segregated on the books of the Fund or its custodian. All assets segregated on the books of the Fund or its custodian, to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written.
The Fund may only buy options if the total premiums it paid for all options are 5% or less of its total assets. Subject to the Derivatives Guidelines, as discussed above, the Fund currently intends to limit writing options only to the extent that obligations under all option contracts and transactions represent not more than 5% of the Fund's total assets.
OTHER GENERAL RISKS OF OPTIONS. There are several risks associated with transactions in options on securities and 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 or security written by the Fund is covered by an option on the same index or security 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.
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.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires. If an option written by the Fund expires, the Fund will realize a capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund will realize a capital loss equal to the premium paid.
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.
OTC OPTIONS ON SECURITIES, INDICES AND FUTURES. The value of over-the-counter options purchased by the Fund, as well as the cover for options written by the Fund, may be considered illiquid and are subject to the Fund's limitation on investments in illiquid securities.
The Fund may write covered put and call options and buy put and call options that trade in the over-the-counter market to the same extent that it may engage in exchange traded options. OTC options differ from exchange-traded options in certain material respects. OTC options are arranged directly with dealers and not, as is the case with exchange traded options, with a clearing corporation. Thus, there is a risk of non-performance by the dealer. Because there is no exchange, pricing is typically done by reference to information from market makers. However, OTC options are available for a greater variety of securities and in a wider range of expiration dates and exercise prices than exchange traded options; and the writer of an OTC option is paid the premium in advance by the dealer.
SPREAD, STRADDLE AND COLLAR TRANSACTIONS. The Fund may engage in "spread" transactions in which it buys and writes a put or call option on the same underlying security, with the options having different exercise prices and/or expiration dates. The Fund may also engage in so-called "straddles," in which it buys or writes combinations of put and call options on the same security, with the options having the same exercise prices and/or expiration dates. The Fund may also participate in a collar transaction, which is a combination of put options and CALL options that can limit, but not eliminate, the risk that their value will decrease. Because buying options in connection with these transactions may, under certain circumstances, involve a limited degree of investment leverage, subject to the Derivatives Guidelines discussed above, the Fund will not enter into any spreads or straddles if, as a result, more than 5% of its total assets will be invested at any time in these options transactions.
SWAP AGREEMENTS. The Fund may enter into swap agreements for the purpose of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in a security that yielded or produced that desired return. These instruments also may be used for tax and/or cash management purposes, hedging the Fund's investments against a decline in value and/or to enhance Fund returns. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a particular security, or at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Fund's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Fund's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of assets segregated on the books of the Fund or its custodian, consisting of cash, U.S government securities, or any liquid assets, to limit any potential leveraging of the Fund's portfolio. These assets will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of any accrued but unpaid net amounts owed to a swap counterparty. The Fund will not enter into a swap agreement with any single party if the net amount that would be owed or received under contracts with that party would exceed 5% of the Fund's total assets. Investments in swaps are also subject to the Fund's Derivatives Guidelines.
Whether the Fund's use of swap agreements will be successful in furthering its investment objective will depend on the ability of the manager correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The manager will cause the Fund to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Fund's repurchase agreement guidelines. Certain positions adopted by the Internal Revenue Service may limit the Fund's ability to use swap agreements in a desired tax strategy.
The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market and the laws relating to swaps, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap agreements, to realize amounts to be received under such agreements, or to enter into swap agreements, or could have adverse tax consequences.
EQUITY SECURITIES Equity securities represent a proportionate share of the ownership of a company; their value is based on the success of the company's business and the value of its assets, as well as general market conditions. 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 also may 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 different voting rights. Equity securities also may include convertible securities, warrants or rights or equity interests in trusts, partnerships, joint ventures or similar enterprises. Convertible securities typically are debt securities or preferred stocks that are convertible into common stock after certain time periods or under certain circumstances. See "Convertible securities" above for more information. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price.
FOREIGN CURRENCY TRANSACTIONS In order to hedge against foreign currency exchange rate risks and/or to generate income for the portfolio, the Fund may, but is not obligated to, 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's investments in futures contracts and related options are subject to the Derivative Guidelines. The Fund also may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market.
FORWARD FOREIGN CURRENCY CONTRACTS. 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 or to enhance income. 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 in the interbank market. The Fund may either accept or make delivery of the currency specified at the maturity of a forward or futures contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract.
The Fund enters into a forward contract, for example, when it contracts 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. Thus, for example, when the Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Similarly, when the Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward contract to buy that foreign currency for a fixed dollar amount. The Fund may also purchase and sell forward contracts for non-hedging purposes when the manager anticipates that the foreign currency will appreciate or depreciate in value but securities denominated in that currency do not present attractive investment opportunities and are held in the Fund.
In addition, when the Fund believes that a foreign currency may experience a substantial movement against another currency, it may enter into a forward contract to buy or sell, as appropriate, an amount of the foreign currency either: a) approximating the value of some or all of its portfolio securities denominated in such foreign currency; or b) necessary to derive a level of additional income that the Fund's manager seeks to achieve for the Fund. This investment practice generally is referred to as "cross-hedging" and, in connection with the Fund's forward contracts, an amount of its assets equal to the amount of the purchase will be segregated on the books of the Fund or its custodian to be used to pay for the commitment. Accordingly, the Fund will always have liquid assets available in an amount equal to 102% of the Fund's commitments under its forward contracts to limit any potential risk. These assets are marked-to-market daily and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to 102% of the amount of the Fund's commitments under its forward contracts. The Fund will cover any commitments under these contracts to sell currency by owning or acquiring the underlying currency (or an absolute right to acquire such currency).
Although the Commodity Futures Trading Commission does not currently regulate these contracts, it may in the future assert such regulatory authority. 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. Moreover, there may be an imperfect correlation between the Fund's portfolio holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. This imperfect correlation may cause the Fund to sustain losses that will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss. The ability of the Fund to enter into forward contracts is limited only to the extent that forward contracts would, in the opinion of the manager, impede portfolio management or the ability of the Fund to honor redemption requests. The Fund generally will not enter into a forward contract with a term greater than one year.
OPTIONS ON FOREIGN CURRENCIES. 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 paid 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. Over-the-counter forwards and related options may be considered illiquid securities and would be subject to the Fund's investment restriction with respect to illiquid securities.
All options written by the Fund will be "covered." For more information about the mechanics of purchasing, writing and covering options, see "Exchange-traded options on securities and futures" under "Derivative securities" above.
FOREIGN CURRENCY FUTURES. The Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies (foreign currency futures). A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of currency at a future date at a price set at the time of the contract. 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.
The Fund may either accept or make delivery of the currency specified at the maturity of a currency futures contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to currency futures contracts are effected on the exchange on which the contract was entered into (or on a linked exchange).
All futures in which the Fund participates may be subject to "margin" and coverage requirements. For more information about the mechanics of participating in futures, see "Futures contracts" under "Derivative SECURITIES" above.
FOREIGN SECURITIES The Fund will invest in foreign securities, including up to 5% of its total assets in Russian securities. Under normal circumstances, the Fund will invest in issuers located in at least three different countries (including the U.S.). The Fund may purchase securities in any foreign country, including developed or emerging markets. Investors should consider carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies generally are not subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. From time to time, trading in a foreign market may be interrupted and 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 generally are 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.
Certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment of foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Furthermore, in some countries the repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval. The Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for repatriation.
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 that 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.
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 may not be internationally traded.
Certain of these 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 investments of the Fund.
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.
EMERGING/DEVELOPING MARKETS. The Fund may invest up to 100% of its total assets in emerging market countries. However, the Fund, under current market conditions, intends to invest no more than 50% of its total assets in emerging markets. Emerging market countries are (i) countries that are generally considered developing by the International Bank of Reconstruction and Development (commonly known as the World Bank) and the International Finance Corporation; or (ii) countries that are classified by the United Nations or otherwise regarded by their authorities as developing; or (iii) countries with a stock market capitalization of less than 3% of the Morgan Stanley Capital International World Index. Emerging market companies are (i) companies whose principal securities trading markets are in emerging market countries; or (ii) companies that derive 50% or more of their total revenue from either goods or services produced or sales made in emerging market countries; or (iii) companies that have 50% or more of their assets in emerging market countries; or (iv) companies that are linked to currencies of emerging market countries; or (v) companies that are organized under the laws of, or with principal offices in, emerging market countries.
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 legal 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 of the countries in which the Fund may invest have experienced substantial, and during 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 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's shareholders.
ILLIQUID SECURITIES Consistent with the SEC Staff's current position on illiquid securities, the Fund may not invest more than 15% of its net assets in illiquid securities. An illiquid asset is an asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the mutual fund has valued the investment on its books.
Securities that are acquired outside the U.S. and that are publicly traded in the U.S. or on a foreign securities exchange or in a foreign securities market are not considered by the Fund to be illiquid assets if: (a) the Fund reasonably believes it can dispose of the securities for cash in the U.S. or foreign market, or (b) current market quotations are readily available. Investments may be in securities of foreign issuers, whether located in developed or undeveloped countries.
The Fund may invest in legally restricted securities (such as those issued pursuant to an exemption from the registration requirements of the federal securities laws) where such investments are consistent with the Fund's investments objective. To the extent the manager determines there is a liquid institutional or other market for these securities, the Fund considers them to be liquid securities. An example is a restricted security that may be freely transferred among qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933 Act), and for which a liquid institutional market has developed. The Board of Trustees of the Fund will review any determination by the manager to treat a restricted security as liquid on an ongoing basis, including the manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the manager and the Board will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential buyers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent the Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the Fund may increase if qualified institutional buyers become uninterested in buying these securities or the market for these securities contracts.
The sale of restricted or illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than the sale of securities eligible for trading on national securities exchanges or in the OTC markets. Restricted securities often sell at a price lower than similar securities that are not subject to restrictions on resale.
The risk to the Fund in holding illiquid securities is that they may be more difficult to sell if the Fund wants to dispose of the security in response to adverse developments or in order to raise money for redemptions or other investment opportunities. Illiquid trading conditions may also make it more difficult for the Fund to realize a security's fair value.
INVESTMENT COMPANIES The Fund may invest in investment companies that invest principally in securities in which the Fund is authorized to invest. Section 12(d)(1) of the 1940 Act limits the Fund to: (i) investing not more than 10% of its total assets in the securities of other investment companies; (ii) investing not more than 5% of its total assets in the securities of any one investment company; and (iii) acquiring not more than 3% of the outstanding voting securities of the acquired investment company. To the extent the Fund invests in other investment funds, the Fund's shareholders will incur certain duplicative fees and expenses, including investment advisory fees. The Fund also can invest its cash balances in affiliated or unaffiliated money market funds to the extent permitted by its investment policies and restrictions, without regard to the percentage limits above.
CLOSED-END INVESTMENT COMPANIES. To encourage indirect foreign investment in their capital markets, some countries, including South Korea, Chile and India, have permitted the creation of closed-end investment companies. Pursuant to the restrictions stated above, shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If the Fund acquires shares of closed-end investment companies, shareholders would bear both their proportionate share of expenses of the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers. These loans may not exceed 33 1/3% of the value of the Fund's total assets (including all collateral as part of the Fund's total assets), measured at the time of the most recent loan. For each loan, the borrower must maintain with the Fund's custodian collateral (consisting of any combination of cash, securities issued by the U.S. government and its agencies and instrumentalities, or irrevocable letters of credit) with an initial market value at least equal to 102% of the market value of the domestic securities loaned (or 105% of the market value of foreign securities loaned), including any accrued interest thereon. Such collateral will be marked-to-market daily, and if the coverage falls below 100%, the borrower will be required to deliver additional collateral equal to at least 102% of the market value of the domestic securities loaned (or 105% of the foreign securities loaned). The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund also continues to receive any distributions paid on the loaned securities. The Fund may terminate a loan at any time and obtain the return of the securities loaned within the normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending of the securities, the manager intends to call the loaned securities to vote proxies, or to use other practicable and legally enforceable means to obtain voting rights, when the manager has knowledge that, in its opinion, a material event affecting the loaned securities will occur or the manager otherwise believes it necessary to vote. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral in the event of default or insolvency of the borrower. The Fund will loan its securities only to parties who meet creditworthiness standards approved by the Fund's board of trustees, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the loan.
LOANS TO AFFILIATED INVESTMENT COMPANIES Subject to the Fund's fundamental restrictions on lending, the Fund may also make loans to affiliated investment companies or other affiliated entities, pursuant to the Borrowing Order granted by the SEC in September 1999. See "Borrowing from affiliated investment companies" above for more information on the Borrowing Order. These lending transactions may include terms that are more favorable than those which would otherwise be available from lending institutions. The Fund may also, under certain conditions, lend cash to other funds in Franklin Templeton Investments at rates higher than those that the Fund would receive if the Fund loaned cash to banks through short-term lending transactions, such as repurchase agreements. The duration of interfund loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. The Fund may not lend to another fund through the credit facility if the loan would cause its aggregate outstanding loans through the credit facility to exceed 5% of its net assets for equity funds or 7.5% of its net assets for taxable bond funds at the time of the loan. Also, the Fund's interfund loans to any one fund shall not exceed 5% of the lending Fund's net assets.
REPURCHASE AGREEMENTS The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, including to satisfy redemption requests from shareholders, waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer 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 market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The manager will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction.
A repurchase agreement with more than seven days to maturity is considered an illiquid security and is subject to the Fund's investment restriction on illiquid securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, the securities in which the Fund normally invests or the economies of the countries where the Fund invests. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity.
Temporary defensive investments generally may include (1) unaffiliated or affiliated money market funds and investment companies (to the extent allowed by the 1940 Act or exemptions granted thereunder and the Fund's fundamental investment policies and restrictions); (2) bank time deposits denominated in the currency of any major nation with less than seven days remaining to maturity; (3) bankers' acceptances; (4) certificates of deposits; (5) debt securities of foreign companies; (6) floating rate securities (if money market fund eligible); (7) repurchase agreements with banks and broker-dealers; (8) commercial paper rated A-1 by S&P or Prime-1 by Moody's or, if unrated, issued by a company which, at the date of investment, had an outstanding debt issue rated AAA or AA by S&P or Aaa or Aa by Moody's; (9) U.S. government securities maturing in 13 months or less; and (10) a variety of other high quality short-term investments. For additional information about these types of investments, see "Debt securities" above.
POLICIES AND PROCEDURES REGARDING THE RELEASE OF PORTFOLIO HOLDINGS The Fund's overall policy with respect to the release of portfolio holdings is to release such information consistent with applicable legal requirements and the fiduciary duties owed to shareholders. Subject to the limited exceptions described below, the Fund will not make available to anyone non-public information with respect to its portfolio holdings, until such time as the information is made available to all shareholders or the general public.
For purposes of this policy, portfolio holdings information does not include aggregate, composite or descriptive information that does not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the applicable U.S. registered fund. Information excluded from the definition of portfolio holdings information generally includes, without limitation: (1) descriptions of allocations among asset classes, regions, countries or industries/sectors; (2) aggregated data such as average or median ratios, market capitalization, credit quality or duration; (3) performance attributions by industry, sector or country; or (4) aggregated risk statistics. Such information, if made available to anyone, will be made available to any person upon request, but, because such information is generally not material to investors, it may or may not be posted on the Fund's website. In addition, other information may also be deemed to not be portfolio holdings information if, in the reasonable belief of the Fund's Chief Compliance Officer (or his/her designee), the release of such information would not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the Fund.
Consistent with current law, the Fund releases complete portfolio holdings information each fiscal quarter through regulatory filings with no more than a 60-day lag.
In addition, a complete list of the Fund's portfolio holdings is released 30 calendar days after the end of each calendar quarter. Other portfolio holdings information, such as the Fund's top 10 holdings, may be released monthly on the Fund's website, no sooner than five days after the end of each month. Released portfolio holdings information can be viewed on franklintempleton.com.
To the extent that this policy would require the release of portfolio holdings information regarding a particular portfolio holding for the Fund, the portfolio manager for the Fund may request that the holding be withheld from the portfolio holdings information if the holding is the subject of ongoing purchase or sale orders/programs, or if the release of such portfolio holdings information would otherwise be sensitive or inappropriate due to liquidity and other market considerations, in each case as determined by the portfolio manager in consultation with the head of Global Investment Adviser Compliance (or his/her designee).
Exceptions to the portfolio holdings release policy will be made only when:
(1) the Fund has a legitimate business purpose for releasing portfolio
holdings information to selected third parties in advance of release to all
shareholders or the general public; (2) the recipient is subject to a duty of
confidentiality pursuant to a signed non-disclosure agreement; and (3) the
release of such information would not otherwise violate the antifraud
provisions of the federal securities laws or the Fund's fiduciary duties.
The determination of whether the Fund has a legitimate business purpose for
releasing portfolio holdings information in advance of release to all
shareholders or the general public shall be made by the Fund's Chief
Compliance Officer or his/her designee, following a request submitted in
writing. The Chief Compliance Officer will report to the board of trustees on
exceptions granted to the policy, along with an explanation of the legitimate
business purpose that is served as a result of the exception.
The eligible third parties to whom portfolio holdings information may be
released in advance of general release fall into the following categories:
data consolidators, including rating agencies, fund rating/ranking services
and other data providers; service providers to the Fund; shareholders of a
fund to whom such fund has determined to process a redemption request in-kind
based upon a determination by the Fund's portfolio manager and the Fund's
Chief Compliance Officer (or his/her designee) that such redemption in-kind
is in the best interests of the redeeming fund and its remaining
shareholders; provided, however, that the portfolio holdings information so
released in advance of the actual delivery of the redemption proceeds is
limited to only that information reasonably necessary to allow the
shareholder to prepare for receipt of the in-kind redemption proceeds;
municipal securities brokers using the Investor Tools product; and certain
entities approved by the Fund's Chief Compliance Officer (or his/her
designee) on a case-by-case basis, in limited circumstances, including where
the release of such information is required by foreign law or regulation (in
these situations, the recipient will be requested to execute a non-disclosure
agreement).
The specific entities to whom the Fund may provide portfolio holdings in advance of their release to the general public are:
o Bloomberg, Capital Access, CDA (Thomson Financial), FactSet, Fidelity Advisors, Lipper Inc., Morningstar, Standard & Poor's, Vestek, and Fidelity Management Trust Company, all of whom may receive portfolio holdings information 15 days after the quarter end
o Service providers to the Fund that receive portfolio holdings information from time to time in advance of general release in the course of performing, or to enable them to perform, services for the Fund, including: Custodian Bank: JPMorgan Chase Bank; Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP; Outside Fund Legal Counsel: Stradley Ronon Stevens & Young, LLP; Independent Directors'/Trustees' Counsel: Bleakley, Platt & Schmidt, LLP; Proxy Voting Services: Glass, Lewis & Co. and RiskMetrics Group; Brokerage Analytical Services: Sanford Bernstein, Brown Brothers Harriman, Royal Bank of Canada Capital Markets, JP Morgan Securities Inc.; Financial Printers: RR Donnelley & Sons Company or GCOM Solutions, Inc.
In all cases, eligible third parties are required to execute a non-disclosure agreement. Non-disclosure agreements include the following provisions:
o The recipient agrees to keep confidential any portfolio holdings information received until such information either is released to the public or the release is otherwise approved by the head of Global Compliance (or his/her designee) or the Fund's Chief Compliance Officer (or his/her designee);
o The recipient agrees not to trade on the non-public information received; and
o The recipient agrees to refresh its representation as to confidentiality and abstention from trading upon request from Franklin Templeton Investments.
In no case does the Fund receive any compensation in connection with the arrangements to release portfolio holdings information to any of the above-described recipients of the information.
Several investment managers within Franklin Templeton Investments (F-T Managers) serve as investment managers to offshore funds that are registered or otherwise authorized for sale with foreign regulatory authorities. The release of portfolio holdings information for such offshore funds is excluded from the Fund's portfolio holdings release policy if such information is given to offshore banks, broker-dealers, insurance companies, registered investment managers and other financial institutions (offshore investment managers) with discretionary authority to select offshore funds on behalf of their clients. Because such offshore funds may from time to time invest in securities substantially similar to those of the Fund, there is the risk that such portfolio holdings information may be used to trade inappropriately against the Fund. To mitigate such risks, such information may only be disclosed for portfolio analytic purposes, such as risk analysis/asset allocation, and the offshore investment manager will be required to execute a non-disclosure agreement, whereby such offshore investment manager agrees to maintain such information as confidential, including limiting the dissemination of such information within its organization, and not to trade in any shares of any U.S. registered Franklin or Templeton fund, including the Fund.
In addition, some F-T Managers serve as investment managers to various bank commingled trusts maintained by a Franklin Templeton Investments trust company, to various Canadian institutional pooled funds, to separate accounts, and as sub-advisers to other mutual funds not within the Franklin Templeton Investments fund complex. Such trusts, pooled funds, accounts and other funds (collectively, "other accounts") are not subject to the Fund's portfolio holdings release policy. However, in some instances the portfolio holdings of such other accounts may be similar to and, in certain cases, nearly identical to those of a Franklin Templeton mutual fund, including the Fund. In the case of bank commingled trusts and Canadian institutional pooled funds, to mitigate risks that such portfolio holdings information may be used to trade inappropriately against a mutual fund, the recipient of such portfolio holdings information will be required to execute a non-disclosure agreement similar to the one described above for offshore funds. With respect to the other mutual funds not within the Franklin Templeton Investments fund complex, the sponsors of such funds may disclose the portfolio holdings of such funds at different times than the Fund discloses its portfolio holdings.
The Fund's portfolio holdings release policy and all subsequent amendments have been reviewed and approved by the Fund's board of trustees, and any other material amendments shall also be reviewed and approved by the board. The investment manager's compliance staff conducts periodic reviews of compliance with the policy and provides at least annually a report to the board of trustees regarding the operation of the policy and any material changes recommended as a result of such review. The investment manager's compliance staff also will report to the board on exceptions granted to the policy, along with an explanation of the legitimate business purpose of the Fund that is served as a result of the exception.
The Trust has a board of trustees. Each trustee will serve until that person resigns and/or a successor is elected and qualified. 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 Fund's day-to-day operations. The board also monitors the Fund to ensure that no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise.
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below.
INDEPENDENT BOARD MEMBERS
-------------------------
NUMBER
OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, YEAR LENGTH OVERSEEN OTHER
OF BIRTH AND OF TIME BY BOARD DIRECTORSHIPS
ADDRESS POSITION SERVED MEMBER* HELD
-----------------------------------------------------------------
Harris J. Trustee Since 139 Bar-S Foods
Ashton (1932) 1992 (meat packing
500 East company).
Broward
Blvd.
Suite 2100
Fort
Lauderdale,
|
FL 33394-3091
Frank J. Trustee Since 19 Fortis, Inc.
Crothers 2003 (utility holding
(1944) company),
500 East Nuinsco
Broward Resources
Blvd. Limited (mineral
Suite 2100 exploration),
Fort Fidelity
Lauderdale, Merchant Bank &
FL 33394-3091 Trust (Cayman)
Limited
(financial
services), C.A.
Bancorp Inc.
(financial
services),
Victory Nickel
Inc. (mineral
exploration),
ABACO Markets
Limited (retail
distributors)
and Belize
Electricity
Limited
(electric
utility).
|
Edith E. Trustee Since 139 Hess
Holiday 2001 Corporation
(1952) (exploration and
500 East refining of oil
Broward and gas), H.J.
Blvd. Heinz Company
Suite 2100 (processed foods
Fort and allied
Lauderdale, products), RTI
FL 33394-3091 International
Metals, Inc.
(manufacture and
distribution of
titanium),
Canadian
National Railway
(railroad) and
White Mountains
Insurance Group,
Ltd. (holding
company).
|
David W. Trustee Since 19 Emeritus Niemiec 2005 Corporation (1949) (assisted 500 East living) and OSI Broward Pharmaceuticals, Blvd. Inc. Suite 2100 (pharmaceutical Fort products). Lauderdale, |
FL 33394-3091
Frank A. Trustee Since 139 Hess Olson 2003 Corporation (1932) (exploration and 500 East refining of oil Broward and gas) and Blvd. Sentient Jet Suite 2100 (private jet Fort service). Lauderdale, |
FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since
2000) (Chairman of the Board (1980-2000) and Chief Executive
Officer (1977-1999)); and FORMERLY, Chairman of the Board,
President and Chief Executive Officer, UAL Corporation
(airlines). ----------------------------------------------------------------- Larry D. Trustee Since 139 None Thompson 2005 (1945) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, |
FL 33394-3091
Constantine Trustee Since 19 None D. 2003 Tseretopoulos (1954) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, |
FL 33394-3091
Robert E. Trustee Since 33 El Oro and
Wade (1946) 2006 Exploration Co.,
500 East p.l.c.
Broward Blvd. (investments)
Suite 2100 and ARC Wireless
Fort Solutions, Inc.
Lauderdale, (wireless
FL 33394-3091 components and
network
products).
|
NUMBER
OF
PORTFOLIOS
IN FUND
COMPLEX
NAME, YEAR LENGTH OVERSEEN OTHER
OF BIRTH AND OF TIME BY BOARD DIRECTORSHIPS
ADDRESS POSITION SERVED MEMBER* HELD
-----------------------------------------------------------------
**Charles B. Trustee, Trustee 139 None
Johnson Chairman of and Vice
(1933) the Board President
One Franklin and Vice since
Parkway President 1992 and
San Mateo, Chairman
CA 94403-1906 of the
Board
since
1995
|
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and
Director, Franklin Resources, Inc.; Director, Templeton
Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 42 of the investment companies in
Franklin Templeton Investments.
**Gregory E. Trustee Since 91 None Johnson April (1961) 2007 One Franklin Parkway San Mateo, |
CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
James M. Chief Chief Not Not Applicable
Davis Compliance ComplianceApplicable
(1952) Officer and Officer
One Franklin Vice since
Parkway President - 2004 and
San Mateo, AML Vice
CA 94403-1906 Compliance President
- AML
Compliance
since
2006
|
Jimmy D. Senior Vice Since Not Not Gambill President 2002 Applicable Applicable (1947) and Chief 500 East Executive Broward Officer-Finance Blvd. and Suite 2100 Administration Fort Lauderdale, |
FL 33394-3091
David P. Vice Since Not Not Applicable Goss (1947) President 2000 Applicable One Franklin Parkway San Mateo, |
CA 94403-1906
Rupert H. Vice Since Not Not Applicable
Johnson, Jr. President 1996 Applicable
(1940)
One Franklin
Parkway
San Mateo,
CA 94403-1906
John R. Kay Vice Since Not Not Applicable (1940) President 1994 Applicable 500 East Broward Blvd. Suite 2100 Fort Lauderdale, |
FL 33394-3091
Christopher President Since Not Not Applicable J. Molumphy and Chief 2002 Applicable (1962) Executive One Franklin Officer - Parkway Investment San Mateo, Management |
CA 94403-1906
Robert C. Secretary Since Not Not Applicable Rosselot 2004 Applicable (1960) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, |
FL 33394-3091
Gregory R. Treasurer Since Not Not Applicable Seward 2004 Applicable (1956) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, |
FL 33394-3091
Craig S. Vice Since Not Not Applicable Tyle (1960) President 2005 Applicable One Franklin Parkway San Mateo, |
CA 94403-1906
Galen Vetter Chief Since Not Not Applicable (1951) Financial 2004 Applicable 500 East Officer and Broward Chief Blvd. Accounting Suite 2100 Officer Fort Lauderdale, |
FL 33394-3091
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this SAI. It is
possible that after this date, information about officers may change.
Note 3: Prior to December 3, 2007, Nicholas F. Brady ceased to be a trustee of the Fund.
The Trust's noninterested board members constitute the sole noninterested board members of 14 funds in the Franklin Templeton Investments complex for which each noninterested board member currently is paid a $145,000 annual retainer fee, together with a $7,000 per meeting fee for attendance at each board meeting, a portion of which fees are allocated to the Trust. Board members who serve on the Audit Committee of the Trust and such other funds receive a flat fee of $3,000 per Committee meeting attended in person and $2,000 per telephonic meeting, a portion of which is allocated to the Trust. David W. Niemiec, who serves as chairman of the Audit Committee of the Trust and such other funds receives an additional fee of $10,000 per year, a portion of which is allocated to the Trust. Members of the Committee are not separately compensated for any committee meeting held on the day of a regularly scheduled board meeting. The foregoing fee arrangements went into effect June 1, 2007, and the following table reflects fees paid prior to such date under arrangements then in effect.
TOTAL FEES NUMBER OF BOARDS
TOTAL FEES RECEIVED IN FRANKLIN
RECEIVED FROM FRANKLIN TEMPLETON
FROM THE TEMPLETON INVESTMENTS ON
TRUST(1) INVESTMENTS(2) WHICH EACH
NAME ($) ($) SERVES(3)
-----------------------------------------------------------------------------
Harris J. Ashton 6,365 409,510 42
Frank J. Crothers 7,842 155,950 14
Edith E. Holiday 7,698 422,501 42
David W. Niemiec 7,843 155,950 14
Frank A. Olson 8,014 373,818 42
Larry D. Thompson 7,698 147,950 42
Constantine D.
Tseretopoulos 7,842 155,950 14
Robert E. Wade(4) 7,698 365,362 18
|
1. For the fiscal year ended August 31, 2007.
2. For the calendar year ended December 31, 2006.
3. We base the number of boards on the number of U.S. registered investment
companies in Franklin Templeton Investments. This number does not include the
total number of series or portfolios within each investment company for which
the board members are responsible.
4. Mr. Wade also is an independent board member of Franklin Mutual Series
Fund Inc. and may, in the future, receive payments pursuant to a discontinued
retirement plan that generally provides payments to independent board members
who have served seven years or longer for such fund.
Noninterested board members are reimbursed for expenses incurred in connection with attending board meetings and are paid pro rata by each fund in Franklin Templeton Investments 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 Franklin Templeton Investments. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) 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 Franklin Templeton funds, as is consistent with their individual financial goals. In February 1998, this policy was formalized through the 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 (excluding committee fees) 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 (excluding committee fees) in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual retainer and regular board meeting fees paid to 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.
The following tables provide the dollar range of equity securities beneficially owned by the board members of the Trust on December 31, 2006.
INDEPENDENT BOARD MEMBERS
-------------------------
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN ALL
FUNDS OVERSEEN BY
DOLLAR RANGE OF THE BOARD MEMBER IN
NAME OF BOARD MEMBER EQUITY SECURITIES IN THE FRANKLIN
THE FUND TEMPLETON FUND
COMPLEX
----------------------------------------------------------------------
Harris J. Ashton $50,001 - $100,000 Over $100,000
Frank J. Crothers None Over $100,000
Edith E. Holiday Over $100,000 Over $100,000
David W. Niemiec None Over $100,000
Frank A. Olson None Over $100,000
Larry D. Thompson $50,001 - $100,000 Over $100,000
Constantine D.
Tseretopoulos None Over $100,000
Robert E. Wade None Over $100,000
INTERESTED BOARD MEMBERS
-------------------------
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN ALL
FUNDS OVERSEEN BY
DOLLAR RANGE OF THE BOARD MEMBER IN
NAME OF BOARD MEMBER EQUITY SECURITIES IN THE FRANKLIN
THE FUND TEMPLETON FUND
COMPLEX
----------------------------------------------------------------------
Charles B. Johnson $1 - $10,000 Over $100,000
Gregory E. Johnson None Over $100,000
|
BOARD COMMITTEES The board maintains two standing committees: the Audit
Committee and the Nominating Committee. The Audit Committee is generally
responsible for recommending the selection of the Trust's independent
registered public accounting firm (auditors), including evaluating their
independence and meeting with such auditors to consider and review matters
relating to the Trust's financial reports and internal controls. The Audit
Committee is comprised of the following independent trustees of the Trust:
Frank J. Crothers, David W. Niemiec, Frank A. Olson and Constantine D.
Tseretopoulos. The Nominating Committee is comprised of the following
independent trustees of the Trust: Frank J. Crothers, Edith E. Holiday and
Frank A. Olson.
The Nominating Committee is responsible for selecting candidates to serve as board members and recommending such candidates (a) for selection and nomination as independent board member by the incumbent independent board member and the full board; and (b) for selection and nomination as interested board members by the full board.
When the board has or expects to have a vacancy, the Nominating Committee receives and reviews information on individuals qualified to be recommended to the full board as nominees for election as board members, including any recommendations by "Qualifying Fund Shareholders" (as defined below). To date, the Nominating Committee has been able to identify, and expects to continue to be able to identify, from its own resources an ample number of qualified candidates. The Nominating Committee, however, will review recommendations from Qualifying Fund Shareholders to fill vacancies on the board if these recommendations are submitted in writing and addressed to the Nominating Committee at the Trust's offices at P.O. Box 33030 St. Petersburg, FL 33733-8030 and are presented with appropriate background material concerning the candidate that demonstrates his or her ability to serve as a board member, including as an independent board member, of the Trust. A Qualifying Fund Shareholder is a shareholder who (i) has continuously owned of record, or beneficially through a financial intermediary, shares of the Fund having a net asset value of not less than two hundred and fifty thousand dollars ($250,000) during the 24-month period prior to submitting the recommendation; and (ii) provides a written notice to the Nominating Committee containing the following information: (a) the name and address of the Qualifying Fund Shareholder making the recommendation; (b) the number of shares of the Fund which are owned of record and beneficially by such Qualifying Fund Shareholder and the length of time that such shares have been so owned by the Qualifying Fund Shareholder; (c) a description of all arrangements and understandings between such Qualifying Fund Shareholder and any other person or persons (naming such person or persons) pursuant to which the recommendation is being made; (d) the name, age, date of birth, business address and residence address of the person or persons being recommended; (e) such other information regarding each person recommended by such Qualifying Fund Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated by the board; (f) whether the shareholder making the recommendation believes the person recommended would or would not be an "interested person" of the Trust, as defined in the 1940 Act; and (g) the written consent of each person recommended to serve as a board member of the Trust if so nominated and elected/appointed.
The Nominating Committee may amend these procedures from time to time, including the procedures relating to the evaluation of nominees and the process for submitting recommendations to the Nominating Committee.
During the fiscal year ended August 31, 2007, the Audit Committee met three times and the Nominating Committee met four times.
FAIR VALUATION AND LIQUIDITY
The Trust's board of trustees has delegated to the manager the task of ensuring that regulatory guidelines governing the fair valuation for securities are applied to the Fund and that the required level of liquidity is maintained. The manager has formed a Valuation & Liquidity Oversight Committee (VLOC) to oversee these obligations. The VLOC oversees and administers the policies and procedures governing fair valuation and liquidity determination of securities. The VLOC meets monthly to review and approve fair value and liquidity reports and conduct other business, and meets whenever necessary to review potential significant market events and take appropriate steps to adjust valuations in accordance with established policies. The VLOC provides regular reports that document its activities to the board of trustees for its review and approval of pricing determinations at scheduled meetings. VLOC meeting minutes are regularly submitted to the board of trustees for their review.
The Trust's policies and procedures governing fair valuation and liquidity determination of securities have been initially reviewed and approved by the board of trustees and any material amendments will also be reviewed and approved by the board. The manager's compliance staff conducts periodic reviews of compliance with the policies and provides at least annually a report to the board of trustees regarding the operation of the policies and any material changes recommended as a result of such review.
The board of trustees of the Trust has delegated the authority to vote proxies related to the portfolio securities held by the Fund to the Fund's manager Franklin Advisers, Inc., in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group (RiskMetrics), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. In addition, the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm, to receive analyses and vote recommendations on the shareholder meetings of publicly held U.S. companies. Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from RiskMetrics, Glass Lewis or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors/trustees and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. Efforts are made to resolve all conflicts in the interests of the manager's clients. Material conflicts of interest are identified by the Proxy Group based upon analyses of client, broker and vendor lists, information periodically gathered from directors and officers, and information derived from other sources, including public filings. In situations where a material conflict of interest is identified, the Proxy Group will refer the matter, along with the recommended course of action by the manager to an interdepartmental Proxy Review Committee (which may include portfolio managers and/or research analysts employed by the manager), for evaluation and voting instructions. The Proxy Review Committee may defer to the voting recommendation of RiskMetrics, Glass Lewis or those of another independent third party provider of proxy services; or send the proxy directly to the Fund with a recommendation regarding the vote for approval. Where the Proxy Review Committee refers a matter to the Fund, it may rely upon the instructions of a representative of the Fund, such as the board of trustees or a committee of the board.
The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis, taking into consideration factors such as the company's corporate governance guidelines or provisions and performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high profile accounting scandals, the manager will closely scrutinize the role and performance of auditors. On a case-by-case basis, the manager will examine proposals relating to non-audit relationships and non-audit fees. The manager will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The manager believes that executive compensation should be directly linked to the performance of the company. The manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the RiskMetrics quantitative model utilized to assess such plans and/or the Glass Lewis evaluation of the plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region.
The manager will attempt to process every proxy it receives for all domestic and foreign issuers. However, there may be situations in which the manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. If a security is on loan, the manager may determine that it is not in the best interests of the Fund to recall the security for voting purposes. Also, the manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are available online at franklintempleton.com and posted on the SEC website at WWW.SEC.GOV. The proxy voting records are updated each year by August 31 to reflect the most recent 12-month period ended June 30.
MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisers, Inc. The manager is a wholly owned subsidiary of 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 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 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. Because the manager is a subsidiary of a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, federal regulations applicable to FHCs may limit or restrict the Fund's ability to acquire or hold a position in a given security when it might otherwise be advantageous for the Fund to acquire or hold that security.
The Fund, its manager and principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its manager and principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the Securities and Exchange Commission (SEC).
MANAGEMENT FEES The Fund pays the manager a fee equal to an annual rate of:
o 0.50% of the value of average daily net assets up to and including $200
million;
o 0.45% of the value of average daily net assets over $200 million and not
over $1.3 billion; and
o 0.40% of the value of average daily net assets in excess of $1.3 billion.
The fee is computed at the close of business on the last business day of each month according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended August 31, the Fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
-------------------------------------------
2007 17,636,113
2006 9,545,912
2005 6,361,768
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PORTFOLIO MANAGERS This section reflects information about the portfolio manager as of August 31, 2007.
The following table shows the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category:
Managed Managed Managed(1) Managed (x $1
(x $1 (x $1 million)(1)
million) million)(1)
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Michael 9 4,456.3 20 13,345.7 0 N/A
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1. The various pooled investment vehicles and accounts listed are managed by a team of investment professionals. Accordingly, the individual manager listed would not be solely responsible for managing such listed amounts.
Portfolio managers that provide investment services to the Fund may also provide services to a variety of other investment products, including other funds, institutional accounts and private accounts. The advisory fees for some of such other products and accounts may be different than that charged to the Fund and may include performance based compensation. This may result in fees that are higher (or lower) than the advisory fees paid by the Fund. As a matter of policy, each fund or account is managed solely for the benefit of the beneficial owners thereof. As discussed below, the separation of the trading execution function from the portfolio management function and the application of objectively based trade allocation procedures helps to mitigate potential conflicts of interest that may arise as a result of the portfolio managers managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts may also give rise to potential conflicts of interest if the funds and other accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. The manager seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment strategies that are used in connection with the management of the Fund. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which may minimize the potential for conflicts of interest. As noted above, the separate management of the trade execution and valuation functions from the portfolio management process also helps to reduce potential conflicts of interest. However, securities selected for funds or accounts other than the Fund may outperform the securities selected for the Fund. Moreover, if a portfolio manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to an allocation of that opportunity across all eligible funds and other accounts. The manager seeks to manage such potential conflicts by using procedures intended to provide a fair allocation of buy and sell opportunities among funds and other accounts.
The structure of a portfolio manager's compensation may give rise to potential conflicts of interest. A portfolio manager's base pay and bonus tend to increase with additional and more complex responsibilities that include increased assets under management. As such, there may be an indirect relationship between a portfolio manager's marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give rise to potential conflicts of interest. While the funds and the manager have adopted a code of ethics which they believe contains provisions reasonably necessary to prevent a wide range of prohibited activities by portfolio managers and others with respect to their personal trading activities, there can be no assurance that the code of ethics addresses all individual conduct that could result in conflicts of interest.
The manager and the Fund have adopted certain compliance procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee that such procedures will detect each and every situation where a conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is competitively positioned to attract, retain and motivate top-quality investment professionals. Portfolio managers receive a base salary, a cash incentive bonus opportunity, an equity compensation opportunity, and a benefits package. Portfolio manager compensation is reviewed annually and the level of compensation is based on individual performance, the salary range for a portfolio manager's level of responsibility and Franklin Templeton guidelines. Portfolio managers are provided no financial incentive to favor one fund or account over another. Each portfolio manager's compensation consists of the following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of the portfolio manager with those of the Fund's shareholders. Each portfolio manager is eligible to receive an annual bonus. Bonuses generally are split between cash (50% to 65%) and restricted shares of Franklin Resources stock (17.5% to 25%) and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is intended to build a vested interest of the portfolio manager in the financial performance of both Franklin Resources and mutual funds advised by the manager. The bonus plan is intended to provide a competitive level of annual bonus compensation that is tied to the portfolio manager achieving consistently strong investment performance, which aligns the financial incentives of the portfolio manager and Fund shareholders. The Chief Investment Officer of the manager and/or other officers of the manager, with responsibility for the Fund, have discretion in the granting of annual bonuses to portfolio managers in accordance with Franklin Templeton guidelines. The following factors are generally used in determining bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to the historic investment performance of all accounts managed by the portfolio manager over the 1, 3 and 5 preceding years measured against risk benchmarks developed by the fixed income management team. The pre-tax performance of each fund managed is measured relative to a relevant peer group and/or applicable benchmark as appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions of the portfolio manager to the manager's business and the investment management team, including business knowledge, productivity, customer service, creativity, and contribution to team goals, are evaluated in determining the amount of any bonus award.
o RESPONSIBILITIES. The characteristics and complexity of funds managed by the portfolio manager are factored in the manager's appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers may also be awarded restricted shares or units of Franklin Resources stock or restricted shares or units of one or more mutual funds, and options to purchase common shares of Franklin Resources stock. Awards of such deferred equity-based compensation typically vest over time, so as to create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio managers to invest in the funds they manage. Exceptions arise when, for example, a fund is closed to new investors or when tax considerations or jurisdictional constraints cause such an investment to be inappropriate for the portfolio manager. The following is the dollar range of Fund shares beneficially owned by the portfolio manager (such amounts may change from time to time):
Dollar Range
of Fund Shares
Portfolio Manager Beneficially Owned
-----------------------------------------
Michael $100,001 - $500,000
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ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, LLC (FT Services) has an agreement with the Fund to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of 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 fee equal to an annual rate of:
o 0.15% of the Fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
For the last three fiscal years ended August 31, the Fund paid FT Services
the following administration fees:
ADMINISTRATION
FEES PAID ($)
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2007 3,741,146
2006 2,224,233
2005 1,619,330
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SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin Templeton Investor Services, LLC (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 3344 Quality Drive, Rancho Cordova, CA 95670-7313. Please send all correspondence to Investor Services at P.O. Box 33030, St. Petersburg, FL 33733-8030.
Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund.
Investor Services may also pay servicing fees, that will be reimbursed by the Fund, in varying amounts to certain financial institutions (primarily to help offset their costs associated with client account maintenance support, statement preparation and transaction processing) that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an IRS-recognized tax-deferred savings plan (including Employer Sponsored Retirement Plans and Section 529 Plans) for which the institution, or its affiliate, provides participant level recordkeeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund for services provided in support of Beneficial Owners and NSCC networking system accounts.
CUSTODIAN JPMorgan Chase 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 depositories, and furnishes information relevant to the selection of compulsory depositories.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004, is the Fund's independent registered public accounting firm. The Independent Registered Public Accounting Firm audits the financial statements included in the Fund's Annual Report to Shareholders.
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 to the underwriter, and purchases from dealers will include a spread between the bid and ask price. 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 an accurate dollar value on the special execution or on the research services the manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions 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 from many securities firms. The receipt of these products and services does not reduce the manager's research activities in providing investment advice to the Fund.
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.
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 accounts 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.
For the last three fiscal years ended August 31, 2007, 2006, and 2005, the Fund did not pay any brokerage commissions.
For the fiscal year ended August 31, 2007, the Fund did not pay brokerage commissions to the brokers who provided research services.
As of August 31, 2007, the Fund did not own securities of its regular broker-dealers.
DISTRIBUTIONS AND TAXES
MULTICLASS DISTRIBUTIONS The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share will differ, however, generally due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the form of dividends and 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. If you are a taxable investor, any income dividends (other than qualified dividends) the Fund pays are taxable to you as ordinary income. A portion of the income dividends paid to you may be qualified dividends eligible to be taxed at reduced rates. A portion of the income dividends may also be designated as interest-related or short-term capital dividends that will not be subject to nonresident alien withholding for most non-U.S. investors. See the section on "Non-U.S. investors" for more information on interest-related and short-term capital gain dividends.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may realize capital gains and losses on the sale of its portfolio securities.
Distributions of short-term capital gains are taxable to you as ordinary income. Distributions of long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund.
Capital gain dividends and any net long-term capital gains you realize from the sale of Fund shares are subject to a maximum rate of tax of 15% for individuals (5% for individuals in the 10% and 15% federal income tax brackets). For individuals in the 10% and 15% tax brackets, the rate for net long-term capital gains realized in calendar years 2008 through 2010 is further reduced from 5% to 0%. These reduced rates of taxation of capital gain dividends and net long-term capital gains are now scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
RETURNS OF CAPITAL If the Fund's distributions exceed its taxable income and realized capital gains for a taxable year, all or a portion of the distributions made in that taxable year may be characterized as a return of capital to you. A return of capital distribution will generally not be taxable, but will reduce the cost basis that you have in your Fund shares and will result in a higher capital gain or in a lower capital loss when you sell your shares. Any return of capital in excess of the basis in your Fund shares, however, will be taxable as a capital gain.
INVESTMENTS IN FOREIGN SECURITIES The next five paragraphs describe tax considerations that are applicable to the Fund's investments in foreign securities.
PASS-THROUGH OF FOREIGN TAX CREDITS. The Fund may be subject to foreign withholding taxes on income from certain foreign securities. If more than 50% of the Fund's total assets at the end of a fiscal year is invested in foreign securities, 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 Fund may report more taxable income to you than it actually distributes. You will then be entitled either to deduct your share of these taxes in computing your taxable income, or to claim a foreign tax credit for these taxes against your U.S. federal income tax (subject to limitations for certain shareholders). The Fund will provide you with the information necessary to claim this deduction or credit on your personal income tax return if it makes this election.
You should be aware that your use of qualified dividends may reduce the otherwise available foreign tax credits on your federal income tax return. Shareholders in these circumstances should talk with their personal tax advisors about their foreign tax credits and the procedures that they should follow to claim these credits on their personal income tax returns.
EFFECT OF FOREIGN DEBT 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 on the sale of debt securities generally are treated as ordinary losses. These gains when distributed are taxable to you as ordinary income, and any losses reduce the Fund's ordinary income otherwise available for distribution to you. THIS TREATMENT COULD INCREASE OR DECREASE 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.
PFIC SECURITIES. The Fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (PFICs). When investing in PFIC securities, the Fund intends to mark-to-market these securities and recognize any gains at the end of its fiscal and excise (described below) tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that the Fund is required to distribute, even though it has not sold the securities. If the Fund is unable to identify an investment as a PFIC security and thus does not make a mark-to-market election, the Fund may be subject to U.S. federal income tax on a portion of any "excess distribution" or gain from the sale of the PFIC shares even if such income is distributed to you as a taxable dividend. Additional charges in the nature of interest may be imposed on the Fund on any deferred taxes arising from such income or gains.
You should also be aware that a Fund's designation of a foreign security as a PFIC security will cause the income dividends of any designated securities to fall outside of the definition of qualified foreign corporation dividends. These dividends generally will NOT qualify for the reduced rate of taxation on qualified dividends when distributed to you by the Fund.
INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of the amount of your income dividends and capital gain 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. The amount of income dividends designated by the Fund, consisting of qualified dividend income (which is relevant to U.S. investors) and interest-related and short-term capital gain dividends (which are relevant to non-U.S. investors) may exceed the total amount of income dividends paid. These designations will not result in more income being reported to you, but rather will allow the Fund to make its designations in a manner that is more tax efficient to both U.S. and non-U.S. investors. If you have not owned your Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividends, or capital gain distributions (distributions of net long-term capital gains), a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund. If you are a non-U.S. investor, the Fund may also designate and distribute to you as an interest-related or short-term capital gain dividend, a percentage of income that may not be equal to the actual amount of each of these types of income earned during the period of your investment in the Fund. Distributions declared in December to shareholders of record in such month, but paid in January, are taxable to you as if paid in December.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund intends to qualify and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (Code). As a regulated investment company, the Fund generally will pay no federal income tax on the income and gains it distributes to you. The board reserves the right not to elect regulated investment company status for the Fund if it determines this course of action to be beneficial to shareholders. In that case, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you would be taxed as dividend income to the extent of the Fund's earnings and profits.
REQUIRED DISTRIBUTIONS. To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the 12-month period ending October 31; and
o 100% of any undistributed amounts of these categories of income or gain from the prior year.
The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes.
TAX REPORTING FOR INCOME AND EXCISE TAX YEARS. Because the periods for measuring a regulated investment company's income are different for income (determined on a fiscal year basis) and excise tax years (determined as noted above), special rules are required to calculate the amount of income earned in each period, and the amount of earnings and profits needed to support that income. For example, if the Fund uses the excise tax period ending on October 31 as the measuring period for calculating and paying out capital gain net income and realizes a net capital loss between November 1 and the end of the Fund's fiscal year, it will likely have insufficient earnings and profits for its taxable year to support its required excise tax distribution. Accordingly, the Fund is permitted to elect to treat its realized capital loss (its "post-October loss") as occurring on the first day of its next fiscal year. Because these rules are not entirely clear, the Fund may be required to interpret the post-October loss and other rules relating to these different year-ends to determine its taxable income and capital gains. The Fund's reporting of income and its allocation between different taxable and excise tax years may be challenged by the Internal Revenue Service (IRS), possibly resulting in adjustments in the income reported by the Fund on its tax returns and/or by the Fund to you on your year-end tax statements.
SALES OF FUND SHARES Sales and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton fund, the IRS requires you to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize is a capital gain or loss, and is long-term or short-term, depending on how long you owned your shares.
SALES AT A LOSS WITHIN SIX MONTHS OF PURCHASE. Any loss incurred on the sale or exchange of Fund shares owned for six months or less is 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.
WASH SALES. All or a portion of any loss that you realize on the sale of your Fund shares is disallowed to the extent that you buy other shares in the Fund within 30 days before or after your sale. Any loss disallowed under these rules is added to your tax basis in the new shares.
DEFERRAL OF BASIS. (CLASS A ONLY) In reporting gain or loss on the sale of your Fund shares, you may be required to adjust your basis in the shares you sell under the following circumstances:
IF:
o In your original purchase of Fund shares, you received a reinvestment
right (the right to reinvest your sales proceeds at a reduced or with no
sales charge), and
o You sell some or all of your original shares within 90 days of their purchase, and
o You reinvest the sales proceeds in the Fund or in another Franklin Templeton fund, and the sales charge that would otherwise apply is reduced or eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the sales charge that you paid for your original shares is excluded from your tax basis in the shares sold and added to your tax basis in the new shares.
TAX CERTIFICATION AND BACKUP WITHHOLDING Tax laws require that you certify your tax information when you become an investor in the Fund. For U.S. residents and resident aliens, this certification is made on IRS Form W-9. Under these laws, the Fund must withhold a portion of your taxable distributions and sales proceeds unless you:
o provide your correct Social Security or taxpayer identification number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 28% of any distributions or proceeds paid.
Non-U.S. investors have special U.S. tax certification requirements. See the section below entitled "Tax certification and backup withholding as applied to non-U.S. investors."
U.S. GOVERNMENT SECURITIES The income earned on certain U.S. government securities is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free status to mutual fund dividends paid to you from interest earned on these securities, subject in some states to minimum investment or reporting requirements that must be met by a fund. The income on Fund investments in certain securities, such as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Ginnie Mae and Fannie Mae securities), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations.
QUALIFIED DIVIDENDS For individual shareholders, a portion of the dividends paid by the Fund may be qualified dividend income eligible for taxation at the 15% long-term capital gain rate (5% for individuals in the 10% and 15% federal rate brackets). For individuals in the 10% and 15% tax brackets, the rate for qualified dividends received in calendar years 2008 through 2010 is further reduced from 5% to 0%.
In general, income dividends from dividends received by the Fund from domestic corporations and qualified foreign corporations will be permitted this favored federal tax treatment. Income dividends from interest earned by the Fund on debt securities and dividends received from unqualified foreign corporations will continue to be taxed at the higher ordinary income tax rates.
After the close of its fiscal year, the Fund will designate the portion of its ordinary dividend income that meets the definition of qualified dividend income taxable at reduced rates. Because the Fund's currently has a substantial percentage of its investment assets in debt securities, it is anticipated that this percentage of qualified dividend income will be small.
SUNSETTING OF PROVISIONS. The special provisions dealing with qualified dividend income, and the reduced rate of taxation of long-term capital gains that were adopted as part of the 2003 Tax Act and that have been recently extended by the 2005 Tax Increase Prevention and Reconciliation Act (2005 Tax Act) are scheduled to sunset on December 31, 2010, unless extended or made permanent before that date. If the 2003 Tax Act changes as extended in 2005 do sunset in 2010, the rules on taxation of CAPITAL GAINS that were in effect prior to the 2003 Tax Act, including provisions for the taxation of five-year gains, will again be effective for 2011 and later years.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS For corporate shareholders, a portion of the dividends paid by the Fund may qualify for the dividends-received deduction. This deduction generally is available to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations. Because the income of the Fund primarily is derived from investments in foreign rather than domestic securities, and from investments earning interest rather than dividend income, generally none or only a small percentage of its income dividends will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities that could require it to adjust the amount, timing and/or tax character (ordinary or capital) of gains and losses it recognizes on these investments. This, in turn, could affect the amount, timing and/or tax character of income distributed to you. For example,
DERIVATIVES. The Fund is permitted to invest in certain derivative contracts, including options, futures, forwards or foreign currency contracts. If it makes these investments, it could be required to mark-to-market these contracts and realize any unrealized gains and losses at its fiscal year end even though it continues to hold the contracts. Under these rules, gains or losses on the contracts generally would be treated as 60% long-term and 40% short-term gains or losses, but gains or losses on certain foreign currency contracts would be treated as ordinary income or losses. In determining its net income for excise tax purposes, the Fund also would be required to mark-to-market these contracts annually as of October 31 (for capital gain net income and ordinary income arising from certain foreign currency contracts) and to realize and distribute any resulting income and gains.
CONSTRUCTIVE SALES. The Fund's entry into an option or other contract could be treated as the "constructive sale" of an "appreciated financial position," causing it to realize gain, but not loss, on the position.
SECURITIES LENDING TRANSACTIONS. The Fund's entry into securities lending transactions may cause the replacement income earned on the loaned securities to fall outside of the definition of qualified dividend income. This replacement income generally will not be eligible for reduced rates of taxation on qualified dividend income, and, to the extent that debt securities are loaned, will generally not qualify as qualified interest income for foreign withholding tax purposes.
TAX STRADDLES. The Fund's investment in options, futures, forwards, foreign currency contracts, actively traded stock or a position with respect to substantially similar or related property in connection with certain hedging transactions could cause the Fund to hold offsetting positions in securities. Likewise, the Fund is authorized to invest in spread, collar and straddle transactions. If the Fund invests in these securities, or if its risk of loss with respect to specific securities in its portfolio is substantially diminished by the fact that it holds other securities in a spread, collar, straddle or similar type of transaction, the Fund could be deemed to have entered into a tax "straddle" or to hold a "successor position" that would require any loss realized by it to be deferred for tax purposes.
STRUCTURED INVESTMENTS. The Fund is permitted to invest in instruments that are designed to restructure the investment characteristics of particular groups of securities. For example, the Fund is permitted to invest in structured notes that are designed to give the holder a specific portion of the principal or interest payments that would otherwise be payable in the case of a traditional debt security. The Fund also could invest in a security that is backed by an interest in an underlying group of securities, or is accompanied by a put or other feature that adjusts the burdens and benefits of ownership of the security. The Fund is also permitted to invest in swap contracts that are designed to give the holder a specific return (on a net basis) than would otherwise be payable in the case of a traditional security. Swap contracts can also involve exchanges in fixed and variable interest rates, foreign currencies or baskets of securities that mimic certain other securities or indices. By investing in these securities, the Fund could be subject to tax consequences that differ from those of an investment in traditional debt or equity securities.
CREDIT-LINKED SECURITIES. The Fund may enter into credit-linked securities including debt securities represented by an interest in or collateralized by one or more corporate debt obligations, or into credit default swap agreements. The rules governing the tax aspects of credit-linked securities that provide for contingent nonperiodic payments of this type are in a developing stage and are not entirely clear in certain aspects. Accordingly, while the Fund intends to account for such transactions in a manner that it deems to be appropriate, the IRS might not accept such treatment, and may require the Fund to modify its treatment of these investments. Certain requirements that must be met under the Code in order for the Fund to qualify as a regulated investment company may limit the extent to which the Fund will be able to engage in credit default swap agreements.
SECURITIES PURCHASED AT DISCOUNT. The Fund is permitted to invest in securities issued or purchased at a discount, such as zero coupon, deferred interest or payment-in-kind (PIK) bonds, that could require it to accrue and distribute income not yet received. The Fund may also invest in distressed mortgage obligations or in other debt obligations in or pending default. These obligations may not pay current interest, but may be subject to tax rules that require the Fund to currently accrue income for tax reporting, and then distribute that income to Fund shareholders to meet its fund qualification and excise tax distribution requirements. If it invests in these securities, the Fund could be required to sell securities in its portfolio that it otherwise might have continued to hold in order to generate sufficient cash to make these distributions.
EACH OF THESE INVESTMENTS BY THE FUND IN COMPLEX SECURITIES IS SUBJECT TO SPECIAL TAX RULES THAT COULD AFFECT THE AMOUNT, TIMING AND/OR TAX CHARACTER OF INCOME REALIZED BY THE FUND AND DISTRIBUTED TO YOU.
EXCESS INCLUSION INCOME OF CERTAIN TAX-EXEMPT SHAREHOLDERS FROM AN INVESTMENT BY THE FUND IN REITS AND REMIC RESIDUAL INTERESTS. Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements (401(k)s) and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income (UBTI). Under current law, the Fund serves to block UBTI from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax exempt shareholder could realize UBTI by virtue of its investment in the Fund if: (i) the Fund invests in a residual interest in a real estate mortgage investment conduit (REMIC) or in a REIT that holds a REMIC residual interest (income that is attributable to these residual interests is referred to in the Code as an "excess inclusion income") or (ii) shares in the Fund constitute debt-financed property in the hands of the tax exempt shareholder within the meaning of Code Section 514(b). In addition, if a REIT, that issues debt securities with more than one maturity, owns a "taxable mortgage pool" within the meaning of Code Section 7701(i) as a portion of the REIT's assets, or as a REIT subsidiary, then a portion of the REIT's income may be treated as if it were an excess inclusion from a REMIC. This income generally is required to be allocated by the Fund to you in proportion to the dividends paid to you with the same tax consequences as if you received the excess inclusion income directly. If you are a tax-exempt shareholder, this excess inclusion income may have a tax consequence to you as discussed below.
Under guidance recently issued by the IRS, the Fund will be taxed at the highest corporate income tax rate on its excess inclusion income that is allocable to the percentage of its shares held in record name by a "disqualified organization." Disqualified organizations generally include certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on their unrelated business taxable income. To the extent that Fund shares owned by a disqualified organization are held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the corporate level tax on the portion of the Fund's excess inclusion income allocable to Fund shares held by the broker/dealer or other nominee on behalf of the disqualified organization. The Fund expects that disqualified organizations will own their shares and will not themselves be pass-through entities. Because this tax is imposed at the Fund level, all shareholders, including shareholders that are not disqualified organizations, will bear a portion of the tax cost associated with the Fund's receipt of excess inclusion income. However, to the extent permissible under the Investment Company Act of 1940, as amended, regulated investment companies such as the Fund are permitted under Treasury Regulations to specially allocate this tax expense to the disqualified organizations to which it is attributable, without a concern that such an allocation will constitute a preferential dividend.
In addition, with respect to Fund shareholders who are not nominees, for Fund taxable years beginning on or after January 1, 2007, the Fund must report excess inclusion income to shareholders in two cases:
o If the excess inclusion income received by the Fund from all sources exceeds 1% of the Fund's gross income, it must inform the non-nominee shareholders of the amount and character of excess inclusion income allocated to them; and
o If the Fund receives excess inclusion income from a REIT whose excess inclusion income in its most recent tax year ending not later than nine months before the first day of the Fund's taxable year exceeded 3% of the REIT's total dividends, the Fund must inform its non-nominee shareholders of the amount and character of the excess inclusion income allocated to them from such REIT.
Any excess inclusion income realized by the Fund and allocated to shareholders under these rules cannot be offset by net operating losses of the shareholders. If the shareholder is a tax-exempt entity and not a "disqualified organization," then this income is fully taxable as unrelated business taxable income under the Code. Charitable reminder trusts do not incur UBTI by receiving excess inclusion income from the Fund. If the shareholder is a non-U.S. person, such shareholder would be subject to U.S. federal income tax withholding at a rate of 30% on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty. If the shareholder is a REIT, a regulated investment company, common trust fund or other pass-through entity, such shareholder's allocable share of the Fund's excess inclusion income would be considered excess inclusion income of such entity and such entity would be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations. Accordingly, investors should be aware that a portion of the Fund's income may be considered excess inclusion income.
Compliance with these requirements will require the Fund to obtain significant cooperation from any REITs in which it invests. There is no guarantee that the Fund will receive the information that it needs to implement these requirements and report any excess inclusion income to you on a timely basis. The Fund will use its best efforts to meet these requirements, and through the Investment Company Institute, will seek additional guidance from the IRS and the cooperation of REITs in providing excess inclusion income information on a timely basis.
Tax-exempt shareholders should talk to their tax advisors about the implications of these rules on their separate tax situations.
NON-U.S. INVESTORS Non-U.S. investors may be subject to U.S. withholding and estate tax, and are subject to special U.S. tax certification requirements. Non-U.S. investors should consult their tax advisors about the applicability of U.S. tax withholding and the use of appropriate forms to certify their foreign status and to claim any applicable treaty benefits to which they are entitled.
IN GENERAL. The United States imposes a flat 30% withholding tax (or a withholding tax at a lower treaty rate) on U.S. source dividends, including on income dividends paid to you by the Fund, subject to certain exemptions for dividends designated as capital gain dividends, short-term capital gain dividends, interest-related dividends and exempt-interest dividends as described below. However, notwithstanding such exemptions from U.S. withholding at the source, any dividends and distributions of income and capital gains, including the proceeds from the sale of your Fund shares, will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a U.S. person.
CAPITAL GAIN DISTRIBUTIONS AND SHORT-TERM CAPITAL GAIN DIVIDENDS. Dividends designated by the Fund as either (i) a capital gain distribution from long-term capital gains, or (ii) a short-term capital gain dividend (other than long- or short-term capital gains realized on disposition of U.S. real property interests - see the discussion below), are not subject to U.S. withholding tax unless you are a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar year.
INTEREST-RELATED DIVIDENDS. Interest-related dividends designated and paid by the Fund from qualified net interest income are not subject to U.S. withholding tax. The Fund's qualified net interest income equals the Fund's qualified interest income less allocable expenses. "Qualified interest income" includes, in general, the sum of the Fund's U.S. source: i) bank deposit interest, ii) short-term original discount, iii) interest (including original issue discount, market discount and acquisition discount) on an obligation in registered form (unless it is earned on an obligation issued by a corporation or partnership in which the Fund is a 10% shareholder or partner), and iv) any interest-related dividend passed through from another regulated investment company. On any payment date, the amount of an income dividend that is designated by the Fund as an interest-related dividend may be more or less than the amount that is so qualified. This is because the designation is based on an estimate of the Fund's qualified interest income for its entire fiscal year, which can only be determined with exactness at fiscal year end. As a consequence, the Fund may over withhold a small amount of U.S. tax from a dividend payment. In this case, the non-U.S. investor's only recourse may be to either forgo recovery of the excess withholding, or to file a United States nonresident income tax return to recover the excess withholding.
LIMITATIONS ON TAX REPORTING FOR INTEREST-RELATED DIVIDENDS AND SHORT-TERM CAPITAL GAIN DIVIDENDS FOR NON-U.S. INVESTORS. It may not be practical in every case for the Fund to designate, and the Fund reserves the right in these cases to not designate, small amounts of interest-related or short-term capital gain dividends. Additionally, the Fund's designation of interest-related or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints. When the Fund has designated interest-related or short-term capital gain dividends, this information will be available online at franklintempleton.com (under the Fund's Tax Information) or through a Customer Service Representative at Franklin Templeton Investments at 1-800/DIAL BEN.
OTHER INCOME DIVIDENDS AND EFFECTIVELY CONNECTED INCOME. Income dividends paid by the Fund to non-U.S. investors on the income earned on portfolio investments in (i) the stock of domestic and foreign corporations, and (ii) the debt of foreign issuers continue to be subject to U.S. withholding tax at a 30% or lower treaty rate. If you hold your Fund shares in connection with a U.S. trade or business, your income and gains will be considered effectively connected income and taxed in the U.S. on a net basis, in which case you may be required to file a nonresident U.S. income tax return.
U.S. ESTATE TAX. The Code also provides for a partial exemption from U.S. estate tax for shares in the Fund held by an estate of a nonresident decedent. The amount treated as exempt is based on the proportion of the assets held by the Fund at the end of the quarter immediately preceding the decedent's death that are treated as property generating qualified interest income or constitute other property not within the United States.
SUNSETTING OF PROVISIONS. The provisions dealing with interest-related dividends and short-term capital gain dividends that are discussed above are scheduled to sunset FOR THIS FUND on August 31, 2008. The provisions creating a partial exemption from U.S. estate tax are scheduled to sunset on December 31, 2007. Unless these rules are extended or made permanent before the sunset provisions become effective, non-U.S. investors will again be subject to nonresident withholding taxes on any ordinary dividends (including short-term capital gain dividends) that they receive, and will no longer be eligible for a reduction in their U.S. estate tax.
TAX CERTIFICATION AND BACKUP WITHHOLDING AS APPLIED TO NON-U.S. INVESTORS. Non-U.S. investors have special U.S. tax certification requirements to avoid backup withholding (at a rate of 28%), and if applicable, to obtain the benefit of any income tax treaty between the non-U.S. investor's country of residence and the United States. To claim these tax benefits, the non-U.S. investor must provide a properly completed Form W-8BEN (or other Form W-8, where applicable, or their substitute forms) to establish his or her status as a non-U.S. investor, to claim beneficial ownership over the assets in the account, and to claim, if applicable, a reduced rate of or exemption from withholding tax under the applicable treaty. A Form W-8BEN provided without a U.S. taxpayer identification number remains in effect for a period of three years beginning on the date that it is signed and ending on the last day of the third succeeding calendar year. However, non-U.S. investors must advise the Fund of any changes of circumstances that would render the information given on the form incorrect, and must then provide a new W-8BEN to avoid the prospective application of backup withholding. Forms W-8BEN with U.S. taxpayer identification numbers remain valid indefinitely, or until the investor has a change of circumstances that renders the form incorrect and necessitates a new form and tax certification.
INVESTMENT IN U.S. REAL PROPERTY. The Fund may invest in equity securities of corporations that invest in U.S. real property, including Real Estate Investment Trusts (REITs). The sale of a U.S. real property interest by the Fund, or by a REIT or U.S. real property holding corporation in which the Fund invests, may trigger special tax consequences to the Fund's non-U.S. shareholders.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes non-U.S. persons subject to U.S. tax on disposition of a U.S. real property interest as if he or she were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code provides a look-through rule for distributions of FIRPTA gain by a regulated investment company (RIC) if all of the following requirements are met:
o The RIC is classified as a qualified investment entity. A "qualified investment entity" includes a RIC if, in general, more than 50% of the RIC's assets consists of interests in REITs and U.S. real property holding corporations, and
o You are a non-U.S. shareholder that owns more than 5% of a class of Fund shares at any time during the one-year period ending on the date of the distribution,
If these conditions are met, Fund distributions to you are treated as gain from the disposition of a U.S. real property interest (USRPI), causing the distribution to be subject to U.S. withholding tax at a rate of 35%, and requiring that you file a nonresident U.S. income tax return.
Because the Fund expects to invest less than 50% of its assets at all times, directly and indirectly, in U.S. real property interests, it does not expect to pay any dividends that would be subject to FIRPTA reporting and tax withholding.
U.S. TREASURY CIRCULAR 230 NOTICE This discussion of "Distributions and Taxes" is not intended or written to be used, and cannot be used, by you for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service. It is not written as tax advice, and does not purport to deal with all of the federal, state or foreign tax consequences that may be applicable to your investment in the Fund. You should consult your personal tax advisor for advice on these consequences.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
The Fund is a non-diversified series of Templeton Income Trust (Trust), an open-end management investment company, commonly called a mutual fund. The Trust was originally organized as a Massachusetts business trust on June 16, 1986, and was reorganized, effective December 3, 2007, as a Delaware statutory trust and is registered with the SEC.
The Fund currently offers three classes of shares, Class A, Class C and Advisor Class. The Fund may offer additional classes of shares in the future. The full title of each class is:
o Templeton Global Bond Fund - Class A
o Templeton Global Bond Fund - Class C
o 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. Shares of each class of a series have the same voting and other rights and preferences as the other classes and series of the Trust for matters that effect the Trust as a whole. Additional series may be offered in the future.
The Trust has noncumulative voting rights. For board member elections, this gives holders of more than 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 may hold special meetings, however, for matters requiring shareholder approval.
As of November 5, 2007, the principal shareholders of the Fund, beneficial or of record, were:
Name and Address Share Class Percentage
(%)
-----------------------------------------------------------
Comerica Bank FBO Mott Global Advisor 5.96
P.O. Box 75000
Detroit, MI 48275-0001
Moderate Target Fund Advisor 5.62
F/T Fund Allocator
C/O Fund Accounting Dept.
960 Park Place, 4th Floor
San Mateo, CA 94403-1907
First Command Bank Advisor 8.21
Trust Department
P.O. Box 901075
Fort Worth, TX 76101-2075
|
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 November 1, 2007, 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 Franklin Templeton Investments.
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. If you buy or sell shares through your securities dealer, you may be charged a transaction processing fee by your securities dealer. Your securities dealer will provide you with specific information about any transaction processing fees you will be charged.
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 a broker-dealer 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. We may deduct any applicable banking charges imposed by the bank from your account.
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.
INVESTMENT BY ASSET ALLOCATORS The Fund permits investment in the Fund by certain asset allocators (Asset Allocators) who represent underlying clients that have granted a power of attorney to the Asset Allocators to invest on their behalf. The Asset Allocators typically make asset allocation decisions across similarly situated underlying accounts that are invested in the Fund. As a result of adjustments in such asset allocation decisions, the Fund may experience relatively large purchases and redemptions when the Asset Allocators implement their asset allocation adjustment decisions. The Fund, based on monitoring of the trading activity of such Asset Allocator accounts, reserves the right to treat such Asset Allocators as market timers. In such circumstances, the Fund may restrict or reject trading activity by Asset Allocators if, in the judgment of the Fund's manager or transfer agent, such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders. Neither the Fund, nor its investment manager nor any other affiliated party receives any compensation or other consideration in return for permitting Fund investments by Asset Allocators.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A. There is no initial sales charge for Class C and Advisor Class.
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 Franklin Templeton funds to take advantage of the lower sales charges for large purchases.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by completing the LOI section of your account application. An LOI 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 LOI section of the application, you acknowledge and agree to the following:
o You authorize Distributors to reserve approximately 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.
o You give Distributors a security interest in the reserved shares and appoint Distributors as attorney-in-fact.
o 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.
o 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. 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 Franklin Templeton funds acquired before you filed your LOI will be counted towards the completion of the LOI. 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 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 charge for these plans will be based on actual plan participation and the projected investments in 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.
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 90 days:
o 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.
o Annuity payments received under either an annuity option or from death benefit proceeds, if the annuity contract offers as an investment option the Franklin Templeton Variable Insurance Products Trust. You should contact your tax advisor for information on any tax consequences that may apply.
o Redemption proceeds from the sale of Class A shares of any of the Franklin Templeton Investment Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Franklin Templeton Investment 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 90 days from the date they are redeemed from the money fund.
WAIVERS FOR CERTAIN INVESTORS. The following investors or investments may qualify to buy Class A shares without an initial sales charge or CDSC due to anticipated economies in sales efforts and expenses, including:
o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Please consult your legal and investment advisors to determine if an investment in the Fund is permissible and suitable for you.
o Registered securities dealers and their affiliates, for their investment accounts only
o Current employees of securities dealers and their affiliates and their family members, as allowed by the internal policies of their employer
o Current and former officers, trustees, directors, full-time employees (and their family members) of both Franklin Templeton Investments and Franklin Templeton funds, consistent with our then current policies.
o Current partners of law firms that currently provide legal counsel to the funds, Resources or its affiliates
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.: (1) under an advisory agreement (including sub-advisory agreements); and/or (2) as Trustee of an inter vivos or testamentary trust.
o Certain unit investment trusts and their holders reinvesting distributions from the trusts
o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code, as amended
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under "Retirement plans" below
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets
o Shares acquired by a financial intermediary that the intermediary holds, directly or indirectly, on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with any broker-dealer, trust company or registered investment advisor (RIA), whether or not affiliated with the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares.
RETIREMENT PLANS. Class A shares at NAV are available for:
o Employer Sponsored Retirement Plans with assets of $1 million or more; or
o Investors who open an IRA with proceeds rolled over directly from an Employer Sponsored Retirement Plan (the Plan) if the IRA is a "Common Platform IRA". An IRA is a Common Platform IRA if (i) the IRA custodian or recordkeeper, or one of its affiliates, is the recordkeeper for the Plan at the time the IRA is opened; and (ii) current agreements with the Fund, or its agent, make Franklin Templeton fund shares available to both the Plan and the IRA investor; or
o Investors who open an IRA as a spousal rollover or a QDRO if opened with proceeds from a DCS plan and/or a plan for which FTB&T was trustee.
A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing plan that qualifies under section 401(a) of the Internal Revenue Code, including 401(k), money purchase pension, profit sharing and defined benefit plans.
An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs.
A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level recordkeeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level recordkeeping related to those DCS services.
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:
SIZE OF PURCHASE - U.S. DOLLARS SALES 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 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 or more but less than $4 million, plus 0.50% on sales of $4 million or more but less than $50 million, plus 0.25% on sales of $50 million or more.
In addition to the sales charge payments described above and the distribution and service (12b-1) fees described below under "The Underwriter - Distribution and service (12b-1) fees," Distributors and/or its non-fund affiliates may make the following additional payments out of their own assets to securities dealers that sell shares of Franklin Templeton funds:
MARKETING SUPPORT PAYMENTS. Distributors may make payments to certain dealers who are holders or dealers of record for accounts in one or more of the Franklin Templeton funds. A dealer's marketing support services may include business planning assistance, advertising, educating dealer personnel about the Franklin Templeton funds and shareholder financial planning needs, placement on the dealer's list of offered funds, and access to sales meetings, sales representatives and management representatives of the dealer. Distributors compensates dealers differently depending upon, among other factors, sales and assets levels, redemption rates and the level and/or type of marketing and educational activities provided by the dealer. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other dealer-sponsored events. These payments may vary depending upon the nature of the event. Distributors will, on an annual basis, determine whether to continue such payments.
In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds and 0.05% (or 0.03%) of the total assets respectively, of equity or fixed income funds attributable to that dealer, on an annual basis.
As noted below, Distributors may make additional payments to dealers, including dealers not listed below, related to ticket charges and various dealer-sponsored events intended to educate financial advisers and their clients about the Franklin Templeton funds. The following is a list of NASD member broker-dealers (including their respective affiliates) receiving marketing support payments as of March 31, 2007:
Advantage Capital Corporation, AG Edwards & Sons, Inc., AIG Financial Advisors, Inc., American General Securities, Inc., American Portfolios Financial Services, Inc., Ameriprise Financial Services, Inc., Associated Securities Corp., AXA Advisors, LLC, Cadaret Grant & Co., Inc., Cambridge Investment Research Inc., CCO Investment Services Corp., Chase Investment Services Corp., Citicorp Investment Services, Comerica Securities, Inc., Commerce Brokerage Services, Inc., Compass Brokerage, Inc., CUNA Brokerage Services, Inc., CUSO Financial Services, L.P., Edward Jones, Fidelity Investments Institutional Services Company, Inc., Fifth Third Securities, Inc., Financial Network Investment Corporation, FSC Securities Corporation, First Command Financial Planning, Inc., Genworth Financial Securities Corp., J.J.B. Hilliard, W.L. Lyons, Inc., IFC Holdings Inc. D/B/A INVEST Financial Corporation, ING Financial Partners, Inc., Investacorp, Inc., Investment Centers of America, Inc., Jefferson Pilot Securities Corporation, Legend Equities Corporation, Lincoln Financial Advisors Corp., Lincoln Investment Planning, Inc., Linsco/Private Ledger Corp., M&T Securities Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Keegan & Company, Inc., Morgan Stanley DW Inc., Multi-Financial Securities Corporation, Mutual Service Corporation, NatCity Investments, Inc., National Planning Corporation, PFS Investments, Inc., PrimeVest Financial Services, Inc., Raymond James & Associates, Inc., Raymond James Financial Services, Inc., RBC Dain Rauscher, Inc., Richard D. Schubert, Inc., Robert W. Baird & Co., Inc., Royal Alliance Associates, Inc., Securities America, Inc., Signator Investors, Inc., SII Investments, Inc., Smith Barney, SunTrust Investment Services, Inc., TFS Securities, Inc., The Investment Center, Inc., UBS Financial Services, Inc., UBS Global Asset Management (US) Inc., UnionBanc Investment Services, LLC, United Planners Financial Services, U.S. Bancorp Investments, Inc., Vanderbilt Securities, LLC, Wachovia Securities, LLC, Waterstone Financial Group, Inc., Wells Fargo Investments, LLC, WM Financial Services, Inc.
Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed the above-stated limitation.
TRANSACTION SUPPORT PAYMENTS. The types of payments that Distributors may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a dealer or one time payments for ancillary services such as setting up funds on a dealer's mutual fund trading system.
OTHER PAYMENTS. From time to time, Distributors, at its expense, may make additional payments to dealers that sell or arrange for the sale of shares of the Fund. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, co-operative advertising, newsletters, and other dealer-sponsored events. These payments may vary depending upon the nature of the event, and can include travel expenses, such as lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting and due diligence trips.
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 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.
Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. Distributors makes payments for events it deems appropriate, subject to Distributors' guidelines and applicable law.
You should ask your dealer for information about any payments it receives from Distributors and any services provided.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A AND C If you invest any amount in Class C shares or $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 on any Class A shares you sell within 18 months and any Class C shares you sell within 12 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.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o Account fees
o 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) the securities dealer of record has entered into a supplemental agreement with Distributors
o Redemptions by the Fund when an account falls below the minimum required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1, 1995
o 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
o Redemptions by Employer Sponsored Retirement Plans
o Distributions from individual retirement accounts (IRAs) due to death or disability or upon periodic distributions based on life expectancy or returns of excess contributions and earnings
o Any trust or plan established as part of a qualified tuition program under
Section 529 of the Internal Revenue Code of 1986, as amended
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 generally are 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.
Each month in which a payment is scheduled, we will redeem an equivalent amount of shares in your account on the day of the month you have indicated on your account application or, if no day is indicated, on the 20th day of the month. If that day falls on a weekend or holiday, we will process the redemption on the next business day. For plans set up before June 1, 2000, we will continue to process redemptions on the 25th day of the month (or the next business day) unless you instruct us to change the processing date. Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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 also may 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of withdrawal payments, or suspend one payment, we must receive instructions from you at least three business days before a scheduled payment. The Fund may discontinue a systematic withdrawal plan by notifying you in writing and will discontinue a systematic withdrawal plan automatically if all shares in your account are withdrawn, if the Fund receives notification of the shareholder's death or incapacity, or if mail is returned to the Fund marked "unable to forward" by the postal service.
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 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 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH is not processed as described in the prospectus.
There are special procedures for banks and other institutions that wish to open multiple accounts. An institution may open a single master account by filing one application form with the Fund, signed by personnel authorized to act for the institution. Individual sub-accounts may be opened when the master account is opened by listing them on the application, or by providing instructions to the Fund at a later date. These sub-accounts may be registered either by name or number. The Fund's investment minimums apply to each sub-account. The Fund will send confirmation and account statements for the sub-accounts to the institution.
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 and bank trust accounts, there may be additional methods of buying or selling Fund shares than those described in this SAI or in the prospectus. Institutional and bank trust accounts include accounts opened by or in the name of a person (includes a legal entity or an individual) that has signed an Institutional Account Application or Bank Trust Account Application accepted by Franklin Templeton Institutional, LLC or entered into a selling agreement and/or servicing agreement with Distributors or Investor Services. For example, the Fund permits the owner of an institutional account to make a same day wire purchase if a good order purchase request is received (a) before the close of the New York Stock Exchange (NYSE) or (b) through the National Securities Clearing Corporation's automated system for processing purchase orders (Fund/SERV), even though funds are delivered by wire after the close of the NYSE. If funds to be wired are not received as scheduled, the purchase order may be cancelled or reversed and the institutional account owner could be liable for any losses or fees the Fund, Distributors and/or Investor Services may incur.
In the event of disputes involving conflicting claims of ownership or authority to control your shares, the Fund has the right (but has no obligation) to: (i) restrict the shares and require the written agreement of all persons deemed by the Fund to have a potential interest in the shares before executing instructions regarding the shares; or (ii) interplead disputed shares or the proceeds from the court-ordered sale thereof with a court of competent jurisdiction.
Should the Fund be required to defend against joint or multiple shareholders in any action relating to an ownership dispute, you expressly grant the Fund the right to obtain reimbursement for costs and expenses including, but not limited to, attorneys' fees and court costs, by unilaterally redeeming shares from your account.
The Fund may be required (i) pursuant to a validly issued levy, to turn your shares over to a levying officer who may, in turn, sell your shares at a public sale; or (ii) pursuant to a final order of forfeiture to sell your shares and remit the proceeds to the U.S. or state government as directed.
Clients of financial advisors whose firms have a Selling Agreement with Franklin Templeton Distributors, Inc., and who are eligible for the Financial Advisor Service Team (FAST) may be eligible for Franklin Templeton VIP Services/TM which offers enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal underwriter in the continuous public offering of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906.
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.
Distributors does not receive compensation from the Fund for acting as underwriter of the Fund's Advisor Class shares.
The table below shows the aggregate underwriting commissions Distributors received in connection with the offering of the Fund's Class A and C 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:
AMOUNT
RECEIVED IN
AMOUNT CONNECTION WITH
TOTAL RETAINED BY REDEMPTIONS AND
COMMISSIONS DISTRIBUTORS REPURCHASES
RECEIVED ($) ($) ($)
--------------------------------------------------------------------
2007 12,781,042 1,820,058 128,595
2006 3,366,112 454,310 113,686
2005 4,133,644 519,590 95,431
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Distributors may be entitled to payments from the Fund 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 - CLASS A AND C The board has adopted a separate plan pursuant to Rule 12b-1 for each class. Although the plans differ in some ways for each class, each plan is designed to benefit the Fund and its shareholders. The plans are expected to, among other things, increase advertising of the Fund, encourage purchases of Fund shares and service to its shareholders, and increase or maintain assets of the Fund so that certain fixed expenses may be spread over a broader asset base, with a positive impact on per share expense ratios. In addition, a positive cash flow into the Fund is useful in managing the Fund because the manager has more flexibility in taking advantage of new investment opportunities and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of activities that are primarily intended to sell shares of the class. These expenses also may include service fees paid to securities dealers or others who have executed a servicing agreement with the Fund, Distributors or its affiliates and who provide service or account maintenance to shareholders (service fees); and the expenses of printing prospectuses and reports used for sales purposes, and of preparing and distributing sales literature and advertisements. Together, these expenses, including the service fees, are "eligible expenses." The 12b-1 fees charged to each class are based only on the fees attributable to that particular class.
THE CLASS A PLAN. The Fund may pay up to 0.25% per year of Class A's average daily net assets.
The Class A plan is a reimbursement plan. It allows the Fund to reimburse Distributors for eligible expenses that Distributors has shown it has incurred. The Fund will not reimburse more than the maximum amount allowed under the plan.
For the fiscal year ended August 31, 2007, the amounts paid by the Fund pursuant to the plan were:
($)
----------------------------------------------
Advertising 39,077
Printing and mailing
prospectuses
other than to current
shareholders 3,917
Payments to underwriters 128,117
Payments to broker-dealers 6,346,946
Other -
------------
Total 6,518,057
============
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THE CLASS C PLAN. The Fund pays Distributors up to 0.65% per year of Class C's average daily net assets, out of which 0.15% may be paid for services to the shareholders (service fees). The Class C plan also may be used to pay Distributors for advancing commissions to securities dealers with respect to the initial sale of Class C shares.
The Class C plan is a compensation plan. It allows the Fund to pay a fee to Distributors that may be more than the eligible expenses Distributors has incurred at the time of the payment. Distributors must, however, demonstrate to the board that it has spent or has near-term plans to spend the amount received on eligible expenses. The Fund will not pay more than the maximum amount allowed under the plan.
In addition to the payments that Distributors or others are entitled to under the plan, each plan also provides that to the extent the Fund, the manager or Distributors or other parties on behalf of the Fund, the manager or Distributors make payments that are deemed to be for the financing of any activity primarily intended to result in the sale of Fund shares within the context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then such payments shall be deemed to have been made pursuant to the plan.
Under the Class C plan, the amounts paid by the Fund pursuant to the plan for the fiscal year ended August 31, 2007, were:
($)
----------------------------------------------
Advertising 17,252
Printing and mailing
prospectuses
other than to current
shareholders 1,724
Payments to underwriters 52,722
Payments to broker-dealers 4,201,091
Other -
------------
Total 4,272,789
============
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THE CLASS A AND C PLANS. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks may not participate in the plans because of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. These banks, however, are allowed to receive fees under the plans for administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the amounts and purpose of any payment made under the plans and any related agreements, and furnish the board with such other information as the board may reasonably request to enable it to make an informed determination of whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms and provisions of each plan also are consistent with Rule 12b-1.
Performance quotations are subject to SEC rules. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Average annual total return before taxes, average annual total return after taxes on distributions, average annual total return after taxes on distributions and sale of shares and current yield quotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. 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 BEFORE TAXES Average annual total return before taxes is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes that the maximum initial sales charge, if applicable, 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 before taxes quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
n
P(1+T) = 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
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AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS
Average annual total return after taxes on distributions is determined by
finding the average annual rates of return over certain periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value, after taxes on distributions. The calculation assumes that the maximum
initial sales charge, if applicable, is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions, less the taxes
due on such 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, but assumes that the redemption
itself had no tax consequences. 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.
Taxes due on distributions are calculated by applying the highest individual
marginal federal income tax rates in effect on the reinvestment date, using
the rates that correspond to the tax character of each component of the
distributions (e.g., the ordinary income rate for distributions of ordinary
income and net short-term capital gains, and the long-term capital gain rate
for distributions of net long-term capital gains). The taxable amount and
tax character of a distribution may be adjusted to reflect any
recharacterization of the distribution since its original date.
Distributions are adjusted to reflect the federal tax impact the distribution
would have on an individual taxpayer on the reinvestment date; for example,
no taxes are assumed to be due on the portion of any distribution that would
not result in federal income tax on an individual (e.g., tax-exempt interest
or non-taxable returns of capital). The effect of applicable tax credits,
such as the foreign tax credit, is taken into account in accordance with
federal tax law. Any potential tax liabilities other than federal tax
liabilities (e.g., state and local taxes) are disregarded, as are the effects
of phaseouts of certain exemptions, deductions, and credits at various income
levels, and the impact of the federal alternative minimum tax. Any
redemptions of shares required to pay recurring fees charged to shareholder
accounts are assumed to result in no additional taxes or tax credits.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (pre-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
n
P(1+T) = ATV
D
|
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV = ending value of a hypothetical $1,000 payment made at the beginning
D of each period at the end of each period, after taxes on fund
distributions but not after taxes on redemption.
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AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES Average annual total return after taxes on distributions and sale of fund shares is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions and sale of fund shares. The calculation assumes that the maximum initial sales charge, if applicable, 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, including taxes upon sale of fund shares. 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.
Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits.
The capital gain or loss upon redemption is calculated by subtracting the tax basis from the redemption proceeds, after deducting any nonrecurring charges assessed at the end of the period, subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. In determining the basis for a reinvested distribution, the distribution is included net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis is adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal law. The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption is separately determined for shares acquired through the initial investment and each subsequent purchase through reinvested distributions. Shares acquired through reinvestment of distributions are not assumed to have the same holding period as the initial investment. The tax character of such reinvestments is determined by the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. Capital gains taxes (or the benefit resulting from tax losses) are calculated using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal law applicable on the redemption date. Shareholders are assumed to have sufficient capital gains of the same character from other investments to offset any capital losses from the redemption, so that the taxpayer may deduct the capital losses in full.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (post-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
n
P(1+T) = ATV
DR
|
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions and
redemptions)
n = number of years
ATV = ending value of a hypothetical $1,000 payment made at the beginning
DR of each period at the end of each period, after taxes on fund
distributions and redemption
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CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total return assumes that the maximum initial sales charge, if applicable, is deducted from the initial $1,000 purchase, income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. Cumulative total return, however, is based on the actual return for a specified period rather than on the average return.
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 following SEC formula is used to calculate these figures:
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 that 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.
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 also may quote the performance of Class A 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 Franklin Templeton Investments. Resources is the parent company of the advisors and underwriter of Franklin Templeton funds.
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 Savings Planner may help you in determining how much money must be invested on a monthly basis 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 Savings Planner leads you through the steps to start 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 Franklin Templeton Investments, 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 over 4 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. In 2001, the Fiduciary Trust team, known for providing global investment management to institutions and high net worth clients worldwide, joined the organization. Together, Franklin Templeton Investments has over $669 billion in assets under management for more than 7 million U.S. based mutual fund shareholder and other accounts. Franklin Templeton Investments offers 110 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 NYSE. 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.
CORPORATE OBLIGATION RATINGS
MOODY'S INVESTORS SERVICE (MOODY'S)
INVESTMENT GRADE
Aaa: Bonds rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa: Bonds rated Aa are judged to be high quality and are subject to very low credit risk.
A: Bonds rated A are considered upper medium-grade obligations and are subject to low credit risk.
Baa: Bonds rated Baa are subject to moderate credit risk and are considered medium-grade obligations. As such they may have certain speculative characteristics.
BELOW INVESTMENT GRADE
Ba: Bonds rated Ba are judged to have speculative elements and are subject to substantial credit risk.
B: Bonds rated B are considered speculative and are subject to high credit risk.
Caa: Bonds rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca: Bonds rated Ca are considered highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Bonds rated C are the lowest rated class of bonds and are typically in default. They have little prospects for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S (S&P(R))
The issue rating definitions are expressions in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.
INVESTMENT GRADE
AAA: This is the highest rating assigned by S&P to a debt obligation. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: Obligations rated AA differ from AAA issues only in a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: Obligations rated A are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in the higher ratings categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: Obligations rated BBB exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BELOW INVESTMENT GRADE
BB, B, CCC, CC, C: Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest degree of speculation. While these obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of the adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. The C rating is also assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is still making payments.
D: Obligations rated D are in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating is also used upon the filing of bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
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.
r: This symbol is attached to the ratings of instruments with significant noncredit risks and highlights risks to principal or volatility of expected returns that are not addressed in the credit rating.
SHORT-TERM DEBT RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs and to individual short-term debt instruments. These obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted. Moody's employs the following designations to indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Issuers (or supporting institutions) so rated have a superior ability to repay short-term debt obligations.
P-2 (Prime-2): Issuers (or supporting institutions) so rated have a strong ability to repay short-term debt obligations.
P-3 (Prime-3): Issuers (or supporting institutions) so rated have an acceptable ability to repay short-term debt obligations.
NP: Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
S&P's ratings are a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days -- including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating.
A-1: This designation indicates that the obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: Issues carrying this designation are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations carrying the higher designations. However, the obligor's capacity to meet its financial commitments on the obligation is satisfactory.
A-3: Issues carrying this designation exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
TEMPLETON INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
TEMPLETON INTERNATIONAL BOND FUND
TEMPLETON INCOME TRUST
CLASS A, C, R & ADVISOR
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 3, 2007
[INSERT FRANKLIN TEMPLETON INVESTMENTS LOGO]
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 December 3, 2007, 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.
For a free copy of the prospectus, contact your investment representative or call 1-800/DIAL BEN(R) (1-800/342-5236).
CONTENTS
Goal, Strategies and Risks 2 Officers and Trustees 20 Fair Valuation and Liquidity 26 Proxy Voting Policies and Procedures 26 Management and Other Services 28 Portfolio Transactions 31 Distributions and Taxes 31 Organization, Voting Rights and Principal Holders 38 Buying and Selling Shares 38 The Underwriter 45 Performance 46 Miscellaneous Information 49 Description of Ratings 49 |
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation 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 will not be considered a violation of the restriction or limitation.
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 trying to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy 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. A non-fundamental policy may be changed by the board of trustees without the approval of shareholders.
FUNDAMENTAL INVESTMENT POLICIES
The Fund's investment goal is current income with capital appreciation and growth of income.
The Fund may not:
1. Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (1940 Act), or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the U.S. Securities and Exchange Commission (SEC).
2. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans if, as a result, more than 33-1/3% of its total assets would be
lent to other persons, including other investment companies to the extent
permitted by the 1940 Act or any rules, exemptions or interpretations thereunder
that may be adopted, granted or issued by the SEC. This limitation does not
apply to (i) the lending of portfolio securities, (ii) the purchase of debt
securities, other debt instruments, loan participations and/or engaging in
direct corporate loans in accordance with its investment goals and policies, and
(iii) repurchase agreements to the extent the entry into a repurchase agreement
is deemed to be a loan.
4. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans.
5. Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) engaging in transactions involving currencies and futures contracts and options thereon or (ii) investing in securities or other instruments that are secured by physical commodities.
6. Issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
7. Invest more than 25% of the Fund's net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies).
NON-FUNDAMENTAL INVESTMENT POLICIES
Under normal market conditions, the Fund invests at least 80% of its net assets in "bonds." "Bonds" include debt securities of any maturity, such as bonds, notes and debentures. Net assets for this 80% policy include the amount of borrowings for investment purposes.
INVESTMENTS, TECHNIQUES, STRATEGIES AND THEIR RISKS
Certain words or phrases may be used in descriptions of Fund investment policies and strategies to give investors a general sense of the Fund's levels of investment. They are broadly identified with, but not limited to, the following percentages of Fund total assets:
"small portion" less than 10% "portion" 10% to 25% "significant" 25% to 50% "substantial" 50% to 66% "primary" 66% to 80% "predominant" 80% or more |
If the Fund intends to limit particular investments or strategies to no more than specific percentages of Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are not limitations unless specifically stated as such in the Fund's prospectus or elsewhere in this SAI.
The value of your shares will increase as the value of the securities owned by the Fund increases and will decrease as the value of the Fund's investments decreases. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors that affect the value of any particular security that the Fund owns, the value of the Fund's shares may also change with movements in the stock and bond markets as a whole.
In trying to achieve its investment goals, the Fund may invest in the following types of securities or engage in the following types of transactions. These securities and transactions, and their associated risks, are described below. The Fund's manager is under no obligation to invest in any or all of these securities or engage in any or all of these types of transactions.
BORROWING Under the current version of the 1940 Act and the SEC's current rules, exemptions and interpretations thereunder, the Fund may borrow up to one-third of the value of its total assets (including the amount borrowed, but less all liabilities and indebtedness not represented by senior securities) from banks to increase its holdings of portfolio securities. Under the 1940 Act, the Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to reduce the amount of its borrowings (within three days) to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise. In the event that the Fund is required to reduce its borrowings, it may have to sell portfolio holdings, even if such sale of the Fund's holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances), which may or may not exceed the income or gains received from the securities purchased with borrowed funds.
Under the 1940 Act, the Fund may also borrow for temporary purposes in an amount not exceeding 5% of the value of its total assets at the time when the loan is made. A loan shall be presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
BORROWING FROM AFFILIATED INVESTMENT COMPANIES. Subject to the Fund's fundamental restrictions on borrowing, the Fund may also borrow money from affiliated investment companies or other affiliated entities. In September 1999, the SEC granted an exemptive order to the Fund, together with other funds in Franklin Templeton Investments, permitting each fund to borrow money from other funds in Franklin Templeton Investments through a credit facility for temporary purposes (the Borrowing Order). The Borrowing Order permits the Fund to borrow money from other funds in Franklin Templeton Investments at rates that may be more favorable than the rates that the Fund would receive if it borrowed from banks or other lenders. The Borrowing Order also permits the Fund to borrow from other affiliated entities, such as the Investment Manager, under emergency market conditions should the SEC permit investment companies to engage in such borrowing in the future, such as it did in response to the emergency market conditions that existed immediately after the events of September 11, 2001.
The Borrowing Order permits the Fund to engage in borrowing and lending through
the credit facilities in the following certain situations: (i) when the cash
position of the Fund is insufficient to meet temporary cash requirements; or
(ii) when a sale of securities "fails" due to circumstances such as a delay in
the delivery of cash to the Fund's custodian or improper delivery instructions
by the broker effecting the transaction.
According to the Borrowing Order, if the total outstanding borrowings of the Fund are less than 10% immediately after the borrowing, the amount borrowed may be unsecured. If the total outstanding borrowings of the Fund are more than 10% immediately after the borrowing, the amount borrowed must be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding loan that requires collateral. Before any Fund that has outstanding interfund borrowings may, through additional borrowings, cause its outstanding borrowings from all sources to exceed 10% of its total assets, the Fund must first secure each outstanding interfund loan by the pledge of segregated collateral with a market value at least equal to 102% of the outstanding principal value of the loan.
If the total outstanding borrowings of the Fund with outstanding interfund loans exceeds 10% of its total assets for any other reason (such as decline in net asset value or because of shareholder redemptions), the Fund will within one business day thereafter: (a) repay all of its outstanding interfund loan, (b) reduce its outstanding indebtedness to 10% or less of its total assets, or (c) secure each outstanding interfund loan by the pledge of segregated collateral with a market value at least equal to 102% of the outstanding principal value of the loan until the Fund's total outstanding borrowings cease to exceed 10% of its total assets, at which time the collateral shall no longer be required. Under these circumstances, until each outstanding interfund loan is repaid or the Fund's total outstanding borrowings cease to exceed 10% of its total assets, the Fund will mark the value of the collateral to market each day and will pledge such additional collateral as is necessary to maintain the market value of the collateral at least equal to 102% of the outstanding principal value of the loan.
The duration of interfund loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. The Fund's borrowings through the credit facility, as measured on the day the most recent loan was made, will not exceed the greater of 125% of the Fund's total net cash redemptions and 102% of sales fails for the preceding seven calendar days. The trustees of the Fund, including a majority of the independent trustees, will: (a) review no less frequently than quarterly the Fund's participation in the credit facility during the preceding quarter for compliance with the conditions with the Borrowing Order; (b) establish a bank loan rate formula used to determine the interest rate on interfund loans in accordance with the Borrowing Order and review no less frequently than annually the continuing appropriateness of the bank loan rate formula; and (c) review no less frequently than annually the continuing appropriateness of the Fund's participation in the credit facility.
CONVERTIBLE SECURITIES A convertible security is usually issued either by an operating company or by an investment bank. When issued by an operating company, a convertible security tends to be senior to common stock, but subordinate to other types of fixed-income securities issued by that company. When a convertible security issued by an operating company is "converted," the operating company often issues new stock to the holder of the convertible security but, if the parity price of the convertible security is less than the call price, the operating company may pay out cash instead of common stock. If the convertible security is issued by an investment bank, the security is an obligation of and is convertible through the issuing investment bank. The issuer of a convertible security may be important in determining the security's true value. This is because the holder of a convertible security will have recourse only to the issuer.
CONVERTIBLE DEBT SECURITIES. As with a straight fixed-income security, a convertible debt security tends to increase in market value when interest rates decline and decrease in value when interest rates rise. Like a common stock, the value of a convertible debt security also tends to increase as the market value of the underlying stock rises, and it tends to decrease as the market value of the underlying stock declines. Because its value can be influenced by both interest rate and market movements, a convertible debt security is not as sensitive to interest rates as a similar fixed-income security, nor is it as sensitive to changes in share price as its underlying stock. The Fund uses the same criteria to rate a convertible debt security that it uses to rate a more conventional debt security.
CONVERTIBLE PREFERRED STOCK. A convertible preferred stock is treated like a preferred stock for the Fund's financial reporting, credit rating and investment limitation purposes. A preferred stock is subordinated to all debt obligations in the event of insolvency, and an issuer's failure to make a dividend payment is generally not an event of default entitling the preferred shareholder to take action. A preferred stock generally has no maturity date, so that its market value is dependent on the issuer's business prospects for an indefinite period of time. In addition, distributions from preferred stock are dividends, rather than interest payments, and are usually treated as such for corporate tax purposes.
DEBT SECURITIES Debt securities represent an obligation of the issuer to repay a loan of money and generally provide for the payment of interest. These include bonds, notes and debentures; commercial paper; time deposits; and bankers' acceptances. A debt security typically has a fixed payment schedule that 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 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. Convertible bonds are exchangeable at the option of the holder for common stock of the issuer. See "Convertible securities" above for more information.
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 per share. 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.
Changes in interest rates in any country where the Fund invests 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.
BANKERS' ACCEPTANCES. A banker's acceptance is a short-term debt instrument created by a non-financial firm and guaranteed by a bank, usually in connection with an international commercial transaction.
BONDS. A bond is a debt security in which investor's loan money to an entity that borrows for a defined period of time at a specified interest rate. Bonds can be rated by independent rating organizations based on an analysis of the fundamental soundness of the borrower. See "Investment grade debt securities," "Lower rated securities" and "Unrated debt securities" below for more information.
CERTIFICATES OF DEPOSIT. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or savings and loan association for a definite period of time and earning a specified return.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). CMOs are fixed-income securities that 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. Conversely, in periods of rising interest rates, prepayments decrease and the effective maturity of the pool increases.
COMMERCIAL PAPER. Commercial paper is an unsecured, short-term loan by a corporation, typically for financing accounts receivable and inventory. Investments in commercial paper are limited to obligations rated Prime-1 by Moody's Investors Service (Moody's) or A-1 by Standard & Poor's (S&P(R)) 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.
DEBENTURES. A debenture is an unsecured debt backed only by the creditworthiness of the borrower, not by collateral.
DEFAULTED DEBT SECURITIES. The Fund may, from time to time, purchase defaulted debt securities if, in the opinion of the manager, the issuer may resume interest payments in the near future. The purchase of defaulted debt securities involves risks such as the possibility of complete loss of the investment in the event the issuer does not restructure or reorganize to enable it to resume paying interest and principal to holders. Defaulted debt securities are lower rated securities and are subject to the Fund's limitation in lower rated securities.
FOREIGN BONDS. The Fund's investments in debt instruments may include U.S. and foreign government and corporate securities. These debt instruments may include Samurai bonds, Yankee bonds, Eurobonds and Global Bonds in order to gain exposure to investment capital in other countries in a certain currency. A Samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company. Eurobonds are generally issued in bearer form, carry a fixed or floating rate of interest, and typically amortize principal through a bullet payment with semiannual interest payments in the currency in which the bond was issued. Yankee bonds are foreign bonds denominated in U.S. dollars and registered with the SEC for sale in the U.S. A Global Bond is a certificate representing the total debt of an issue. Such bonds are created to control the primary market distribution of an issue in compliance with selling restrictions in certain jurisdictions or because definitive bond certificates are not available. A Global Bond is also known as a Global Certificate.
INVESTMENT GRADE DEBT SECURITIES. Various independent rating organizations publish ratings of some of the debt securities in which the Fund may invest based upon their assessment of the financial soundness of the issuer. Generally, a higher rating indicates less risk. Debt securities that are rated Baa by Moody's or BBB by S&P or above, or unrated securities deemed by the Fund's manager to be of comparable quality, are considered to be "investment grade." Debt securities in the lowest investment grade category may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade debt securities. If the rating on an issue held in the Fund's portfolio is changed by the rating service or the security goes into default, this event will be considered by the Fund in its evaluation of the overall investment merits of that security but will not generally result in an automatic sale of the security.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and floating rate loans arranged through private negotiations between a sovereign, sovereign-related or corporate entity and one or more financial institutions (Lenders). The Fund may invest in such loans in the form of participations (Participations) in loans and assignments of all or a portion of loans from third parties. Participations typically will result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Participations only if the Lender interpositioned between the Fund and the borrower is believed by the manager to be creditworthy. When the Fund purchases assignments from Lenders, the Fund will acquire direct rights against the borrower on the loan, except that under certain circumstances such rights may be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of assignments and Participations. Because the market for such instruments is not highly liquid, the Fund anticipates that such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market will have an adverse impact on the value of such instruments and on the ability of the Fund to dispose of particular assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower.
LOWER RATED SECURITIES. Higher yields are ordinarily available from securities in the lower rating categories, such as securities rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities deemed by the Fund's manager to be of comparable quality. Such high-yield securities are considered to be below "investment grade" and are sometimes referred to as "junk bonds." These ratings represent the opinions of the rating services with respect to the issuer's ability to pay interest and repay principal. They do not purport to reflect the risk of fluctuations in market value and are not absolute standards of quality.
The Fund may invest up to 35% of its total assets in lower rated securities, or unrated securities of comparable quality. The Fund does not maintain any minimum rating on lower rated securities.
Although they may offer higher yields than do higher rated securities, lower rated and unrated debt securities generally involve greater volatility of price and risk to principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. These securities will have some quality and protective characteristics, but these are outweighed by large uncertainties or major risk exposures to adverse conditions. If the rating on an issue held in the Fund's portfolio is changed by the rating service or the security goes into default, this event will be considered by the Fund in its evaluation of the overall investment merits of that security but will not generally result in an automatic sale of the security.
The markets in which lower 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 lower rated or unrated debt securities may also make it more difficult for the Fund to obtain accurate market quotations for the purposes of valuing its portfolio. Market quotations are generally available on many lower 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 lower rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of lower 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 lower rated debt securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher rated securities.
Lower rated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of lower 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 lower 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 lower rated debt securities defaults, the Fund may incur additional expenses to seek recovery.
NOTES. A note is a medium- or short-term debt instrument, usually with a maturity of 10 years or less.
STRUCTURED INVESTMENTS. Structured investments are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities typically are organized by investment banking firms that 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 generally will 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 instruments, the purchase will not be deemed to be leverage for purposes of the limitations placed on the extent of the Fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, the Fund's investment in these structured investments may be limited by the restrictions contained in the 1940 Act. Structured investments typically are sold in private placement transactions, and there currently is no active trading market for structured investments. However, the Fund will only invest in publicly distributed structured investments. To the extent such investments are illiquid, they will be subject to the Fund's restrictions on investments in illiquid securities.
TIME DEPOSITS. Time deposits are non-negotiable deposits, such as savings accounts or certificates of deposit, held by a financial institution for a fixed term with the understanding that the depositor can withdraw its money only by giving notice to the institution. However, there may be early withdrawal penalties depending upon market conditions and the remaining maturity of the obligation.
UNRATED DEBT SECURITIES. The Fund may also invest in unrated debt securities, which are debt securities not yet rated by an independent rating organization. Unrated debt, while not necessarily of lower quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed by the Fund's manager to determine whether to purchase unrated debt securities and if it is of comparable quality to rated securities.
U.S. GOVERNMENT SECURITIES. 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.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED SECURITIES. The Fund may purchase securities on a when-issued, delayed delivery or to-be-announced basis. These transactions involve a commitment by the Fund to purchase or sell particular securities with payment and delivery taking place at a future date, and permit the Fund to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates or market action. No income accrues to the purchaser of a security on a when-issued, delayed delivery or to-be-announced basis prior to delivery. Such securities are recorded as an asset and are subject to changes in value based upon changes in the general level of interest rates. Purchasing a security on a when-issued, delayed delivery or to-be-announced basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Fund will only make commitments to purchase securities on a when-issued, delayed delivery or to-be-announced basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable.
The Fund will segregate on the books of the Fund or the Fund's custodian, an amount of liquid assets equal to 102% of the amount of its commitment to purchase securities on a when-issued, delayed delivery or to-be-announced basis. These assets will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to 102% of the amount of the Fund's commitments.
ZERO COUPON AND PAY-IN-KIND BONDS. Zero coupon and pay-in-kind bonds are debt securities that typically do not pay cash interest until the security's maturity or payment date. The Fund may accrue and report interest on high yield bonds structured as zero coupon bonds or pay-in-kind securities as income 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, the Fund must distribute substantially all of its income to shareholders. Thus, the Fund may have to dispose of their portfolio securities under disadvantageous circumstances to generate cash in order to satisfy the distribution requirement.
DEPOSITARY RECEIPTS Depositary receipts are certificates that give their holders the right to receive securities of (a) a foreign issuer deposited in a U.S. bank or trust company (American Depositary Receipts, "ADRs"); or (b) a foreign or U.S. issuer deposited in a foreign bank or trust company (Global Depositary Receipts, "GDRs," or European Depositary Receipts, "EDRs"). For purposes of the Fund's investment policies, the Fund's investments in depositary receipts will be deemed to be investments in the underlying securities.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on exchanges or over-the-counter. While ADRs do not eliminate all the risks associated with foreign investments, by investing in ADRs rather than directly in the securities of foreign issuers, the Fund will avoid currency risks during the settlement period for either purchases or sales and certain foreign securities markets trading risks. In general, there is a large, liquid market in the U.S. for ADRs quoted on a national securities exchange or on the Nasdaq. The information available for ADRs is subject to the accounting, auditing, and financial reporting standards of the U.S. market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject.
Depositary receipts may be issued under sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities traded in the form of depositary receipts. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be less information available regarding issuers of securities underlying unsponsored programs, and there may not be a correlation between such information and the market value of the depositary receipts.
DERIVATIVE SECURITIES Derivative securities are securities or other instruments 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. To the extent that the Fund enters into these transactions, the successful use of such securities will depend upon the manager's ability to predict pertinent market movements. The Fund is subject to derivatives guidelines established by the board of trustees (the Derivatives Guidelines) regarding the use of derivatives. Under these guidelines, currently no more than 5% of the Fund's total assets may be invested in, or exposed to, futures, options, collars and swap agreements (as measured at the time of investment).
FUTURES CONTRACTS. A financial futures contract is an agreement between two parties to buy or sell a specified 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.
When the Fund enters into a futures contract, it must deliver to the futures commission merchant selected by the Fund, an amount referred to as "initial margin" that currently ranges from 1(1)/2% to 5% of the contract amount. Initial margin requirements are determined by the respective exchanges on which the futures contracts are traded. Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the Fund from, such account in accordance with controls set for such accounts, depending upon changes in the price of the underlying securities subject to the futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund's custodian on a daily basis.
At the time the Fund buys or sells a futures contract, an amount of cash, U.S. government securities, liquid debt securities or other liquid assets (including equity securities) equal to the market value of the contract, minus any initial margin or variation margin deposit, will be segregated on the books of the Fund or its custodian. Alternatively, the Fund may "cover" its position by owning the same futures contract, 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 segregated on the books of the Fund or its custodian). Any assets segregated on the books of the Fund or the Fund's custodian, will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are equal to the price of the contract, minus any initial margin or variation margin deposit.
EXCHANGE-TRADED SECURITIES INDEX FUTURES. The Fund may buy and sell index futures contracts with respect to any securities traded on a recognized securities exchange or board of trade. The Fund may buy and sell securities index futures contracts traded on a recognized securities exchange or board of trade for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. A securities 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 value of a unit is the current value of the index.
The securities index futures contract specifies that no delivery of the actual securities 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 securities index at the expiration of the contract.
When the Fund enters into a securities index futures contract, it must deliver to the futures commission merchant selected by the Fund, an amount referred to as "initial margin" that currently ranges from 1(1)/2% to 5% of the contract amount. Initial margin requirements are determined by the respective exchanges on which the index futures contracts are traded. Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the Fund from, such account in accordance with controls set for such accounts, depending upon changes in the price of the underlying securities subject to the securities index futures contract. The account is marked-to-market daily and the variation margin is monitored by the Fund's custodian on a daily basis.
At the time the Fund buys or sells a securities index futures contract, an amount of cash, U.S. government securities, highly liquid debt securities or other pledge (including equity securities) equal to the market value of the contract, minus any initial margin or variation margin deposit, will be segregated on the books of the Fund or its custodian. Alternatively, the Fund may "cover" its position by owning the same securities index futures contract, or holding a call option permitting the Fund to purchase the same securities index 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 segregated on the books of the Fund or its custodian). Any assets segregated on the books of the Fund or the Fund's custodian, will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are equal to the price of the contract, minus any initial margin or variation margin deposit.
Some of the risks involved in securities 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 will generally buy 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 securities index futures for hedging may involve risks because of imperfect correlations between movements in the prices of the securities index futures on the one hand and movements in the prices of the securities being hedged or of the underlying securities index on the other. Successful use of securities index futures by the Fund for hedging purposes also depends upon the managers' ability to predict correctly movements in the direction of the market, as to which no assurance can be given.
INTEREST RATE FUTURES. The Fund may enter into interest rate futures, a futures contract based on an interbank deposit rate or an underlying fixed-income security such as a U.S. Treasury issue. The value of the contract is inversely proportional to the changes in interest rates.
EXCHANGE-TRADED OPTIONS ON SECURITIES AND FUTURES. 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. The Fund must limit its purchase options to the extent that the total premiums it paid for all options are 5% or less of its total assets. Investments in options are subject to the Fund's Derivatives Guidelines.
The Fund may 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 or futures contract and the changes in value of the Fund's security holdings being hedged. In addition, the Fund will continue to receive interest or dividend income on the security. The Fund may sell a put option that it has previously purchased prior to the sale of the securities underlying that option. These sales will result in a net gain or loss depending on whether the amount received on the sale is more or less than the premium and other transaction costs paid for the put option that is sold. This gain or loss may be wholly or partially offset by a change in the value of the underlying security that the Fund owns or has the right to acquire.
A call option gives the holder the right to buy the underlying securities from the option writer at a stated exercise price. The Fund may buy call options on securities that it intends to buy in order to limit the risk of a substantial increase in the market price of this security. The Fund may also buy call options on securities held in its portfolio and on which it has written call options. Prior to its expiration, a call option may be sold in a closing sale transaction. Profit or loss from such a sale will depend on whether the amount received is more or less than the premium paid for the call option plus the related transaction costs. 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. 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 or futures contract does not rise.
The Fund may write options to generate additional income and to hedge its investment portfolio against anticipated adverse market and/or exchange rate movements. The Fund may write covered call and put options on any securities on which it may invest. The Fund may buy and write these options on securities that are listed on domestic or foreign securities exchanges. Call options written by the Fund give the holder the right to buy the underlying securities from the Fund at a stated exercise price. Put options written by the Fund give the holder the right to sell the underlying security to the Fund at a stated exercise price.
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 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 consideration held in liquid assets segregated on the books of the Fund or 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 (i) is equal to or less than the exercise price of the call written or (ii) is greater than the exercise price of the call written if the difference is maintained by the Fund in liquid securities segregated on the books of the Fund or its custodian. A put option on a security or futures contract written by the Fund is "covered" if the Fund maintains liquid assets segregated on the books of the Fund or its custodian with a value equal to the exercise price, or else holds a put on the same security or futures contract 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. All assets segregated on the books of the Fund or its custodian to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written.
The purpose of writing covered call options is to realize greater income than would be realized on portfolio securities alone. However, in writing covered call options for additional income, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
EXCHANGE-TRADED SECURITIES INDEX OPTIONS. Call and put options on securities indices are similar to options on securities except that, rather than the right to buy or sell particular securities at a specified price, options on a securities index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying securities index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the securities market generally (or in a particular industry or segment of the market) rather than price movements in individual securities.
The Fund may buy and sell put and call options on securities indices in standardized contracts traded on national securities exchanges, boards of trade, or similar entities or quoted on Nasdaq for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. 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.
The Fund may write call options and put options only if they are "covered." A written call option on an index is covered if the Fund maintains liquid assets segregated on the books of the Fund or its custodian with a value equal to the exercise price. A call option is also covered if the Fund holds a call on the same index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, if the difference is maintained by the Fund in liquid securities segregated on the books of the Fund or its custodian. The Fund may also 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. All assets segregated on the books of the Fund or its custodian, to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written.
The Fund may "cover" put options on securities indices that it writes if it
maintains liquid assets segregated on the books of the Fund or its custodian
with a value equal to the exercise price, or else holds a put on the same
securities index 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. A written put option is also "covered" if the Fund holds a put
on the same index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, if the difference is maintained by
the Fund in liquid securities segregated on the books of the Fund or its
custodian. All assets segregated on the books of the Fund or its custodian, to
"cover" options will be marked-to-market daily, and the Fund will increase the
aggregate value of the assets, as necessary, to ensure that the assets are at
least equal to the amount of the option written.
All assets segregated on the books of the Fund or its custodian, to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written. The Fund may only buy options if the total premiums it paid for all options are 5% or less of its total assets. All assets segregated on the books of the Fund or its custodian, to "cover" options will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the option written. The Fund may only buy options if the total premiums it paid for all options are 5% or less of its total assets. Subject to the Derivatives Guidelines, as discussed above, the Fund currently intends to limit writing options only to the extent that obligations under all option contracts and transactions represent not more than 5% of the Fund's total assets.
OTHER GENERAL RISKS OF OPTIONS. There are several risks associated with transactions in options on securities and 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 or security written by the Fund is covered by an option on the same index or security 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.
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.
Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires. If an option written by the Fund expires, the Fund will realize a capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund will realize a capital loss equal to the premium paid.
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.
FORWARD CONVERSIONS. In a forward conversion, the Fund will buy securities and write call options and buy put options on these securities. All options written by the Fund will be covered, as described above under "Exchange-traded options on securities and futures." By buying puts, the Fund protects the underlying security from depreciation in value. By writing calls on the same security, the Fund receives premiums that may offset part or all of the cost of purchasing the puts while foregoing the opportunity for appreciation in the value of the underlying security. The Fund will not exercise a put it has purchased while a written call option on the same security is outstanding. The use of options in connection with forward conversions is intended to hedge against fluctuations in the market value of the underlying security. Although it is generally intended in forward conversion transactions that the exercise price of put and call options would be identical, situations might occur in which some option positions are acquired with different exercise prices. Therefore, the Fund's return may depend in part on movements in the price of the underlying security because of the different exercise prices of the call and put options. These price movements may also affect the Fund's total return if the conversion is terminated prior to the expiration date of the options. In this event, the Fund's return may be greater or less than it would otherwise have been if it had hedged the security by only buying put options.
OTC OPTIONS ON SECURITIES, INDICES AND FUTURES. The value of over-the-counter options purchased by the Fund, as well as the cover for options written by the Fund, may be considered illiquid and are subject to the Fund's limitation on investments in illiquid securities.
The Fund may write covered put and call options and buy put and call options that trade in the over-the-counter market to the same extent that it may engage in exchange traded options. OTC options differ from exchange-traded options in certain material respects. OTC options are arranged directly with dealers and not, as is the case with exchange traded options, with a clearing corporation. Thus, there is a risk of non-performance by the dealer. Because there is no exchange, pricing is typically done by reference to information from market makers. However, OTC options are available for a greater variety of securities and in a wider range of expiration dates and exercise prices than exchange traded options; and the writer of an OTC option is paid the premium in advance by the dealer.
SPREAD, STRADDLE AND COLLAR TRANSACTIONS. The Fund may engage in "spread" transactions in which it buys and writes a put or call option on the same underlying security, with the options having different exercise prices and/or expiration dates. The Fund may also engage in so-called "straddles," in which it buys or writes combinations of put and call options on the same security, with the options having the same exercise prices and/or expiration dates. The Fund may also participate in a collar transaction, which is a combination of PUT options and CALL options that can limit, but not eliminate, the risk that their value will decrease. Because buying options in connection with these transactions may, under certain circumstances, involve a limited degree of investment leverage, subject to the Derivatives Guidelines discussed above, the Fund will not enter into any spreads or straddles if, as a result, more than 5% of its total assets will be invested at any time in these options transactions.
SWAP AGREEMENTS. The Fund may enter into swap agreements for the purpose of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in a security that yielded or produced that desired return. These instruments also may be used for tax and/or cash management purposes, hedging the Fund's investments against a decline in value and/or to enhance Fund returns. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a particular security, or at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Fund's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Fund's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of assets segregated on the books of the Fund or its custodian, consisting of cash, U.S. government securities, or any liquid assets, to limit any potential leveraging of the Fund's portfolio. These assets will be marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of any accrued but unpaid net amounts owed to a swap counterparty. The Fund will not enter into a swap agreement with any single party if the net amount that would be owed or received under contracts with that party would exceed 5% of the Fund's total assets. Investments in swaps are also subject to the Fund's Derivatives Guidelines.
Whether the Fund's use of swap agreements will be successful in furthering its investment objective will depend on the ability of the manager correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The manager will cause the Fund to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Fund's repurchase agreement guidelines. Certain positions adopted by the Internal Revenue Service may limit the Fund's ability to use swap agreements in a desired tax strategy.
The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market and the laws relating to swaps, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap agreements, to realize amounts to be received under such agreements, or to enter into swap agreements, or could have adverse tax consequences.
EQUITY SECURITIES Equity securities represent a proportionate share of the ownership of a company; their value is based on the success of the company's business and the value of its assets, as well as general market conditions. 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 also may 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 different voting rights. Equity securities also may include convertible securities, warrants or rights or equity interests in trusts, partnerships, joint ventures or similar enterprises. Convertible securities typically are debt securities or preferred stocks that are convertible into common stock after certain time periods or under certain circumstances. See "Convertible securities" above for more information. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price.
FOREIGN CURRENCY HEDGING TRANSACTIONS In order to hedge against foreign currency exchange rate risks and/or to generate income for the portfolio, the Fund may, but is not obligated to, 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's investments in futures contracts and related options are subject to the Derivative Guidelines. The Fund also may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market.
FORWARD FOREIGN CURRENCY CONTRACTS. 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 or to enhance income. 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 in the interbank market. The Fund may either accept or make delivery of the currency specified at the maturity of a forward or futures contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract.
The Fund enters into a forward contract, for example, when it contracts 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. Thus, for example, when the Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. Similarly, when the Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward contract to buy that foreign currency for a fixed dollar amount. The Fund may also purchase and sell forward contracts for non-hedging purposes when the manager anticipates that the foreign currency will appreciate or depreciate in value but securities denominated in that currency do not present attractive investment opportunities and are held in the Fund.
In addition, when the Fund believes that a foreign currency may experience a substantial movement against another currency, it may enter into a forward contract to buy or sell, as appropriate, an amount of the foreign currency either: a) approximating the value of some or all of its portfolio securities denominated in such foreign currency; or b) necessary to derive a level of additional income that the Fund's manager seeks to achieve for the Fund. This investment practice generally is referred to as "cross-hedging" and in connection with the Fund's forward contracts, an amount of its assets equal to the amount of the purchase will be segregated on the books of the Fund or its custodian to be used to pay for the commitment. Accordingly, the Fund will always have liquid assets available in an amount equal to 102% of the Fund's commitments under its forward contracts to limit any potential risk. These assets are marked-to-market daily and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to 102% of the amount of the Fund's commitments under its forward contracts. The Fund will cover any commitments under these contracts to sell currency by owning or acquiring the underlying currency (or an absolute right to acquire such currency).
Although the Commodity Futures Trading Commission does not currently regulate these contracts, it may in the future assert such regulatory authority. 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. Moreover, there may be an imperfect correlation between the Fund's portfolio holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. This imperfect correlation may cause the Fund to sustain losses that will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss. The ability of the Fund to enter into forward contracts is limited only to the extent that forward contracts would, in the opinion of the manager, impede portfolio management or the ability of the Fund to honor redemption requests. The Fund generally will not enter into a forward contract with a term greater than one year.
OPTIONS ON FOREIGN CURRENCIES. 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 paid 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. Over-the-counter forwards and related options may be considered illiquid securities and would be subject to the Fund's investment restriction with respect to illiquid securities.
All options written by the Fund will be "covered." For more information about the mechanics of purchasing, writing and covering options, see "Exchange-traded options on securities and futures" under "Derivative securities" above.
FOREIGN CURRENCY FUTURES. The Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies (foreign currency futures). A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of currency at a future date at a price set at the time of the contract. 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.
The Fund may either accept or make delivery of the currency specified at the maturity of a currency futures contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to currency futures contracts are effected on the exchange on which the contract was entered into (or on a linked exchange).
All futures in which the Fund participates may be subject to "margin" and coverage requirements. For more information about the mechanics of participating in futures, see "Futures contracts" under "Derivative securities" above.
FOREIGN SECURITIES The Fund will invest in foreign securities. The Fund may purchase securities in any foreign country, including developed or emerging markets. Investors should consider carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies generally are not subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. From time to time, trading in a foreign market may be interrupted and 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 generally are 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.
Certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment of foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Furthermore, in some countries the repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval. The Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for repatriation.
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 that 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.
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 may not be internationally traded.
Certain of these 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 investments of the Fund.
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.
EMERGING/DEVELOPING MARKETS. The Fund may invest up to 100% of its assets in emerging market countries. Emerging market countries are (i) countries that are generally considered developing by the International Bank of Reconstruction and Development (commonly known as the World Bank) and the International Finance Corporation; or (ii) countries that are classified by the United Nations or otherwise regarded by their authorities as developing; or (iii) countries with a stock market capitalization of less than 3% of the Morgan Stanley Capital International World Index. Emerging market companies are (i) companies whose principal securities trading markets are in emerging market countries; or (ii) companies that derive 50% or more of their total revenue from either goods or services produced or sales made in emerging market countries; or (iii) companies that have 50% or more of their assets in emerging market countries; or (iv) companies that are linked to currencies of emerging market countries; or (v) companies that are organized under the laws of, or with principal offices in, emerging market countries.
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 legal 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 of the countries in which the Fund may invest have experienced substantial, and during 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 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's shareholders.
ILLIQUID SECURITIES Consistent with the SEC Staff's current position on illiquid securities, the Fund may not invest more than 15% of its net assets in illiquid securities. An illiquid asset is an asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the mutual fund has valued the investment on its books.
Securities that are acquired outside the U.S. and that are publicly traded in the U.S. or on a foreign securities exchange or in a foreign securities market are not considered by the Fund to be illiquid assets if: (a) the Fund reasonably believes it can dispose of the securities for cash in the U.S. or foreign market, or (b) current market quotations are readily available. Investments may be in securities of foreign issuers, whether located in developed or undeveloped countries.
The Fund may invest in legally restricted securities (such as those issued pursuant to an exemption from the registration requirements of the federal securities laws) where such investments are consistent with the Fund's investments objective. To the extent the manager determines there is a liquid institutional or other market for these securities, the Fund considers them to be liquid securities. An example is a restricted security that may be freely transferred among qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the 1933 Act), and for which a liquid institutional market has developed. See "Rule 144A securities" below. The board of trustees of the Fund will review any determination by the manager to treat a restricted security as liquid on an ongoing basis, including the manager's assessment of current trading activity and the availability of reliable price information. In determining whether a restricted security is properly considered a liquid security, the manager and the board will take into account the following factors: (i) the frequency of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential buyers; (iii) dealer undertakings to make a market in the security; and (iv) the nature of the security and marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). To the extent the Fund invests in restricted securities that are deemed liquid, the general level of illiquidity in the Fund may increase if qualified institutional buyers become uninterested in buying these securities or the market for these securities contracts.
The sale of restricted or illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than the sale of securities eligible for trading on national securities exchanges or in the OTC markets. Restricted securities often sell at a price lower than similar securities that are not subject to restrictions on resale.
The risk to the Fund in holding illiquid securities is that they may be more difficult to sell if the Fund wants to dispose of the security in response to adverse developments or in order to raise money for redemptions or other investment opportunities. Illiquid trading conditions may also make it more difficult for the Fund to realize a security's fair value.
INVESTMENT COMPANIES The Fund may invest in investment companies that invest principally in securities in which the Fund is authorized to invest. Section 12(d)(1) of the 1940 Act limits the Fund to: (i) investing not more than 10% of its total assets in the securities of other investment companies; (ii) investing not more than 5% of its total assets in the securities of any one investment company; and (iii) acquiring not more than 3% of the outstanding voting securities of the acquired investment company. To the extent the Fund invests in other investment funds, the Fund's shareholders will incur certain duplicative fees and expenses, including investment advisory fees. The Fund also can invest its cash balances in affiliated money market funds to the extent permitted by its investment policies and restrictions and exemptions granted under the 1940 Act.
CLOSED-END INVESTMENT COMPANIES. To encourage indirect foreign investment in their capital markets, some countries, including South Korea, Chile and India, have permitted the creation of closed-end investment companies. Pursuant to the restrictions stated above, shares of certain closed-end investment companies may at times be acquired only at market prices representing premiums to their net asset values. If the Fund acquires shares of closed-end investment companies, shareholders would bear both their proportionate share of expenses of the Fund (including management and advisory fees) and, indirectly, the expenses of such closed-end investment companies.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers. These loans may not exceed 33 1/3% of the value of the Fund's total assets (including all collateral as part of the Fund's total assets), measured at the time of the most recent loan. For each loan, the borrower must maintain with the Fund's custodian collateral (consisting of any combination of cash, securities issued by the U.S. government and its agencies and instrumentalities, or irrevocable letters of credit) with an initial market value at least equal to 102% of the market value of the domestic securities loaned (or 105% of the market value of foreign securities loaned), including any accrued interest thereon. Such collateral will be marked-to-market daily, and if the coverage falls below 100%, the borrower will be required to deliver additional collateral equal to at least 102% of the market value of the domestic securities loaned (or 105% of the foreign securities loaned). The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund also continues to receive any distributions paid on the loaned securities. The Fund may terminate a loan at any time and obtain the return of the securities loaned within the normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending of the securities, the manager intends to call the loaned securities to vote proxies, or to use other practicable and legally enforceable means to obtain voting rights, when the manager has knowledge that, in its opinion, a material event affecting the loaned securities will occur or the manager otherwise believes it necessary to vote. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral in the event of default or insolvency of the borrower. The Fund will loan its securities only to parties who meet creditworthiness standards approved by the Fund's board of trustees, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the loan.
LOANS TO AFFILIATED INVESTMENT COMPANIES Subject to the Fund's fundamental restrictions on lending, the Fund may also make loans to affiliated investment companies or other affiliated entities, pursuant to the Borrowing Order granted by the SEC in September 1999. See "Borrowing from affiliated investment companies" above for more information on the Borrowing Order. These lending transactions may include terms that are more favorable than those which would otherwise be available from lending institutions. The Fund may also, under certain conditions, lend cash to other funds in Franklin Templeton Investments at rates higher than those that the Fund would receive if the Fund loaned cash to banks through short-term lending transactions, such as repurchase agreements. The duration of interfund loans will be limited to the time required to receive payment for securities sold, but in no event more than seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. The Fund may not lend to another fund through the credit facility if the loan would cause its aggregate outstanding loans through the credit facility to exceed 5% of its net assets for equity funds or 7.5% of its net assets for taxable bond funds at the time of the loan. Also, the Fund's interfund loans to any one fund shall not exceed 5% of the lending fund's net assets.
REPURCHASE AGREEMENTS The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, including to satisfy redemption requests from shareholders, waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer 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 market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The market value of the collateral will be monitored and adjusted, as necessary, on an on-going basis to ensure that the collateral is at least equal to 100% of the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction.
A repurchase agreement with more than seven days to maturity is considered an illiquid security and is subject to the Fund's investment restriction on illiquid securities.
JOINT TRANSACTIONS. The Fund may participate in joint repurchase agreement arrangements with, and combine orders to buy or sell securities with orders from, other funds managed by the manager and its affiliates, to the extent permitted by exemptions granted by the SEC under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS The Fund may also enter into reverse repurchase agreements. Under a reverse repurchase agreement, the Fund agrees to sell a security in its portfolio and then to repurchase the security at an agreed-upon price, date and interest payment. Reverse repurchase agreements may be considered borrowing under the federal securities laws, and therefore the Fund must have at least 300% asset coverage (total assets less liabilities excluding the reverse repurchase agreement) for all borrowings by the Fund. The Fund will also segregate assets covering the reverse repurchase agreement by maintaining liquid assets segregated on the books of the Fund or its custodian, with a value equal to the value of the Fund's obligation under the agreement, including accrued interest. All assets segregated on the books of the Fund or its custodian are marked-to-market daily, and the Fund will increase the aggregate value of the assets, as necessary, to ensure that the assets are at least equal to the amount of the obligation under the agreement, including accrued interest. Although reverse repurchase agreements may be considered borrowings under the federal securities laws, the Fund does not treat them as borrowings for purposes of its investment restrictions, provided they are segregated on the books of the Fund or its custodian.
RULE 144A SECURITIES Subject to its liquidity limitation, the Fund may invest in certain unregistered securities which may be sold under Rule 144A of the 1933 Act (Rule 144A securities). Due to changing market or other factors, Rule 144A securities may be subject to a greater possibility of becoming illiquid than securities that have been registered with the SEC for sale. In addition, the Fund's purchase of Rule 144A securities may increase the level of the security's illiquidity, as some institutional buyers may become uninterested in purchasing such securities after the Fund has purchased them.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, the securities in which the Fund normally invests, or the economies of the countries where the Fund invests. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity.
Temporary defensive investments generally may include (1) unaffiliated or
affiliated money market funds and investment companies (to the extent allowed by
the 1940 Act or exemptions granted thereunder and the Fund's fundamental
investment policies and restrictions); (2) bank time deposits denominated in the
currency of any major nation with less than seven days remaining to maturity;
(3) bankers' acceptances; (4) certificates of deposits; (5) debt securities of
foreign companies; (6) floating rate securities (if money market fund eligible);
(7) repurchase agreements with banks and broker-dealers; (8) commercial paper
rated A-1 by S&P or Prime-1 by Moody's or, if unrated, issued by a company
which, at the date of investment, had an outstanding debt issue rated AAA or AA
by S&P or Aaa or Aa by Moody's; (9) U.S. government securities maturing in 13
months or less; and (10) a variety of other high quality short-term investments.
For additional information about these types of investments, see "Debt
securities" above.
POLICIES AND PROCEDURES REGARDING THE RELEASE OF PORTFOLIO HOLDINGS The Fund's overall policy with respect to the release of portfolio holdings is to release such information consistent with applicable legal requirements and the fiduciary duties owed to shareholders. Subject to the limited exceptions described below, the Fund will not make available to anyone non-public information with respect to its portfolio holdings, until such time as the information is made available to all shareholders or the general public.
For purposes of this policy, portfolio holdings information does not include aggregate, composite or descriptive information that does not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the applicable U.S. registered fund. Information excluded from the definition of portfolio holdings information generally includes, without limitation: (1) descriptions of allocations among asset classes, regions, countries or industries/sectors; (2) aggregated data such as average or median ratios, market capitalization, credit quality or duration; (3) performance attributions by industry, sector or country; or (4) aggregated risk statistics. Such information, if made available to anyone, will be made available to any person upon request, but, because such information is generally not material to investors, it may or may not be posted on the Fund's website. In addition, other information may also be deemed to not be portfolio holdings information if, in the reasonable belief of the Fund's Chief Compliance Officer (or his/her designee), the release of such information would not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the Fund.
Consistent with current law, the Fund releases complete portfolio holdings information each fiscal quarter through regulatory filings with no more than a 60-day lag.
In addition, a complete list of the Fund's portfolio holdings is released 30 calendar days after the end of each calendar quarter. Other portfolio holdings information, such as the Fund's top 10 holdings, may be released monthly on the Fund's website, no sooner than five days after the end of each month. Released portfolio holdings information can be viewed on franklintempleton.com.
To the extent that this policy would require the release of portfolio holdings information regarding a particular portfolio holding for the Fund, the portfolio manager for the Fund may request that the holding be withheld from the portfolio holdings information if the holding is the subject of ongoing purchase or sale orders/programs, or if the release of such portfolio holdings information would otherwise be sensitive or inappropriate due to liquidity and other market considerations, in each case as determined by the portfolio manager in consultation with the head of Global Investment Adviser Compliance (or his/her designee).
Exceptions to the portfolio holdings release policy will be made only when: (1) the Fund has a legitimate business purpose for releasing portfolio holdings information to selected third parties in advance of release to all shareholders or the general public; (2) the recipient is subject to a duty of confidentiality pursuant to a signed non-disclosure agreement; and (3) the release of such information would not otherwise violate the antifraud provisions of the federal securities laws or the Fund's fiduciary duties. The determination of whether the Fund has a legitimate business purpose for releasing portfolio holdings information in advance of release to all shareholders or the general public shall be made by the Fund's Chief Compliance Officer or his/her designee, following a request submitted in writing. The Chief Compliance Officer will report to the board of trustees on exceptions granted to the policy, along with an explanation of the legitimate business purpose that is served as a result of the exception.
The eligible third parties to whom portfolio holdings information may be released in advance of general release fall into the following categories: data consolidators, including rating agencies, fund rating/ranking services and other data providers; service providers to the Fund; shareholders of a fund to whom such fund has determined to process a redemption request in-kind based upon a determination by the Fund's portfolio manager and the Fund's Chief Compliance Officer (or his/her designee) that such redemption in-kind is in the best interests of the redeeming fund and its remaining shareholders; provided, however, that the portfolio holdings information so released in advance of the actual delivery of the redemption proceeds is limited to only that information reasonably necessary to allow the shareholder to prepare for receipt of the in-kind redemption proceeds; municipal securities brokers using the Investor Tools product; and certain entities approved by the Fund's Chief Compliance Officer (or his/her designee) on a case-by-case basis, in limited circumstances, including where the release of such information is required by foreign law or regulation (in these situations, the recipient will be requested to execute a non-disclosure agreement).
The specific entities to whom the Fund may provide portfolio holdings in advance of their release to the general public are:
o Bloomberg, Capital Access, CDA (Thomson Financial), FactSet, Fidelity Advisors, Lipper Inc., Morningstar, Standard & Poor's, Vestek, and Fidelity Management Trust Company, all of whom may receive portfolio holdings information 15 days after the quarter end
o Service providers to the Fund that receive portfolio holdings information from
time to time in advance of general release in the course of performing, or
to enable them to perform, services for the Fund, including: Custodian
Bank: Bank of New York; Independent Registered Public Accounting Firm:
PricewaterhouseCoopers LLP; Outside Fund Legal Counsel: Stradley Ronon
Stevens & Young, LLP; Independent Directors'/Trustees' Counsel: Bleakley,
Platt & Schmidt, LLP; Proxy Voting Services: Glass, Lewis & Co. and
RiskMetrics Group; Brokerage Analytical Services: Sanford Bernstein, Brown
Brothers Harriman, Royal Bank of Canada Capital Markets, JP Morgan Securities
Inc.; Financial Printers: RR Donnelley & Sons Company or GCOM Solutions, Inc.
In all cases, eligible third parties are required to execute a non-disclosure agreement. Non-disclosure agreements include the following provisions:
o The recipient agrees to keep confidential any portfolio holdings information received until such information either is released to the public or the release is otherwise approved by the head of Global Compliance (or his/her designee) or the Fund's Chief Compliance Officer (or his/her designee);
o The recipient agrees not to trade on the non-public information received; and
o The recipient agrees to refresh its representation as to confidentiality and abstention from trading upon request from Franklin Templeton Investments.
In no case does the Fund receive any compensation in connection with the arrangements to release portfolio holdings information to any of the above-described recipients of the information.
Several investment managers within Franklin Templeton Investments (F-T Managers) serve as investment managers to offshore funds that are registered or otherwise authorized for sale with foreign regulatory authorities. The release of portfolio holdings information for such offshore funds is excluded from the Fund's portfolio holdings release policy if such information is given to offshore banks, broker-dealers, insurance companies, registered investment managers and other financial institutions (offshore investment managers) with discretionary authority to select offshore funds on behalf of their clients. Because such offshore funds may from time to time invest in securities substantially similar to those of the Fund, there is the risk that such portfolio holdings information may be used to trade inappropriately against the Fund. To mitigate such risks, such information may only be disclosed for portfolio analytic purposes, such as risk analysis/asset allocation, and the offshore investment manager will be required to execute a non-disclosure agreement, whereby such offshore investment manager agrees to maintain such information as confidential, including limiting the dissemination of such information within its organization, and not to trade in any shares of any U.S. registered Franklin or Templeton fund, including the Fund.
In addition, some F-T Managers serve as investment managers to various bank commingled trusts maintained by a Franklin Templeton Investments trust company, to various Canadian institutional pooled funds, to separate accounts, and as sub-advisers to other mutual funds not within the Franklin Templeton Investments fund complex. Such trusts, pooled funds, accounts and other funds (collectively, "other accounts") are not subject to the Fund's portfolio holdings release policy. However, in some instances the portfolio holdings of such other accounts may be similar to and, in certain cases, nearly identical to those of a Franklin Templeton mutual fund, including the Fund. In the case of bank commingled trusts and Canadian institutional pooled funds, to mitigate risks that such portfolio holdings information may be used to trade inappropriately against a mutual fund, the recipient of such portfolio holdings information will be required to execute a non-disclosure agreement similar to the one described above for offshore funds. With respect to the other mutual funds not within the Franklin Templeton Investments fund complex, the sponsors of such funds may disclose the portfolio holdings of such funds at different times than the Fund discloses its portfolio holdings.
The Fund's portfolio holdings release policy and all subsequent amendments have been reviewed and approved by the Fund's board of trustees, and any other material amendments shall also be reviewed and approved by the board. The investment manager's compliance staff conducts periodic reviews of compliance with the policy and provides at least annually a report to the board of trustees regarding the operation of the policy and any material changes recommended as a result of such review. The investment manager's compliance staff also will report to the board on exceptions granted to the policy, along with an explanation of the legitimate business purpose of the Fund that is served as a result of the exception.
The Trust has a board of trustees. Each trustee will serve until that person resigns and/or a successor is elected and qualified. 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 Fund's day-to-day operations. The board also monitors the Fund to ensure that no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise.
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below.
INDEPENDENT BOARD MEMBERS
-------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF LENGTH OF OVERSEEN BY
BIRTH AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------------------------------------------------------------------------------
Harris J. Ashton Trustee Since 1992 139 Bar-S Foods (meat
(1932) packing company).
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank
holding company) (until 2002); and President, Chief Executive Officer and
Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
-------------------------------------------------------------------------------------------------------
Frank J. Crothers Trustee Since 2003 19 Fortis, Inc. utility
(1944) holding company),
500 East Broward Nuinsco Resources Limited
Blvd. (mineral exploration),
Suite 2100 Fidelity Merchant Bank &
Fort Lauderdale, FL Trust (Cayman) Limited
33394-3091 (financial services), C.A.
Bancorp Inc. (financial
services), Victory Nickel
Inc. (mineral
exploration), ABACO
Markets Limited (retail
distributors),and Belize
Electricity Limited
(electric utility).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean
Utilities Company Ltd.; Director, Provo Power Company Ltd.; director of various
other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic
Equipment & Power Ltd. (1977-2003).
-------------------------------------------------------------------------------------------------------
Edith E. Holiday Trustee Since 2001 139 Hess Corporation
(1952) (exploration and
500 East Broward refining of oil and
Blvd. gas), H.J. Heinz Company
Suite 2100 (processed foods and
Fort Lauderdale, FL allied products), RTI
33394-3091 International Metals, Inc.
(manufacture and
distribution of titanium),
Canadian National Railway
(railroad) and White
Mountains Insurance Group,
Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to
the President of the United States and Secretary of the Cabinet (1990-1993);
General Counsel to the United States Treasury Department (1989-1990); and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
-------------------------------------------------------------------------------------------------------------
David W. Niemiec Trustee Since 2005 19 Emeritus Corporation (assisted
(1949) living) and OSI
500 East Broward Pharmaceuticals, Inc.
Blvd. (pharmaceutical products).
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY,
Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking)
(1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial
Officer, Dillon, Read & Co. Inc. (1982-1997).
-------------------------------------------------------------------------------------------------------------
Frank A. Olson Trustee Since 2003 139 Hess Corporation (exploration
(1932) and refining of oil and
500 East Broward gas) and Sentient Jet
Blvd. (private jet service).
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of
the Board (1980-2000) and Chief Executive Officer (1977-1999)); and FORMERLY,
Chairman of the Board, President and Chief Executive Officer, UAL Corporation
(airlines).
-------------------------------------------------------------------------------------------------------------
Larry D. Thompson Trustee Since 2005 139 None
(1945)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary,
PepsiCo, Inc. (consumer products); and FORMERLY, Director, Delta Airlines
(aviation) (2003-2005) and Providian Financial Corp. (credit card provider)
(1997-2001); Senior Fellow of The Brookings Institution (2003-2004); Visiting
Professor, University of Georgia School of Law (2004); and Deputy Attorney
General, U.S. Department of Justice (2001-2003).
-------------------------------------------------------------------------------------------------------------
Constantine D. Trustee Since 2003 19 None
Tseretopoulos (1954)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit
organizations; and FORMERLY, Cardiology Fellow, University of Maryland
(1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center
(1982-1985).
-------------------------------------------------------------------------------------------------------------
Robert E. Wade (1946) Trustee Since 2006 33 El Oro and
500 East Broward Blvd. Exploration Co., p.l.c.
Suite 2100 (investments) and ARC
Fort Lauderdale, FL Wireless Solutions, Inc.
33394-3091 (wireless components and
network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
-------------------------------------------------------------------------------------------------------------
|
INTERESTED BOARD MEMBERS AND OFFICERS
-------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, YEAR OF LENGTH OF OVERSEEN BY
BIRTH AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------------------------------------------------------------------------------
**Charles B. Johnson Trustee, Trustee and 139 None
(1933) Chairman Vice President
One Franklin Parkway of the since 1992 and
San Mateo, CA Board and Chairman of
94403-1906 Vice President the Board
since 1995
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Director, Templeton Worldwide, Inc.; and officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 42 of the investment companies in Franklin
Templeton Investments.
----------------------- --------------------- ---------------- ----------------- ----------------------------
**Gregory E. Johnson Trustee Since April 91 None
(1961) 2007
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.;
President, Templeton Worldwide, Inc.; Director, Templeton Asset Management Ltd.;
and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 33 of the investment companies
in Franklin Templeton Investments.
-------------------------------------------------------------------------------------------------------------
James M. Davis Chief Compliance Chief Not Applicable Not Applicable
(1952) Officer and Vice Compliance
One Franklin Parkway President - AML Officer since
San Mateo, CA Compliance 2004 and Vice
94403-1906 President -
AML Compliance
since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director of
Compliance, Franklin Resources, Inc. (1994-2001).
-------------------------------------------------------------------------------------------------------------
Jimmy D. Gambill Senior Vice President Since 2002 Not Applicable Not Applicable
(1947) and Chief Executive
500 East Broward Officer-Finance and
Blvd. Administration
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton
Worldwide, Inc.; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
-------------------------------------------------------------------------------------------------------------
David P. Goss (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and
director of one of the subsidiaries of Franklin Resources, Inc.; and officer of
46 of the investment companies in Franklin Templeton Investments.
-------------------------------------------------------------------------------------------------------------
Rupert H. Johnson, Vice President Since 1996 Not Applicable Not Applicable
Jr. (1940)
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Director, Franklin Advisers, Inc. and Templeton Worldwide, Inc.; Senior
Vice President, Franklin Advisory Services, LLC; and officer and/or director or
trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 44 of the investment companies in Franklin Templeton
Investments.
-------------------------------------------------------------------------------------------------------------
John R. Kay (1940) Vice President Since 1994 Not Applicable Not Applicable
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin
Templeton Services, LLC; and officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 32 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Vice President and Controller, Keystone
Group, Inc.
-------------------------------------------------------------------------------------------------------------
Christopher J. President and Chief Since 2002 Not Applicable Not Applicable
Molumphy (1962) Executive Officer -
One Franklin Parkway Investment
San Mateo, CA Management
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Director, Franklin Advisers, Inc.; and officer of
some of the other subsidiaries of Franklin Resources, Inc. and of six of the
investment companies in Franklin Templeton Investments.
-------------------------------------------------------------------------------------------------------------
Robert C. Rosselot Secretary Since 2004 Not Applicable Not Applicable
(1960)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant
Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton
Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary
Trust International of the South; and officer of 14 of the investment companies
in Franklin Templeton Investments.
-------------------------------------------------------------------------------------------------------------
Gregory R. Seward Treasurer Since 2004 Not Applicable Not Applicable
(1956)
500 East Broward
Blvd.
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Vice
President, JPMorgan Chase (2000-2004) and American General Financial Group
(1991-2000).
-------------------------------------------------------------------------------------------------------------
Craig S. Tyle (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA
94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer
of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the
investment companies in Franklin Templeton Investments; and FORMERLY, Partner,
Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
-------------------------------------------------------------------------------------------------------------
Galen Vetter (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Officer and Chief
Blvd. Accounting Officer
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the
other subsidiaries of Franklin Resources, Inc. and of 46 of the investment
companies in Franklin Templeton Investments; and FORMERLY, Managing Director,
RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
-------------------------------------------------------------------------------------------------------------
|
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's investment manager and distributor. Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this SAI. It is
possible that after this date, information about officers may change.
The Trust's noninterested board members constitute the sole noninterested board members of 14 funds in the Franklin Templeton Investments complex for which each noninterested board member currently is paid a $145,000 annual retainer fee, together with a $7,000 per meeting fee for attendance at each board meeting, a portion of which fees are allocated to the Trust. Board members who serve on the Audit Committee of the Trust and such other funds receive a flat fee of $3,000 per Committee meeting attended in person and $2,000 per telephonic meeting, a portion of which is allocated to the Trust. David W. Niemiec, who serves as chairman of the Audit Committee of the Trust and such other funds receives an additional fee of $10,000 per year, a portion of which is allocated to the Trust. Members of the Committee are not separately compensated for any committee meeting held on the day of a regularly scheduled board meeting. The foregoing fee arrangements went into effect June 1, 2007, and the following table reflects fees paid prior to such date under arrangements then in effect.
NUMBER OF
BOARDS IN
FRANKLIN
TEMPLETON
TOTAL FEES TOTAL FEES INVESTMENTS
RECEIVED RECEIVED FROM ON
FROM THE FRANKLIN TEMPLETON WHICH EACH
NAME TRUST(1) ($) INVESTMENTS(2) ($) SERVES(3)
-------------------------------------------------------------------------------
Harris J. Ashton 6,365 409,510 42
Frank J. Crothers 7,842 155,950 14
Edith E. Holiday 7,698 422,501 42
David W. Niemiec 7,843 155,950 14
Frank A. Olson 8,013 373,818 42
Larry D. Thompson 7,698 147,950 42
Constantine D. Tseretopoulos 7,842 155,950 14
Robert E. Wade(4) 7,698 354,362 18
|
1. For the fiscal year ended August 31, 2007.
2. For the calendar year ended December 31, 2006.
3. We base the number of boards on the number of U.S. registered investment
companies in Franklin Templeton Investments. This number does not include the
total number of series or portfolios within each investment company for which
the board members are responsible.
4. Mr. Wade also is an independent board member of Franklin Mutual Series Fund
Inc. and may, in the future, receive payments pursuant to a discontinued
retirement plan that generally provides payments to independent board members
who have served seven years or longer for such fund.
Noninterested board members are reimbursed for expenses incurred in connection with attending board meetings and are paid pro rata by each fund in Franklin Templeton Investments 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 Franklin Templeton Investments. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) 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 Franklin Templeton funds, as is consistent with their individual financial goals. In February 1998, this policy was formalized through the 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 (excluding committee fees) 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 (excluding committee fees) in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual retainer and regular board meeting fees paid to 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.
The following tables provide the dollar range of equity securities beneficially owned by the board members of the Trust on December 31, 2006.
INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
FUNDS OVERSEEN BY THE BOARD
MEMBER IN THE FRANKLIN
NAME OF BOARD MEMBER TEMPLETON FUND COMPLEX
-------------------------------------------------------------------------------
Harris J. Ashton Over $100,000
-------------------------------------------------------------------------------
Frank J. Crothers Over $100,000
-------------------------------------------------------------------------------
Edith E. Holiday Over $100,000
-------------------------------------------------------------------------------
David W. Niemiec Over $100,000
-------------------------------------------------------------------------------
Frank A. Olson Over $100,000
-------------------------------------------------------------------------------
Larry D. Thompson Over $100,000
-------------------------------------------------------------------------------
Constantine D. Tseretopoulos Over $100,000
-------------------------------------------------------------------------------
Robert E. Wade Over $100,000
-------------------------------------------------------------------------------
|
INTERESTED BOARD MEMBERS
------------------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
FUNDS OVERSEEN BY THE BOARD
MEMBER IN THE FRANKLIN
NAME OF BOARD MEMBER TEMPLETON FUND COMPLEX
-------------------------------------------------------------------------------
Charles B. Johnson Over $100,000
-------------------------------------------------------------------------------
Gregory E. Johnson Over $100,000
-------------------------------------------------------------------------------
BOARD COMMITTEES The board maintains two standing committees: the Audit
|
Committee and the Nominating Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent registered public accounting firm (auditors), including evaluating their independence and meeting with such auditors to consider and review matters relating to the Fund's financial reports and internal controls. The Audit Committee is comprised of the following independent trustees of the Trust: Frank J. Crothers, David W. Niemiec, Frank A. Olson and Constantine D. Tseretopoulos. The Nominating Committee is comprised of the following independent trustees of the Trust: Frank J. Crothers, Edith E. Holiday and Frank A. Olson.
The Nominating Committee is responsible for selecting candidates to serve as board members and recommending such candidates (a) for selection and nomination as independent board member by the incumbent independent board member and the full board; and (b) for selection and nomination as interested board members by the full board.
When the board has or expects to have a vacancy, the Nominating Committee receives and reviews information on individuals qualified to be recommended to the full board as nominees for election as board members, including any recommendations by "Qualifying Fund Shareholders" (as defined below). To date, the Nominating Committee has been able to identify, and expects to continue to be able to identify, from its own resources an ample number of qualified candidates. The Nominating Committee, however, will review recommendations from Qualifying Fund Shareholders to fill vacancies on the board if these recommendations are submitted in writing and addressed to the Nominating Committee at the Trust's offices at P.O. Box 33030, St. Petersburg, FL 33733-8030 and are presented with appropriate background material concerning the candidate that demonstrates his or her ability to serve as a board member, including as an independent board member, of the Trust. A Qualifying Fund Shareholder is a shareholder who (i) has continuously owned of record, or beneficially through a financial intermediary, shares of the Fund having a net asset value of not less than two hundred and fifty thousand dollars ($250,000) during the 24-month period prior to submitting the recommendation; and (ii) provides a written notice to the Nominating Committee containing the following information: (a) the name and address of the Qualifying Fund Shareholder making the recommendation; (b) the number of shares of the Fund which are owned of record and beneficially by such Qualifying Fund Shareholder and the length of time that such shares have been so owned by the Qualifying Fund Shareholder; (c) a description of all arrangements and understandings between such Qualifying Fund Shareholder and any other person or persons (naming such person or persons) pursuant to which the recommendation is being made; (d) the name, age, date of birth, business address and residence address of the person or persons being recommended; (e) such other information regarding each person recommended by such Qualifying Fund Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated by the board; (f) whether the shareholder making the recommendation believes the person recommended would or would not be an "interested person" of the Trust, as defined in the 1940 Act; and (g) the written consent of each person recommended to serve as a board member of the Trust if so nominated and elected/appointed.
The Nominating Committee may amend these procedures from time to time, including the procedures relating to the evaluation of nominees and the process for submitting recommendations to the Nominating Committee.
During the fiscal year ended August 31, 2007, the Audit Committee met three times; the Nominating Committee met four times.
The Trust's board of trustees has delegated to the manager the task of ensuring that regulatory guidelines governing the fair valuation for securities are applied to the Fund and that the required level of liquidity is maintained. The manager has formed a Valuation & Liquidity Oversight Committee (VLOC) to oversee these obligations. The VLOC oversees and administers the policies and procedures governing fair valuation and liquidity determination of securities. The VLOC meets monthly to review and approve fair value and liquidity reports and conduct other business, and meets whenever necessary to review potential significant market events and take appropriate steps to adjust valuations in accordance with established policies. The VLOC provides regular reports that document its activities to the board of trustees for its review and approval of pricing determinations at scheduled meetings. VLOC meeting minutes are regularly submitted to the board of trustees for their review.
The Trust's policies and procedures governing fair valuation and liquidity determination of securities have been initially reviewed and approved by the board of trustees and any material amendments will also be reviewed and approved by the board. The manager's compliance staff conducts periodic reviews of compliance with the policies and provides at least annually a report to the board of trustees regarding the operation of the policies and any material changes recommended as a result of such review.
The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group (RiskMetrics), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. In addition, the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm, to receive analyses and vote recommendations on the shareholder meetings of publicly held U.S. companies. Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from RiskMetrics, Glass Lewis or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors/trustees and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. Efforts are made to resolve all conflicts in the interests of the manager's clients. Material conflicts of interest are identified by the Proxy Group based upon analyses of client, broker and vendor lists, information periodically gathered from directors and officers, and information derived from other sources, including public filings. In situations where a material conflict of interest is identified, the Proxy Group will refer the matter, along with the recommended course of action by the manager to an interdepartmental Proxy Review Committee (which may include portfolio managers and/or research analysts employed by the manager), for evaluation and voting instructions. The Proxy Review Committee may defer to the voting recommendation of RiskMetrics, Glass Lewis or those of another independent third party provider of proxy services; or send the proxy directly to the Fund with a recommendation regarding the vote for approval. Where the Proxy Review Committee refers a matter to the Fund, it may rely upon the instructions of a representative of the Fund, such as the board of trustees or a committee of the board.
The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis, taking into consideration factors such as the company's corporate governance guidelines or provisions and performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high profile accounting scandals, the manager will closely scrutinize the role and performance of auditors. On a case-by-case basis, the manager will examine proposals relating to non-audit relationships and non-audit fees. The manager will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The manager believes that executive compensation should be directly linked to the performance of the company. The manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the RiskMetrics quantitative model utilized to assess such plans and/or the Glass Lewis evaluation of the plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region.
The manager will attempt to process every proxy it receives for all domestic and foreign issuers. However, there may be situations in which the manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. If a security is on loan, the manager may determine that it is not in the best interests of the Fund to recall the security for voting purposes. Also, the manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records will be available online at franklintempleton.com and posted on the SEC website at www.sec.gov. The proxy voting records are updated each year by August 31 to reflect the most recent 12-month period ended June 30.
MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisers, Inc. The manager is a wholly owned subsidiary of 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 manager and its affiliates have offices in Argentina, Australia, Austria, Bahamas, Belgium, Brazil, Canada, China, France, Germany, Holland (the Netherlands), Hong Kong, India, Ireland, Italy, Japan, Luxembourg, Mexico, Poland, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, United Arab Emirates, United Kingdom and United States.
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 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. Because the manager is a subsidiary of a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, federal regulations applicable to FHCs may limit or restrict the Fund's ability to acquire or hold a position in a given security when it might otherwise be advantageous for the Fund to acquire or hold that security.
The Fund, its manager and principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its manager and principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the Securities and Exchange Commission (SEC).
MANAGEMENT FEES The Fund pays the manager a fee equal to an annual rate of:
o 0.50% of the value of net assets up to and including $200 million;
o 0.45% of the value of net assets over $200 million up to and including $1.3 billion;
o 0.40% of the value of net assets in excess of $1.3 billion.
The fee is calculated daily and paid monthly according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee.
PORTFOLIO MANAGERS This section reflects information about the portfolio manager as of August 31, 2007:
The following table shows the number of other accounts managed by the portfolio manager and the total assets in the accounts managed within each category:
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ASSETS OF
OTHER ASSETS OF
NUMBER OF REGISTERED OTHER POOLED ASSETS OF
OTHER INVESTMENT NUMBER OF INVESTMENT NUMBER OTHER
REGISTERED COMPANIES OTHER POOLED VEHICLES OF ACCOUNTS
INVESTMENT MANAGED INVESTMENT MANAGED OTHER MANAGED
COMPANIES (X$1 VEHICLES (X $1 ACCOUNTS (X $1
NAME MANAGED MILLION) MANAGED(1) MILLION)(1) MANAGED(1) MILLION)(1)
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Michael
Hasenstab 10 10,454.6 19 14,477.6 N/A N/A
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1. The various pooled investment vehicles and accounts listed are managed by a team of investment professionals. Accordingly, the individual manager listed would not be solely responsible for managing such listed amounts.
Portfolio managers that provide investment services to the Fund may also provide services to a variety of other investment products, including other funds, institutional accounts and private accounts. The advisory fees for some of such other products and accounts may be different than that charged to the Fund and may include performance based compensation. This may result in fees that are higher (or lower) than the advisory fees paid by the Fund. As a matter of policy, each fund or account is managed solely for the benefit of the beneficial owners thereof. As discussed below, the separation of the trading execution function from the portfolio management function and the application of objectively based trade allocation procedures helps to mitigate potential conflicts of interest that may arise as a result of the portfolio managers managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts may also give rise to potential conflicts of interest if the funds and other accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. The manager seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment strategies that are used in connection with the management of the Fund. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which may minimize the potential for conflicts of interest. As noted above, the separate management of the trade execution and valuation functions from the portfolio management process also helps to reduce potential conflicts of interest. However, securities selected for funds or accounts other than the Fund may outperform the securities selected for the Fund. Moreover, if a portfolio manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to an allocation of that opportunity across all eligible funds and other accounts. The manager seeks to manage such potential conflicts by using procedures intended to provide a fair allocation of buy and sell opportunities among funds and other accounts.
The structure of a portfolio manager's compensation may give rise to potential conflicts of interest. A portfolio manager's base pay and bonus tend to increase with additional and more complex responsibilities that include increased assets under management. As such, there may be an indirect relationship between a portfolio manager's marketing or sales efforts and his or her bonus. Finally, the management of personal accounts by a portfolio manager may give rise to potential conflicts of interest. While the funds and the manager have adopted a code of ethics which they believe contains provisions reasonably necessary to prevent a wide range of prohibited activities by portfolio managers and others with respect to their personal trading activities, there can be no assurance that the code of ethics addresses all individual conduct that could result in conflicts of interest. The manager and the Fund have adopted certain compliance procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee that such procedures will detect each and every situation where a conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is competitively positioned to attract, retain and motivate top-quality investment professionals. Portfolio managers receive a base salary, a cash incentive bonus opportunity, an equity compensation opportunity, and a benefits package. Portfolio manager compensation is reviewed annually and the level of compensation is based on individual performance, the salary range for a portfolio manager's level of responsibility and Franklin Templeton guidelines. Portfolio managers are provided no financial incentive to favor one fund or account over another. Each portfolio manager's compensation consists of the following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of the portfolio manager with those of the Fund's shareholders. Each portfolio manager is eligible to receive an annual bonus. Bonuses generally are split between cash (50% to 65%) and restricted shares of Franklin Resources stock (17.5% to 25%) and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is intended to build a vested interest of the portfolio manager in the financial performance of both Franklin Resources and mutual funds advised by the manager. The bonus plan is intended to provide a competitive level of annual bonus compensation that is tied to the portfolio manager achieving consistently strong investment performance, which aligns the financial incentives of the portfolio manager and Fund shareholders. The Chief Investment Officer of the manager and/or other officers of the manager, with responsibility for the Fund, have discretion in the granting of annual bonuses to portfolio managers in accordance with Franklin Templeton guidelines. The following factors are generally used in determining bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to the historic investment performance of all accounts managed by the portfolio manager over the 1, 3 and 5 preceding years measured against risk benchmarks developed by the fixed income management team. The pre-tax performance of each fund managed is measured relative to a relevant peer group and/or applicable benchmark as appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions of the portfolio manager to the manager's business and the investment management team, including business knowledge, productivity, customer service, creativity, and contribution to team goals, are evaluated in determining the amount of any bonus award.
o RESPONSIBILITIES. The characteristics and complexity of funds managed by the portfolio manager are factored in the manager's appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers may also be awarded restricted shares or units of Franklin Resources stock or restricted shares or units of one or more mutual funds, and options to purchase common shares of Franklin Resources stock. Awards of such deferred equity-based compensation typically vest over time, so as to create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio managers to invest in the funds they manage. Exceptions arise when, for example, a fund is closed to new investors or when tax considerations or jurisdictional constraints cause such an investment to be inappropriate for the portfolio manager.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, LLC (FT Services) has an agreement with the Fund to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of 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 0.20% of the Fund's average daily net assets.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin Templeton Investor Services, LLC (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 3344 Quality Drive, Rancho Cordova, CA 95670-7313. Please send all correspondence to Investor Services at P.O. Box 33030, St. Petersburg, FL 33733-8030.
Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund.
Investor Services may also pay servicing fees, that will be reimbursed by the Fund, in varying amounts to certain financial institutions (primarily to help offset their costs associated with client account maintenance support, statement preparation and transaction processing) that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an IRS-recognized tax-deferred savings plan (including Employer Sponsored Retirement Plans and Section 529 Plans) for which the institution, or its affiliate, provides participant level recordkeeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund for services provided in support of Beneficial Owners and NSCC networking system accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 100 Church Street, New York, NY 10286, acts as custodian of the Fund's securities and other assets. As foreign custody manager, the bank selects and monitors foreign sub-custodian banks, selects and evaluates non-compulsory foreign depositories, and furnishes information relevant to the selection of compulsory depositories.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004, is the Fund's independent registered public accounting firm. The Independent Registered Public Accounting Firm audits the financial statements included in the Fund's Annual Report to Shareholders.
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 to the underwriter, and purchases from dealers will include a spread between the bid and ask price. 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 an accurate dollar value on the special execution or on the research services the manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions 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 from many securities firms. The receipt of these products and services does not reduce the manager's research activities in providing investment advice to the Fund.
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.
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 accounts 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.
MULTICLASS DISTRIBUTIONS The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share will differ, however, generally due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the form of dividends and 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. If you are a taxable investor, any income dividends (other than qualified dividends) the Fund pays are taxable to you as ordinary income. A portion of the income dividends paid to you may be qualified dividends eligible to be taxed at reduced rates. A portion of the income dividends may also be designated as interest-related or short-term capital dividends that will not be subject to nonresident alien withholding for most non-U.S. investors. See the section on "Non-U.S. investors" for more information on interest-related and short-term capital gain dividends.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may realize capital gains and losses on the sale of its portfolio securities.
Distributions of short-term capital gains are taxable to you as ordinary income. Distributions of long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund.
Capital gain dividends and any net long-term capital gains you realize from the sale of Fund shares are subject to a maximum rate of tax of 15% for individuals (5% for individuals in the 10% and 15% federal income tax brackets). For individuals in the 10% and 15% tax brackets, the rate for net long-term capital gains realized in calendar years 2008 through 2010 is further reduced from 5% to 0%. These reduced rates of taxation of capital gain dividends and net long-term capital gains are now scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
RETURNS OF CAPITAL If the Fund's distributions exceed its taxable income and realized capital gains for a taxable year, all or a portion of the distributions made in that taxable year may be characterized as a return of capital to you. A return of capital distribution will generally not be taxable, but will reduce the cost basis that you have in your Fund shares and will result in a higher capital gain or in a lower capital loss when you sell your shares. Any return of capital in excess of the basis in your Fund shares, however, will be taxable as a capital gain.
INVESTMENTS IN FOREIGN SECURITIES The next five paragraphs describe tax considerations that are applicable to the Fund's investments in foreign securities.
PASS-THROUGH OF FOREIGN TAX CREDITS. The Fund may be subject to foreign withholding taxes on income from certain foreign securities. If more than 50% of the Fund's total assets at the end of a fiscal year is invested in foreign securities, 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 Fund may report more taxable income to you than it actually distributes. You will then be entitled either to deduct your share of these taxes in computing your taxable income, or to claim a foreign tax credit for these taxes against your U.S. federal income tax (subject to limitations for certain shareholders). The Fund will provide you with the information necessary to claim this deduction or credit on your personal income tax return if it makes this election.
You should be aware that your use of qualified dividends may reduce the otherwise available foreign tax credits on your federal income tax return. Shareholders in these circumstances should talk with their personal tax advisors about their foreign tax credits and the procedures that they should follow to claim these credits on their personal income tax returns.
EFFECT OF FOREIGN DEBT 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 on the sale of debt securities generally are treated as ordinary losses. These gains when distributed are taxable to you as ordinary income, and any losses reduce the Fund's ordinary income otherwise available for distribution to you. THIS TREATMENT COULD INCREASE OR DECREASE 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.
PFIC SECURITIES. The Fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (PFICs). When investing in PFIC securities, the Fund intends to mark-to-market these securities and recognize any gains at the end of its fiscal and excise (described below) tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that the Fund is required to distribute, even though it has not sold the securities. If the Fund is unable to identify an investment as a PFIC security and thus does not make a mark-to-market election, the Fund may be subject to U.S. federal income tax on a portion of any "excess distribution" or gain from the sale of the PFIC shares even if such income is distributed to you as a taxable dividend. Additional charges in the nature of interest may be imposed on the Fund on any deferred taxes arising from such income or gains.
You should also be aware that a Fund's designation of a foreign security as a PFIC security will cause the income dividends of any designated securities to fall outside of the definition of qualified foreign corporation dividends. These dividends generally will not qualify for the reduced rate of taxation on qualified dividends when distributed to you by the Fund.
INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of the amount of your income dividends and capital gain 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. The amount of income dividends designated by the Fund, consisting of qualified dividend income (which is relevant to U.S. investors) and interest-related and short-term capital gain dividends (which are relevant to non-U.S. investors) may exceed the total amount of income dividends paid. These designations will not result in more income being reported to you, but rather will allow the Fund to make its designations in a manner that is more tax efficient to both U.S. and non-U.S. investors. If you have not owned your Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income, qualified dividends, or capital gain distributions (distributions of net long-term capital gains), a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund. If you are a non-U.S. investor, the Fund may also designate and distribute to you as an interest-related or short-term capital gain dividend, a percentage of income that may not be equal to the actual amount of each of these types of income earned during the period of your investment in the Fund. Distributions declared in December to shareholders of record in such month, but paid in January, are taxable to you as if paid in December.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund intends to qualify and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (Code). As a regulated investment company, the Fund generally will pay no federal income tax on the income and gains it distributes to you. The board reserves the right not to elect regulated investment company status for the Fund if it determines this course of action to be beneficial to shareholders. In that case, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you would be taxed as dividend income to the extent of the Fund's earnings and profits.
REQUIRED DISTRIBUTIONS. To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the 12-month period
ending October 31; and
o 100% of any undistributed amounts of these categories of income or gain from
the prior year.
The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes.
TAX REPORTING FOR INCOME AND EXCISE TAX YEARS. Because the periods for measuring a regulated investment company's income are different for income (determined on a fiscal year basis) and excise tax years (determined as noted above), special rules are required to calculate the amount of income earned in each period, and the amount of earnings and profits needed to support that income. For example, if the Fund uses the excise tax period ending on October 31 as the measuring period for calculating and paying out capital gain net income and realizes a net capital loss between November 1 and the end of the Fund's fiscal year, it will likely have insufficient earnings and profits for its taxable year to support its required excise tax distribution. Accordingly, the Fund is permitted to elect to treat its realized capital loss (its "post-October loss") as occurring on the first day of its next fiscal year. Because these rules are not entirely clear, the Fund may be required to interpret the post-October loss and other rules relating to these different year-ends to determine its taxable income and capital gains. The Fund's reporting of income and its allocation between different taxable and excise tax years may be challenged by the Internal Revenue Service (IRS), possibly resulting in adjustments in the income reported by the Fund on its tax returns and/or by the Fund to you on your year-end tax statements.
SALES OF FUND SHARES Sales and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton fund, the IRS requires you to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize is a capital gain or loss, and is long-term or short-term, depending on how long you owned your shares.
SALES AT A LOSS WITHIN SIX MONTHS OF PURCHASE. Any loss incurred on the sale or exchange of Fund shares owned for six months or less is 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.
WASH SALES. All or a portion of any loss that you realize on the sale of your Fund shares is disallowed to the extent that you buy other shares in the Fund within 30 days before or after your sale. Any loss disallowed under these rules is added to your tax basis in the new shares.
DEFERRAL OF BASIS. (CLASS A ONLY) In reporting gain or loss on the sale of your Fund shares, you may be required to adjust your basis in the shares you sell under the following circumstances:
IF:
o In your original purchase of Fund shares, you received a reinvestment right
(the right to reinvest your sales proceeds at a reduced or with no
SALES charge), and
o You sell some or all of your original shares within 90 days of their purchase,
and
o You reinvest the sales proceeds in the Fund or in another Franklin Templeton
fund, and the sales charge that would otherwise apply is reduced or
eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the sales charge that you paid for your original shares is excluded from your tax basis in the shares sold and added to your tax basis in the new shares.
TAX CERTIFICATION AND BACKUP WITHHOLDING Tax laws require that you certify your tax information when you become an investor in the Fund. For U.S. residents and resident aliens, this certification is made on IRS Form W-9. Under these laws, the Fund must withhold a portion of your taxable distributions and sales proceeds unless you:
o provide your correct Social Security or taxpayer identification number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 28% of any distributions or proceeds paid.
Non-U.S. investors have special U.S. tax certification requirements. See the section below entitled "Tax certification and backup withholding as applied to non-U.S. Investors."
U.S. GOVERNMENT SECURITIES The income earned on certain U.S. government securities is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free status to mutual fund dividends paid to you from interest earned on these securities, subject in some states to minimum investment or reporting requirements that must be met by a fund. The income on Fund investments in certain securities, such as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Ginnie Mae and Fannie Mae securities), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations.
QUALIFIED DIVIDENDS For individual shareholders, a portion of the dividends paid by the Fund may be qualified dividend income eligible for taxation at the 15% long-term capital gain rate (5% for individuals in the 10% and 15% federal rate brackets). For individuals in the 10% and 15% tax brackets, the rate for qualified dividends received in calendar years 2008 through 2010 is further reduced from 5% to 0%.
In general, income dividends from dividends received by the Fund from domestic corporations and qualified foreign corporations will be permitted this favored federal tax treatment. Income dividends from interest earned by the Fund on debt securities and dividends received from unqualified foreign corporations will continue to be taxed at the higher ordinary income tax rates.
After the close of its fiscal year, the Fund will designate the portion of its ordinary dividend income that meets the definition of qualified dividend income taxable at reduced rates. Because the Fund's currently has a substantial percentage of its investment assets in debt securities, it is anticipated that this percentage of qualified dividend income will be small.
SUNSETTING OF PROVISIONS. The special provisions dealing with qualified dividend income, and the reduced rate of taxation of long-term capital gains that were adopted as part of the 2003 Tax Act and that have been recently extended by the 2005 Tax Increase Prevention and Reconciliation Act (2005 Tax Act) are scheduled to sunset on December 31, 2010, unless extended or made permanent before that date. If the 2003 Tax Act changes as extended in 2005 do sunset in 2010, the rules on taxation of CAPITAL GAINS that were in effect prior to the 2003 Tax Act, including provisions for the taxation of five-year gains, will again be effective for 2011 and later years.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS For corporate shareholders, a portion of the dividends paid by the Fund may qualify for the dividends-received deduction. This deduction generally is available to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations. Because the income of the Fund primarily is derived from investments in foreign rather than domestic securities, and from investments earning interest rather than dividend income, generally none or only a small percentage of its income dividends will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities that could require it to adjust the amount, timing and/or tax character (ordinary or capital) of gains and losses it recognizes on these investments. This, in turn, could affect the amount, timing and/or tax character of income distributed to you. For example,
DERIVATIVES. The Fund is permitted to invest in certain derivative contracts, including options, futures, forwards or foreign currency contracts. If it makes these investments, it could be required to mark-to-market these contracts and realize any unrealized gains and losses at its fiscal year end even though it continues to hold the contracts. Under these rules, gains or losses on the contracts generally would be treated as 60% long-term and 40% short-term gains or losses, but gains or losses on certain foreign currency contracts would be treated as ordinary income or losses. In determining its net income for excise tax purposes, the Fund also would be required to mark-to-market these contracts annually as of October 31 (for capital gain net income and ordinary income arising from certain foreign currency contracts) and to realize and distribute any resulting income and gains.
CONSTRUCTIVE SALES. The Fund's entry into an option or other contract could be treated as the "constructive sale" of an "appreciated financial position," causing it to realize gain, but not loss, on the position.
SECURITIES LENDING TRANSACTIONS. The Fund's entry into securities lending transactions may cause the replacement income earned on the loaned securities to fall outside of the definition of qualified dividend income. This replacement income generally will not be eligible for reduced rates of taxation on qualified dividend income, and, to the extent that debt securities are loaned, will generally not qualify as qualified interest income for foreign withholding tax purposes.
TAX STRADDLES. The Fund's investment in options, futures, forwards, foreign currency contracts, actively traded stock or a position with respect to substantially similar or related property in connection with certain hedging transactions could cause the Fund to hold offsetting positions in securities. Likewise, the Fund is authorized to invest in spread, collar and straddle transactions. If the Fund invests in these securities, or if its risk of loss with respect to specific securities in its portfolio is substantially diminished by the fact that it holds other securities in a spread, collar, straddle or similar type of transaction, the Fund could be deemed to have entered into a tax "straddle" or to hold a "successor position" that would require any loss realized by it to be deferred for tax purposes.
STRUCTURED INVESTMENTS. The Fund is permitted to invest in instruments that are designed to restructure the investment characteristics of particular groups of securities. For example, the Fund is permitted to invest in structured notes that are designed to give the holder a specific portion of the principal or interest payments that would otherwise be payable in the case of a traditional debt security. The Fund also could invest in a security that is backed by an interest in an underlying group of securities, or is accompanied by a put or other feature that adjusts the burdens and benefits of ownership of the security. The Fund is also permitted to invest in swap contracts that are designed to give the holder a specific return (on a net basis) than would otherwise be payable in the case of a traditional security. Swap contracts can also involve exchanges in fixed and variable interest rates, foreign currencies or baskets of securities that mimic certain other securities or indices. By investing in these securities, the Fund could be subject to tax consequences that differ from those of an investment in traditional debt or equity securities.
SECURITIES PURCHASED AT DISCOUNT. The Fund is permitted to invest in securities issued or purchased at a discount, such as zero coupon, deferred interest or payment-in-kind (PIK) bonds, that could require it to accrue and distribute income not yet received. The Fund may also invest in distressed mortgage obligations or in other debt obligations in or pending default. These obligations may not pay current interest, but may be subject to tax rules that require the Fund to currently accrue income for tax reporting, and then distribute that income to Fund shareholders to meet its fund qualification and excise tax distribution requirements. If it invests in these securities, the Fund could be required to sell securities in its portfolio that it otherwise might have continued to hold in order to generate sufficient cash to make these distributions.
EACH OF THESE INVESTMENTS BY THE FUND IN COMPLEX SECURITIES IS SUBJECT TO SPECIAL TAX RULES THAT COULD AFFECT THE AMOUNT, TIMING AND/OR TAX CHARACTER OF INCOME REALIZED BY THE FUND AND DISTRIBUTED TO YOU.
EXCESS INCLUSION INCOME OF CERTAIN TAX-EXEMPT SHAREHOLDERS FROM AN INVESTMENT BY THE FUND IN REITS AND REMIC RESIDUAL INTERESTS. Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements (401(k)s) and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their unrelated business taxable income (UBTI). Under current law, the Fund serves to block UBTI from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if: (i) the Fund invests in a residual interest in a real estate mortgage investment conduit (REMIC) or in a Real Estate Investment Trusts (REITs) that holds a REMIC residual interest (income that is attributable to these residual interests is referred to in the Code as an "excess inclusion income") or (ii) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). In addition, if a REIT, that issues debt securities with more than one maturity, owns a "taxable mortgage pool" within the meaning of Code Section 7701(i) as a portion of the REIT's assets, or as a REIT subsidiary, then a portion of the REIT's income may be treated as if it were an excess inclusion from a REMIC. This income generally is required to be allocated by the Fund to you in proportion to the dividends paid to you with the same tax consequences as if you received the excess inclusion income directly. If you are a tax-exempt shareholder, this excess inclusion income may have a tax consequence to you as discussed below.
Under guidance recently issued by the IRS, the Fund will be taxed at the highest corporate income tax rate on its excess inclusion income that is allocable to the percentage of its shares held in record name by a "disqualified organization." Disqualified organizations generally include certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on their unrelated business taxable income. To the extent that Fund shares owned by a disqualified organization are held in record name by a broker-dealer or other nominee, the broker-dealer or other nominee would be liable for the corporate level tax on the portion of the Fund's excess inclusion income allocable to Fund shares held by the broker-dealer or other nominee on behalf of the disqualified organization. The Fund expects that disqualified organizations will own their shares and will not themselves be pass-through entities. Because this tax is imposed at the Fund level, all shareholders, including shareholders that are not disqualified organizations, will bear a portion of the tax cost associated with the Fund's receipt of excess inclusion income. However, to the extent permissible under the Investment Company Act of 1940, as amended, regulated investment companies such as the Fund are permitted under Treasury Regulations to specially allocate this tax expense to the disqualified organizations to which it is attributable, without a concern that such an allocation will constitute a preferential dividend.
In addition, with respect to Fund shareholders who are not nominees, for Fund taxable years beginning on or after January 1, 2007, the Fund must report excess inclusion income to shareholders in two cases:
o If the excess inclusion income received by the Fund from all sources exceeds
1% of the Fund's gross income, it must inform the non-nominee shareholders
of the amount and character of excess inclusion income allocated to them;
and
o If the Fund receives excess inclusion income from a REIT whose excess
inclusion income in its most recent tax year ending not later than nine
months before the first day of the Fund's taxable year exceeded 3% of the
REIT's total dividends, the Fund must inform its non-nominee shareholders
of the amount and character of the excess inclusion income allocated to
them from such REIT.
Any excess inclusion income realized by the Fund and allocated to shareholders under these rules cannot be offset by net operating losses of the shareholders. If the shareholder is a tax-exempt entity and not a "disqualified organization," then this income is fully taxable as unrelated business taxable income under the Code. Charitable reminder trusts do not incur UBTI by receiving excess inclusion income from the Fund. If the shareholder is a non-U.S. person, such shareholder would be subject to U.S. federal income tax withholding at a rate of 30% on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty. If the shareholder is a REIT, a regulated investment company, common trust fund or other pass-through entity, such shareholder's allocable share of the Fund's excess inclusion income would be considered excess inclusion income of such entity and such entity would be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations. Accordingly, investors should be aware that a portion of the Fund's income may be considered excess inclusion income.
Compliance with these requirements will require the Fund to obtain significant cooperation from any REITs in which it invests. There is no guarantee that the Fund will receive the information that it needs to implement these requirements and report any excess inclusion income to you on a timely basis. The Fund will use its best efforts to meet these requirements, and through the Investment Company Institute, will seek additional guidance from the IRS and the cooperation of REITs in providing excess inclusion income information on a timely basis.
Tax-exempt shareholders should talk to their tax advisors about the implications of these rules on their separate tax situations.
NON-U.S. INVESTORS Non-U.S. investors may be subject to U.S. withholding and estate tax, and are subject to special U.S. tax certification requirements. Non-U.S. investors should consult their tax advisors about the applicability of U.S. tax withholding and the use of appropriate forms to certify their foreign status and to claim any applicable treaty benefits to which they are entitled.
IN GENERAL. The United States imposes a flat 30% withholding tax (or a withholding tax at a lower treaty rate) on U.S. source dividends, including on income dividends paid to you by the Fund, subject to certain exemptions for dividends designated as capital gain dividends, short-term capital gain dividends, interest-related dividends and exempt-interest dividends as described below. However, notwithstanding such exemptions from U.S. withholding at the source, any dividends and distributions of income and capital gains, including the proceeds from the sale of your Fund shares, will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a U.S. person.
CAPITAL GAIN DISTRIBUTIONS AND SHORT-TERM CAPITAL GAIN DIVIDENDS. Dividends
designated by the Fund as either (i) a capital gain distribution from long-term
capital gains, or (ii) a short-term capital gain dividend (other than long- or
short-term capital gains realized on disposition of U.S. real property interests
- see the discussion below), are not subject to U.S. withholding tax unless you
are a nonresident alien individual present in the United States for a period or
periods aggregating 183 days or more during the calendar year.
INTEREST-RELATED DIVIDENDS. Interest-related dividends designated and paid by the Fund from qualified net interest income are not subject to U.S. withholding tax. The Fund's qualified net interest income equals the Fund's qualified interest income less allocable expenses. "Qualified interest income" includes, in general, the sum of the Fund's U.S. source: i) bank deposit interest, ii) short-term original discount, iii) interest (including original issue discount, market discount and acquisition discount) on an obligation in registered form (unless it is earned on an obligation issued by a corporation or partnership in which the Fund is a 10% shareholder or partner), and iv) any interest-related dividend passed through from another regulated investment company. On any payment date, the amount of an income dividend that is designated by the Fund as an interest-related dividend may be more or less than the amount that is so qualified. This is because the designation is based on an estimate of the Fund's qualified interest income for its entire fiscal year, which can only be determined with exactness at fiscal year end. As a consequence, the Fund may over withhold a small amount of U.S. tax from a dividend payment. In this case, the non-U.S. investor's only recourse may be to either forgo recovery of the excess withholding, or to file a United States nonresident income tax return to recover the excess withholding.
LIMITATIONS ON TAX REPORTING FOR INTEREST-RELATED DIVIDENDS AND SHORT-TERM CAPITAL GAIN DIVIDENDS FOR NON-U.S. INVESTORS. It may not be practical in every case for the Fund to designate, and the Fund reserves the right in these cases to not designate, small amounts of interest-related or short-term capital gain dividends. Additionally, the Fund's designation of interest-related or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints. When the Fund has designated interest-related or short-term capital gain dividends, this information will be available online at franklintempleton.com (under the Fund's Tax Information) or through a Customer Service Representative at Franklin Templeton Investments at 1-800/DIAL BEN.
OTHER INCOME DIVIDENDS AND EFFECTIVELY CONNECTED INCOME. Income dividends paid by the fund to non-u.S. Investors on the income earned on portfolio investments in (i) the stock of domestic and foreign corporations, and (ii) the debt of foreign issuers continue to be subject to u.S. Withholding tax at a 30% or lower treaty rate. If you hold your fund shares in connection with a u.S. Trade or business, your income and gains will be considered effectively connected income and taxed in the u.S. On a net basis, in which case you may be required to file a nonresident u.S. Income tax return.
U.S. ESTATE TAX. The code also provides for a partial exemption from u.S. Estate tax for shares in the fund held by an estate of a nonresident decedent. The amount treated as exempt is based on the proportion of the assets held by the fund at the end of the quarter immediately preceding the decedent's death that are treated as property generating qualified interest income or constitute other property not within the united states.
SUNSETTING OF PROVISIONS. The provisions dealing with interest-related dividends and short-term capital gain dividends that are discussed above are scheduled to sunset for this Fund on August 31, 2008. The provisions creating a partial exemption from U.S. estate tax are scheduled to sunset on December 31, 2007. Unless these rules are extended or made permanent before the sunset provisions become effective, non-U.S. investors will again be subject to nonresident withholding taxes on any ordinary dividends (including short-term capital gain dividends) that they receive, and will no longer be eligible for a reduction in their U.S. estate tax.
TAX CERTIFICATION AND BACKUP WITHHOLDING AS APPLIED TO NON-U.S. INVESTORS. Non-U.S. investors have special U.S. tax certification requirements to avoid backup withholding (at a rate of 28%), and if applicable, to obtain the benefit of any income tax treaty between the non-U.S. investor's country of residence and the United States. To claim these tax benefits, the non-U.S. investor must provide a properly completed Form W-8BEN (or other Form W-8, where applicable, or their substitute forms) to establish his or her status as a non-U.S. investor, to claim beneficial ownership over the assets in the account, and to claim, if applicable, a reduced rate of or exemption from withholding tax under the applicable treaty. A Form W-8BEN provided without a U.S. taxpayer identification number remains in effect for a period of three years beginning on the date that it is signed and ending on the last day of the third succeeding calendar year. However, non-U.S. investors must advise the Fund of any changes of circumstances that would render the information given on the form incorrect, and must then provide a new W-8BEN to avoid the prospective application of backup withholding. Forms W-8BEN with U.S. taxpayer identification numbers remain valid indefinitely, or until the investor has a change of circumstances that renders the form incorrect and necessitates a new form and tax certification.
INVESTMENT IN U.S. REAL PROPERTY. The Fund may invest in equity securities of corporations that invest in U.S. real property, including REITs. The sale of a U.S. real property interest by the Fund, or by a REIT or U.S. real property holding corporation in which the Fund invests, may trigger special tax consequences to the Fund's non-U.S. shareholders.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes non-U.S. persons subject to U.S. tax on disposition of a U.S. real property interest as if he or she were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code provides a look-through rule for distributions of FIRPTA gain by a regulated investment company (RIC) if all of the following requirements are met:
o The RIC is classified as a qualified investment entity. A "qualified
investment entity" includes a RIC if, in general, more than 50% of the
RIC's assets consists of interests in REITs and U.S. real property holding
corporations, and
o you are a non-U.S. shareholder that owns more than 5% of a class of Fund
shares at any time during the one-year period ending on the date of the
distribution,
o If these conditions are met, Fund distributions to you are treated as gain
from the disposition of a U.S. real property interest (USRPI), causing the
distribution to be subject to U.S. withholding tax at a rate of 35%, and
requiring that you file a nonresident U.S. income tax return.
Because the Fund expects to invest less than 50% of its assets at all times, directly and indirectly, in U.S. real property interests, it does not expect to pay any dividends that would be subject to FIRPTA reporting and tax withholding.
U.S. TREASURY CIRCULAR 230 NOTICE This discussion of "Distributions and Taxes" is not intended or written to be used, and cannot be used, by you for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service. It is not written as tax advice, and does not purport to deal with all of the federal, state or foreign tax consequences that may be applicable to your investment in the Fund. You should consult your personal tax advisor for advice on these consequences.
The Fund currently offers four classes of shares, Class A, Class C, Class R and Advisor Class. The Fund began offering shares on December 3, 2007. The Fund may offer additional classes of shares in the future. The full title of each class is:
o Templeton International Bond Fund - Class A
o Templeton International Bond Fund - Class C
o Templeton International Bond Fund - Class R
o Templeton International 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. Shares of each class of a series have the same voting and other rights and preferences as the other classes and series of the Trust for matters that affect the Trust as a whole. Additional series may be offered in the future.
The Trust has noncumulative voting rights. For board member elections, this gives holders of more than 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.
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.
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 a broker-dealer 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. We may deduct any applicable banking charges imposed by the bank from your account.
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.
INVESTMENT BY ASSET ALLOCATORS The Fund permits investment in the Fund by certain asset allocators (Asset Allocators) who represent underlying clients that have granted a power of attorney to the Asset Allocators to invest on their behalf. The Asset Allocators typically make asset allocation decisions across similarly situated underlying accounts that are invested in the Fund. As a result of adjustments in such asset allocation decisions, the Fund may experience relatively large purchases and redemptions when the Asset Allocators implement their asset allocation adjustment decisions. The Fund, based on monitoring of the trading activity of such Asset Allocator accounts, reserves the right to treat such Asset Allocators as market timers. In such circumstances, the Fund may restrict or reject trading activity by Asset Allocators if, in the judgment of the Fund's manager or transfer agent, such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders. Neither the Fund, nor its investment manager nor any other affiliated party receives any compensation or other consideration in return for permitting Fund investments by Asset Allocators.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A. There is no initial sales charge for Class C, Class R and Advisor Class.
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 Franklin Templeton funds to take advantage of the lower sales charges for large purchases.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by completing the LOI section of your account application. An LOI 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 LOI section of the application, you acknowledge and agree to the following:
o You authorize Distributors to reserve approximately 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.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o 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.
o 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. 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 Franklin Templeton funds acquired before you filed your LOI will be counted towards the completion of the LOI. 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 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 charge for these plans will be based on actual plan participation and the projected investments in 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.
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 90 days:
o 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 Advisor Class or Class Z shareholders of a
Franklin Templeton fund who may reinvest their distributions in the Fund's
Class A shares.
o Annuity payments received under either an annuity option or from death benefit
proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust. You should contact
your tax advisor for information on any tax consequences that may apply.
o Redemption proceeds from the sale of Class A shares of any of the Franklin
Templeton Investment Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Franklin
Templeton Investment 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 90 days from the date they are redeemed from the money fund.
WAIVERS FOR CERTAIN INVESTORS. The following investors or investments may qualify to buy Class A shares without an initial sales charge or CDSC due to anticipated economies in sales efforts and expenses, including:
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Please consult your legal and investment advisors to determine if an
investment in the Fund is permissible and suitable for you.
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Current and former officers, trustees, directors, full-time employees (and
their family members) of both Franklin Templeton Investments and Franklin
Templeton funds, consistent with our then-current policies
o Current partners of law firms that currently provide legal counsel to the
funds, Resources or its affiliates
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.:
(1) under an advisory agreement (including sub-advisory agreements); and/or
(2) as Trustee of an inter vivos or testamentary trust
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Any trust or plan established as part of a qualified tuition program under
Section 529 of the Internal Revenue Code, as amended
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets
o Shares acquired by a financial intermediary that the intermediary holds,
directly or indirectly, on behalf of a beneficial owner who has entered
into a comprehensive fee or other advisory fee arrangement with any
broker-dealer, trust company or registered investment advisor (RIA),
whether or not affiliated with the financial intermediary, provided the
financial intermediary has entered into an agreement with Distributors
authorizing the sale of Fund shares
RETIREMENT PLANS. Class A shares at NAV are available for:
o Employer Sponsored Retirement Plans with assets of $1 million or more; or
o Investors who open an IRA with proceeds rolled over directly from an Employer
Sponsored Retirement Plan (the Plan) if the IRA is a "Common Platform IRA."
An IRA is a Common Platform IRA if (i) the IRA custodian or recordkeeper,
or one of its affiliates, is the recordkeeper for the Plan at the time the
IRA is opened; and (ii) current agreements with the Fund, or its agent,
make Franklin Templeton fund shares available to both the Plan and the IRA
investor; or
o Investors who open an IRA as a spousal rollover or a QDRO if opened with
proceeds from a DCS plan and/or a plan for which FTB&T was trustee.
A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing
plan that qualifies under section 401(a) of the Internal Revenue Code, including
401(k), money purchase pension, profit sharing and defined benefit plans.
An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs.
A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level recordkeeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level recordkeeping related to those DCS services.
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:
SIZE OF PURCHASE - U.S. DOLLARS SALES 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 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 or more but less than $4 million, plus 0.50% on sales of $4 million or more but less than $50 million, plus 0.25% on sales of $50 million or more.
In addition to the sales charge payments described above and the distribution and service (12b-1) fees described below under "The Underwriter - Distribution and service (12b-1) fees," Distributors and/or its non-fund affiliates may make the following additional payments out of their own assets to securities dealers that sell shares of Franklin Templeton funds:
MARKETING SUPPORT PAYMENTS. Distributors may make payments to certain dealers who are holders or dealers of record for accounts in one or more of the Franklin Templeton funds. A dealer's marketing support services may include business planning assistance, advertising, educating dealer personnel about the Franklin Templeton funds and shareholder financial planning needs, placement on the dealer's list of offered funds, and access to sales meetings, sales representatives and management representatives of the dealer. Distributors compensates dealers differently depending upon, among other factors, sales and assets levels, redemption rates and the level and/or type of marketing and educational activities provided by the dealer. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other dealer-sponsored events. These payments may vary depending upon the nature of the event. Distributors will, on an annual basis, determine whether to continue such payments.
In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds and 0.05% (or 0.03%) of the total assets respectively, of equity or fixed income funds attributable to that dealer, on an annual basis.
As noted below, Distributors may make additional payments to dealers, including dealers not listed below, related to ticket charges and various dealer-sponsored events intended to educate financial advisers and their clients about the Franklin Templeton funds. The following is a list of NASD member broker-dealers (including their respective affiliates) receiving marketing support payments as of March 31, 2007:
Advantage Capital Corporation, AG Edwards & Sons, Inc., AIG Financial Advisors, Inc., American General Securities, Inc., American Portfolios Financial Services, Inc., Ameriprise Financial Services, Inc., Associated Securities Corp., AXA Advisors, LLC, Cadaret Grant & Co., Inc., Cambridge Investment Research Inc., CCO Investment Services Corp., Chase Investment Services Corp., Citicorp Investment Services, Comerica Securities, Inc., Commerce Brokerage Services, Inc., Compass Brokerage, Inc., CUNA Brokerage Services, Inc., CUSO Financial Services, L.P., Edward Jones, Fidelity Investments Institutional Services Company, Inc., Fifth Third Securities, Inc., Financial Network Investment Corporation, FSC Securities Corporation, First Command Financial Planning, Inc., Genworth Financial Securities Corp., J.J.B. Hilliard, W.L. Lyons, Inc., IFC Holdings Inc. D/B/A INVEST Financial Corporation, ING Financial Partners, Inc., Investacorp, Inc., Investment Centers of America, Inc., Jefferson Pilot Securities Corporation, Legend Equities Corporation, Lincoln Financial Advisors Corp., Lincoln Investment Planning, Inc., Linsco/Private Ledger Corp., M&T Securities Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Keegan & Company, Inc., Morgan Stanley DW Inc., Multi-Financial Securities Corporation, Mutual Service Corporation, NatCity Investments, Inc., National Planning Corporation, PFS Investments, Inc., PrimeVest Financial Services, Inc., Raymond James & Associates, Inc., Raymond James Financial Services, Inc., RBC Dain Rauscher, Inc., Richard D. Schubert, Inc., Robert W. Baird & Co., Inc., Royal Alliance Associates, Inc., Securities America, Inc., Signator Investors, Inc., SII Investments, Inc., Smith Barney, SunTrust Investment Services, Inc., TFS Securities, Inc., The Investment Center, Inc., UBS Financial Services, Inc., UBS Global Asset Management (US) Inc., UnionBanc Investment Services, LLC, United Planners Financial Services, U.S. Bancorp Investments, Inc., Vanderbilt Securities, LLC, Wachovia Securities, LLC, Waterstone Financial Group, Inc., Wells Fargo Investments, LLC, WM Financial Services, Inc.
Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed the above-stated limitation.
TRANSACTION SUPPORT PAYMENTS. The types of payments that Distributors may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a dealer or one time payments for ancillary services such as setting up funds on a dealer's mutual fund trading system.
OTHER PAYMENTS. From time to time, Distributors, at its expense, may make additional payments to dealers that sell or arrange for the sale of shares of the Fund. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, co-operative advertising, newsletters, and other dealer-sponsored events. These payments may vary depending upon the nature of the event, and can include travel expenses, such as lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting and due diligence trips.
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 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.
Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. Distributors makes payments for events it deems appropriate, subject to Distributors' guidelines and applicable law.
You should ask your dealer for information about any payments it receives from Distributors and any services provided.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A AND C If you invest any amount in Class C shares or $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 on any Class A shares you sell within 18 months and any Class C shares you sell within 12 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.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o Account fees
o Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the securities dealer of record received a
payment from Distributors of 0.25% or less, or (ii) the securities dealer
of record has entered into a supplemental agreement with Distributors
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, 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
o Redemptions by Employer Sponsored Retirement Plans
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy or
returns of excess contributions and earnings
o Any trust or plan established as part of a qualified tuition program under
Section 529 of the Internal Revenue Code of 1986, as amended
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 generally are 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.
Each month in which a payment is scheduled, we will redeem an equivalent amount of shares in your account on the day of the month you have indicated on your account application or, if no day is indicated, on the 20th day of the month. If that day falls on a weekend or holiday, we will process the redemption on the next business day. For plans set up before June 1, 2000, we will continue to process redemptions on the 25th day of the month (or the next business day) unless you instruct us to change the processing date. Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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 also may 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of withdrawal payments, or suspend one payment, we must receive instructions from you at least three business days before a scheduled payment. The Fund may discontinue a systematic withdrawal plan by notifying you in writing and will discontinue a systematic withdrawal plan automatically if all shares in your account are withdrawn, if the Fund receives notification of the shareholder's death or incapacity, or if mail is returned to the Fund marked "unable to forward" by the postal service.
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 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 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH is not processed as described in the prospectus.
There are special procedures for banks and other institutions that wish to open multiple accounts. An institution may open a single master account by filing one application form with the Fund, signed by personnel authorized to act for the institution. Individual sub-accounts may be opened when the master account is opened by listing them on the application, or by providing instructions to the Fund at a later date. These sub-accounts may be registered either by name or number. The Fund's investment minimums apply to each sub-account. The Fund will send confirmation and account statements for the sub-accounts to the institution.
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 and bank trust accounts, there may be additional methods of buying or selling Fund shares than those described in this SAI or in the prospectus. Institutional and bank trust accounts include accounts opened by or in the name of a person (includes a legal entity or an individual) that has signed an Institutional Account Application or Bank Trust Account Application accepted by Franklin Templeton Institutional, LLC or entered into a selling agreement and/or servicing agreement with Distributors or Investor Services. For example, the Fund permits the owner of an institutional account to make a same day wire purchase if a good order purchase request is received (a) before the close of the New York Stock Exchange (NYSE) or (b) through the National Securities Clearing Corporation's automated system for processing purchase orders (Fund/SERV), even though funds are delivered by wire after the close of the NYSE. If funds to be wired are not received as scheduled, the purchase order may be cancelled or reversed and the institutional account owner could be liable for any losses or fees the Fund, Distributors and/or Investor Services may incur.
In the event of disputes involving conflicting claims of ownership or authority to control your shares, the Fund has the right (but has no obligation) to: (i) restrict the shares and require the written agreement of all persons deemed by the Fund to have a potential interest in the shares before executing instructions regarding the shares; or (ii) interplead disputed shares or the proceeds from the court-ordered sale thereof with a court of competent jurisdiction.
Should the Fund be required to defend against joint or multiple shareholders in any action relating to an ownership dispute, you expressly grant the Fund the right to obtain reimbursement for costs and expenses including, but not limited to, attorneys' fees and court costs, by unilaterally redeeming shares from your account.
The Fund may be required (i) pursuant to a validly issued levy, to turn your shares over to a levying officer who may, in turn, sell your shares at a public sale; or (ii) pursuant to a final order of forfeiture to sell your shares and remit the proceeds to the U.S. or state government as directed.
Clients of financial advisors whose firms have a Selling Agreement with Franklin Templeton Distributors, Inc., and who are eligible for the Financial Advisor Service Team (FAST) may be eligible for Franklin Templeton VIP Services/TM which offers enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal underwriter in the continuous public offering of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906.
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.
Distributors does not receive compensation from the Fund for acting as underwriter of the Fund's Advisor Class shares.
Distributors may be entitled to payments from the Fund under the Rule 12b-1 plans, as discussed below. Except as noted, Distributors receives no other compensation from the Fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES - CLASS A, C AND R The board has adopted a separate plan pursuant to Rule 12b-1 for each class. Although the plans differ in some ways for each class, each plan is designed to benefit the Fund and its shareholders. The plans are expected to, among other things, increase advertising of the Fund, encourage purchases of Fund shares and service to its shareholders, and increase or maintain assets of the Fund so that certain fixed expenses may be spread over a broader asset base, with a positive impact on per share expense ratios. In addition, a positive cash flow into the Fund is useful in managing the Fund because the manager has more flexibility in taking advantage of new investment opportunities and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of activities that are primarily intended to sell shares of the class. These expenses also may include service fees paid to securities dealers or others who have executed a servicing agreement with the Fund, Distributors or its affiliates and who provide service or account maintenance to shareholders (service fees); and the expenses of printing prospectuses and reports used for sales purposes, and of preparing and distributing sales literature and advertisements. Together, these expenses, including the service fees, are "eligible expenses." The 12b-1 fees charged to each class are based only on the fees attributable to that particular class.
THE CLASS A, C AND R PLANS. The Fund pays Distributors up to 0.35% per year of Class A's average daily net assets, out of which 0.25% may be paid for services to the shareholders (service fees). The Fund pays Distributors up to 0.65% per year of Class C's average daily net assets, out of which 0.15% may be paid for service fees. For Class R shares, the Fund pays Distributors up to 0.50% per year of the class's average daily net assets. The Class C and R plans also may be used to pay Distributors for advancing commissions to securities dealers with respect to the initial sale of Class C and R shares.
The Class A, C and R plans are compensation plans. They allow the Fund to pay a fee to Distributors that may be more than the eligible expenses Distributors has incurred at the time of the payment. Distributors must, however, demonstrate to the board that it has spent or has near-term plans to spend the amount received on eligible expenses. The Fund will not pay more than the maximum amount allowed under the plans.
In addition to the payments that Distributors or others are entitled to under each plan, each plan also provides that to the extent the Fund, the manager or Distributors or other parties on behalf of the Fund, the manager or Distributors make payments that are deemed to be for the financing of any activity primarily intended to result in the sale of Fund shares within the context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then such payments shall be deemed to have been made pursuant to the plan.
To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks may not participate in the plans because of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. These banks, however, are allowed to receive fees under the plans for administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the amounts and purpose of any payment made under the plans and any related agreements, and furnish the board with such other information as the board may reasonably request to enable it to make an informed determination of whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms and provisions of each plan also are consistent with Rule 12b-1.
Performance quotations are subject to SEC rules. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Average annual total return before taxes, average annual total return after taxes on distributions, average annual total return after taxes on distributions and sale of shares and current yieldquotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. 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 BEFORE TAXES Average annual total return before taxes is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes that the maximum initial sales charge, if applicable, 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 before taxes quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
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
AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS
Average annual total return after taxes on distributions is determined by
finding the average annual rates of return over certain periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable value,
after taxes on distributions. The calculation assumes that the maximum initial
sales charge, if applicable, is deducted from the initial $1,000 purchase, and
income dividends and capital gain distributions, less the taxes due on such
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, but assumes that the redemption itself had no
tax consequences. 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.
Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (E.G., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (E.G., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (E.G., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (pre-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
P(1+T)n = ATV/D
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D = ending value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period, after
taxes on fund distributions but not after taxes on redemption
AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES Average annual total return after taxes on distributions and sale of fund shares is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions and sale of fund shares. The calculation assumes that the maximum initial sales charge, if applicable, 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, including taxes upon sale of fund shares. 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.
Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (E.G., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (E.G., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits.
The capital gain or loss upon redemption is calculated by subtracting the tax basis from the redemption proceeds, after deducting any nonrecurring charges assessed at the end of the period, subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. In determining the basis for a reinvested distribution, the distribution is included net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis is adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal law. The amount and character (E.G., short-term or long-term) of capital gain or loss upon redemption is separately determined for shares acquired through the initial investment and each subsequent purchase through reinvested distributions. Shares acquired through reinvestment of distributions are not assumed to have the same holding period as the initial investment. The tax character of such reinvestments is determined by the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. Capital gains taxes (or the benefit resulting from tax losses) are calculated using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal law applicable on the redemption date. Shareholders are assumed to have sufficient capital gains of the same character from other investments to offset any capital losses from the redemption, so that the taxpayer may deduct the capital losses in full.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (post-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, 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 following SEC formula is used to calculate these figures:
P(1+T)n = ATV/DR
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions and redemptions)
n = number of years
ATV/DR = ending value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period, after
taxes on fund distributions and redemption
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total return assumes that the maximum initial sales charge, if applicable, is deducted from the initial $1,000 purchase, income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. Cumulative total return, however, is based on the actual return for a specified period rather than on the average return.
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 following SEC formula is used to calculate these figures:
Yield = 2 [(A-B + 1)(6) - 1]
where:
a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends 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 that 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 interest, if any, and is calculated over a different period of time.
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 also may quote the performance of Class A 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 Franklin Templeton Investments. Resources is the parent company of the advisors and underwriter of Franklin Templeton funds.
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 Savings Planner may help you in determining how much money must be invested on a monthly basis 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 Savings Planner leads you through the steps to start 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 Franklin Templeton Investments, 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 over 4 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. In 2001, the Fiduciary Trust team, known for providing global investment management to institutions and high net worth clients worldwide, joined the organization. Together, Franklin Templeton Investments has over $669 billion in assets under management for more than 7 million U.S. based mutual fund shareholder and other accounts. Franklin Templeton Investments offers 110 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 NYSE. 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.
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE (MOODY'S)
INVESTMENT GRADE
Aaa: Bonds rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa: Bonds rated Aa are judged to be high quality and are subject to very low credit risk.
A: Bonds rated A are considered upper medium-grade obligations and are subject to low credit risk.
Baa: Bonds rated Baa are subject to moderate credit risk and are considered medium-grade obligations. As such they may have certain speculative characteristics.
BELOW INVESTMENT GRADE
Ba: Bonds rated Ba are judged to have speculative elements and are subject to substantial credit risk.
B: Bonds rated B are considered speculative and are subject to high credit risk.
Caa: Bonds rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca: Bonds rated Ca are considered highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Bonds rated C are the lowest rated class of bonds and are typically in default. They have little prospects for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S (S&P(R))
The issue rating definitions are expressions in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.
INVESTMENT GRADE
AAA: This is the highest rating assigned by S&P to a debt obligation. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. |
AA: Obligations rated AA differ from AAA issues only in a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: Obligations rated A are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in the higher ratings categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: Obligations rated BBB exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BELOW INVESTMENT GRADE
BB, B, CCC, CC, C: Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest degree of speculation. While these obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of the adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. The C rating is also assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is still making payments.
D: Obligations rated D are in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating is also used upon the filing of bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
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.
r: This symbol is attached to the ratings of instruments with significant noncredit risks and highlights risks to principal or volatility of expected returns that are not addressed in the credit rating.
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs and to individual short-term debt instruments. These obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted. Moody's employs the following designations to indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Issuers (or supporting institutions) so rated have a superior ability to repay short-term debt obligations.
P-2 (Prime-2): Issuers (or supporting institutions) so rated have a strong ability to repay short-term debt obligations.
P-3 (Prime-3): Issuers (or supporting institutions) so rated have an acceptable ability to repay short-term debt obligations.
NP: Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
S&P's ratings are a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days -- including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating.
A-1: This designation indicates that the obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: Issues carrying this designation are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations carrying the higher designations. However, the obligor's capacity to meet its financial commitments on the obligation is satisfactory.
A-3: Issues carrying this designation exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B: Issues carrying this designation are regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation. However, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
C: Issues carrying this designation are currently vulnerable to nonpayment and are dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D: Issues carrying this designation are in payment default. The D rating category is used when payments on an obligation are not made on the due date even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
TEMPLETON INCOME TRUST
File Nos. 33-06510 and 811-04706
Item 23. Exhibits
The following exhibits are incorporated by reference to the previously filed document indicated below, except as noted:
(a) Agreements and Declaration of Trust
(i) Agreement and Declaration of Trust dated October 18, 2006/7
(ii) Certificate of Trust of Templeton Income Trust, a Delaware statutory trust dated, October 18, 2006/7
(b) By-laws
(i) By-Laws of Templeton Funds, a Delaware statutory trust dated October 18, 2006/7
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contract
(i) Investment Management Agreement between the Registrant on behalf of Templeton Global Bond Fund and Franklin Advisers, Inc. dated December 3, 2007
(ii) Investment Management Agreement between the Registrant on behalf of Templeton International Bond Fund and Franklin Advisers Inc. dated July 18, 2007
(e) Underwriting Contracts
(i) Distribution Agreement between the Registrant on behalf of each series Templeton Global Bond Fund and Templeton International Bond Fund and Franklin Templeton Distributors, Inc. dated December 3, 2007
(ii) Form of Selling Agreements between Registrant, Franklin Templeton Distributors, Inc. and Securities Dealers dated November 1, 2003/6
(iii) Amendment dated May 15, 2006 to form of Selling Agreements between Franklin Templeton Distributors, Inc. and Securities Dealers/7
(f) Bonus or Profit Sharing Contracts
Not applicable
(g) Custodian Agreements
(i) Custody Agreement between Registrant on behalf of Templeton Global Bond Fund and JPMorgan Chase Bank dated September 15, 1986/2
(ii) Amendment dated March 3, 1998 to the Custody Agreement/3
(iii) Amendment No. 2 dated July 23, 1998 to the Custody Agreement/3
(iv) Amendment No. 3 dated May 1, 2001 to the Custody Agreement/4
(v) Master Custody Agreement dated February 16, 1996 between Registrant and Bank of New York
(vi) Terminal Link Agreement dated February 16, 1996between Registrant and Bank of New York
(vii) Amendment dated May 7, 1997 to Master Custody Agreement dated February 16, 1996 between Registrant and Bank of New York
(viii) Amendment dated February 27, 1998 to Master Custody Agreement dated February 16, 1996between Registrant and Bank of New York
(ix) Amendment dated May 16, 2001, to Master Custody Agreement dated February 16, 1996 between Registrant and Bank of New York
(x) Amended and Restated Foreign Custody Management Agreement between the Registrant and Bank of New York made as of May 16, 2001
(xi) Amendment dated March 19, 2007, to Schedule 2 of the Foreign Custody Management Agreement
(xii) Amendment dated November 1, 2007, to Exhibit A of the Master Custody Agreement dated February 16, 1996 between Registrant and Bank of New York
(xiii) Amendment dated November 1, 2007, to Schedule 1 of the Foreign Management Agreement
(xiv) Assignment of Custody Agreement between Registrant on behalf of Templeton Global Bond Fund and JPMorgan Chase Bank dated December 3, 2007
(h) Other Material Contracts
(i) Sub-Transfer Agent Agreement dated June 22, 1994 between the Registrant, Franklin Templeton Investor Services, LLC and The Shareholder Services Group, Inc./5
(ii) Amendment to Sub-Transfer Agent Agreement dated January 1, 1999/5
(iii) Assignment of Sub-Transfer Agent Agreement dated June 13, 2003/5
(iv) Sub-Accounting Services Agreement dated May 1, 1991 between the Registrant, Franklin Templeton Investor Services, LLC, Financial Data Services, Inc., and Merrill Lynch, Pierce, Fenner & Smith, Inc./2
(v) Fund Administration Agreement between the Registrant on behalf of Templeton International Bond Fund and Franklin Templeton Services, LLC dated July 18, 2007
(vi) Fund Administration Agreement between the Registrant on behalf of Templeton Global Bond Fund and Franklin Templeton Services, LLC dated December 3, 2007
(vii) Transfer Agent and Shareholder Services Agreement between the Registrant on behalf of each series Templeton Global Bond Fund and Templeton International Bond Fund and Franklin Templeton Investor Services LLC dated December 3, 2007
(i) Legal Opinion
(i) Legal opinion and consent of counsel, Securities Act of 1933, with respect to TIT - DE and each of its series
(j) Other Opinions
(i) Consent of Independent Registered Public Accounting Firm
(k) Omitted Financial Statements
Not applicable
(l) Initial Capital Agreements
(i) Letter of Understanding dated April 28, 1995/1
(m) Rule 12b-1 Plan
(i) Distribution Plan - Class A Templeton International Bond Fund dated July 18, 2007
(ii) Distribution Plan - Class C Templeton International Bond Fund dated July 18, 2007
(iii) Distribution Plan - Class R Templeton International Bond Fund dated July 18, 2007
(iv) Distribution Plan - Class A Templeton Global Bond Fund dated December 3, 2007
(v) Distribution Plan - Class C Templeton Global Bond Fund dated December 3, 2007
(n) Rule 18f-3 Plan
(i) Multi-Class Plan, Templeton Income Trust on behalf of Templeton International Bond Fund dated July 18, 2007
(ii) Multi-Class Plan, Templeton Income Trust on behalf of Templeton Global Bond Fund dated October 17, 2006
(p) Code of Ethics dated May 2007/7
(q) Power of Attorney
(i) Power of Attorney dated May 22, 2007, for Templeton Income Trust, a Massachusetts Business Trust/7
(ii) Power of Attorney dated May 22, 2007, for Templeton Income Trust, a Delaware statutory trust/7
1. Previously filed with Post Effective Amendment No. 16 to the Registration Statement on April 28, 1995
2. Previously filed with Post Effective Amendment No. 17 to the Registration Statement on December 28, 1995
3. Previously filed with Post Effective Amendment No. 21 to the Registration Statement on October 30, 1998
4. Previously filed with Post Effective Amendment No. 25 to the Registration Statement on December 27, 2002
5. Previously filed with Post Effective Amendment No. 26 to the Registration Statement on December 30, 2003
6. Previously filed with Post Effective Amendment No. 27 to the Registration Statement on December 2, 2004
7. Previously filed with Post Effective Amendment No. 30 to the Registration Statement on September 17, 2007
Item 24. Persons Controlled by or Under Common Control with the Fund
None
Item 25. Indemnification
The Agreement and Declaration of Trust (the "Declaration") of TIT - DE provides that any person who is or was a Trustee, officer, employee or other agent, including the underwriter, of such Trust shall be liable to such Trust and its shareholders only for (1) any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing, or (2) the person's own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person (such conduct referred to herein as Disqualifying Conduct) and for nothing else. Except in these instances, these persons shall not be responsible or liable for any act or omission of any other agent of such Trust or its investment adviser or principal underwriter to the fullest extent that limitations of liability are permitted by the Delaware statutory trust Act (the "Delaware Act"). Moreover, except in these instances, none of these persons, when acting in their respective capacity as such, shall be personally liable to any other person, other than such Trust or its shareholders, for any act, omission or obligation of such Trust or any trustee thereof.
TIT - DE shall indemnify, out of its assets, to the fullest extent permitted under applicable law, any of these persons who was or is a party, or is threatened to be made a party, to any Proceeding (as defined in the Declaration) because the person is or was an agent of such Trust. These persons shall be indemnified against any expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the Proceeding if the person acted in good faith or, in the case of a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful. The termination of any proceeding by judgment, settlement or its equivalent shall not in itself create a presumption that the person did not act in good faith or that the person had reasonable cause to believe that the person's conduct was unlawful. There shall nonetheless be no indemnification for a person's own Disqualifying Conduct.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Trustees, officers and controlling persons of the Fund pursuant to the foregoing provisions, or otherwise, the Fund has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Fund of expenses incurred or paid by a Trustee, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities being registered, the Fund may be required, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
The officers and directors of Franklin Advisers, Inc. (Advisers), also serve as officers and/or directors for (1) Advisers' corporate parent, Franklin Resources, Inc., and/or (2) other investment companies in the Franklin Templeton Investments.
For additional information please see Part B and Schedules A and D of Form ADV of Advisers (SEC File 801-26292), incorporated herein by reference, which sets forth the officers and directors of Advisers and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years.
Item 27. Principal Underwriter
a) Franklin Templeton Distributors, Inc., (Distributors) also acts as principal underwriter of shares of:
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund, Inc.
Templeton Institutional Funds, Inc.
Franklin California Tax-Free Income Fund
Franklin California Tax-Free Trust
Franklin Capital Growth Fund
Franklin Custodian Funds, Inc.
Franklin Federal Tax-Free Income Fund
Franklin Global Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Recovery Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Templeton Variable Insurance Products Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The information required by this Item 27 with respect to each director and officer of Distributors is incorporated by reference to Part B of this Form N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated person of an affiliated person of the Registrant.
Item 28. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained by the Registrant pursuant to Section 31 (a) of the Investment Company Act and the rules thereunder are located at 500 East Broward Boulevard, Fort Lauderdale, Florida 33394. Other records are maintained at the offices of Franklin Templeton Investor Services, LLC, 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 and 3344 Quality Drive, Rancho Cordova, CA 95670-7313.
Item 29. Management Services
There are no management-related service contracts not discussed in Part A or Part B.
Item 30. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all the requirements for effectiveness of the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 28th day of November, 2007.
TEMPLETON INCOME TRUST, a
Delaware statutory trust
(Registrant)
By:/s/DAVID P. GOSS ---------------------- David P. Goss Vice President |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated:
CHRISTOPHER J. MOLUMPHY President and Chief Executive
------------------------------- Officer - Investment Management
Christopher J. Molumphy* Dated: November 28, 2007
JIMMY D. GAMBILL Senior Vice President and Chief
------------------------------- Executive Officer - Finance and
Jimmy D. Gambill* Administration
Dated: November 28, 2007
GALEN G. VETTER Chief Financial Officer and
------------------------------- Chief Accounting Officer
Galen G. Vetter* Dated: November 28, 2007
HARRIS J. ASHTON Trustee
------------------------------- Dated: November 28, 2007
Harris J. Ashton*
FRANK J. CROTHERS Trustee
------------------------------- Dated: November 28, 2007
Frank J. Crothers*
EDITH E. HOLIDAY Trustee
------------------------------- Dated: November 28, 2007
Edith E. Holiday*
CHARLES B. JOHNSON Trustee
------------------------------- Dated: November 28, 2007
Charles B. Johnson*
GREGORY E. JOHNSON Trustee
------------------------------- Dated: November 28, 2007
Gregory E. Johnson*
DAVID W. NIEMIEC Trustee
------------------------------- Dated: November 28, 2007
David W. Niemiec*
FRANK A. OLSON Trustee
------------------------------- Dated: November 28, 2007
Frank A. Olson*
LARRY D. THOMPSON Trustee
------------------------------- Dated: November 28, 2007
Larry D. Thompson*
CONSTANTINE D. TSERETOPOULOS Trustee
------------------------------- Dated: November 28, 2007
Constantine D. Tseretopoulos*
ROBERT E. WADE Trustee
------------------------------- Dated: November 28, 2007
Robert E. Wade*
*By /s/DAVID P. GOSS
-----------------
David P. Goss
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
|
TEMPLETON INCOME TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
------------------------------------------------------------------------------
EX-99.(a)(i) Agreement and Declaration of Trust dated *
October 18, 2006
EX-99.(a)(ii) Certificate of Trust of Templeton Income *
Trust, a Delaware statutory trust dated
October 18, 2006
EX-99.(b)(i) By-Laws dated October 18, 2006 *
EX-99.(d)(i) Investment Management Agreement between Attached
the Registrant on behalf of Templeton Global
Bond Fund and Franklin Advisers, Inc.
dated December 3, 2007
EX-99.(d)(ii) Investment Management Agreement between the Attached
Registrant on behalf of Templeton International
Bond Fund and Franklin Advisers, Inc. dated
July 18, 2007
EX-99.(e)(i) Distribution Agreement between the Registrant on Attached
behalf of Templeton Global Bond Fund and Franklin
Templeton Distributors, Inc. dated December 3, 2007
EX-99.(e)(ii) Form of Selling Agreements between Registrant, *
Franklin Templeton Distributors, Inc. and
Securities Dealers dated November 1, 2003
EX-99.(e)(iii) Amendment dated May 15, 2006 to form of Selling *
Agreements between Franklin Templeton Distributors,
Inc. and Securities Dealers
EX-99.(g)(i) Custody Agreement between Registrant on behalf of *
Templeton Global Bond Fund and JPMorgan Chase
Bank dated September 15, 1986
EX-99.(g)(ii) Amendment dated March 3, 1998 to the *
Custody Agreement
EX-99.(g)(iii) Amendment No. 2 dated July 23, 1998 to the *
Custody Agreement
EX-99.(g)(iv) Amendment No. 3 dated May 1, 2001 to *
the Custody Agreement
EX-99.(g)(v) Master Custody Agreement February 16, 1996 Attached
between the Registrant on bahalf of Templeton
International Bond Fund and Bank of New York
EX-99.(g)(vi) Terminal Link Agreement February 16, 1996 Attached
between the Registrant on behalf of Templeton
International Bond Fund and Bank of New York
EX-99.(g)(vii) Amendment dated May 7, 1997 to Master Attached
Custody Agreement between the Registrant on
behalf of Templeton International Bond Fund
and Bank of New York dated February 16, 1996
EX-99.(g)(viii) Amendment dated February 27, 1998 to Master Attached
Custody Agreement between the Registrant on
behalf of Templeton International Bond Fund
and Bank of New York dated February 16, 1996
EX-99.(g)(ix) Agreement dated May 16, 2001, to Master Custody Attached
Agreement between the Registrant on behalf of
Templeton International Bond Fund and Bank of
New York dated February 16, 1996
EX-99.(g)(x) Amended and Restated Foreign Custody Management Attached
Agreement between the Registrant on behalf of
Templeton International Bond Fund and Bank of
New York made as of May 16, 2001
EX-99.(g)(xi) Amendment dated March 19, 2007, to Schedule 2 Attached
of the Foreign Custody Management Agreement
EX-99.(g)(xii) Amendment dated November 1, 2007, to Exhibit A Attached
of the Master Custody Agreement between the
Registrant on behalf of Templeton International
Bond Fund and Bank of New York dated
February 16, 1996
EX-99.(g)(xiii) Amendment dated November 1, 2007, to Schedule Attached
1 of the Foreign Management Agreement
EX-99.(g)(xiv) Assignment of Custody Agreement between the Attached
Registrant on behalf of Templeton Global Bond
Fund and JPMorgan Chase Bank dated
December 3, 2007
EX-99.(h)(i) Sub-Transfer Agent Agreement dated June 22, 1994 *
between the Registrant, Franklin Templeton
Investor Services, LLC and The Shareholder
Services Group, Inc.
EX-99.(h)(ii) Amendment to Sub-Transfer Agent Agreement dated *
January 1, 1999
EX-99.(h)(iii) Assignment of Sub-Transfer Agent Agreement dated *
June 13, 2003
EX-99.(h)(iv) Sub-Accounting Services Agreement between the *
Registrant, Franklin Templeton Investor Services,
LLC, Financial Data Services, Inc. and Merrill
Lynch, Pierce, Fenner and Smith Inc. dated
May 1, 1991
EX-99.(h)(v) Fund Administration Agreement between the Attached
Registrant on behalf of Templeton International
Bond Fund and Franklin Templeton Services, LLC
dated July 18, 2007
EX-99.(h)(vi) Fund Administration Agreement between the Attached
Registrant on behalf of Templeton Global
Bond Fund and Franklin Templeton Services,
LLC dated December 3, 2007
EX-99.(h)(vii) Transfer Agent and Shareholder Services Attached
Agreement between the Registrant on behalf
of each series Templeton Global Bond Fund and
Templeton International Bond Fund and Franklin
Templeton Investor Services LLC dated
December 3, 2007
EX-99.(i)(i) Legal Opinion and Consent of counsel, Securities Attached
Act of 1933, with respect to TIT-DE and each of
its series
EX-99.(j)(i) Consent of Independent Registered Public Attached
Accounting Firm
EX-99.(l)(i) Letter of Understanding dated April 28, 1995 *
1995
EX-99.(m)(i) Distribution Plan - Class A Templeton Attached
International Bond Fund dated
July 18, 2007
EX-99.(m)(ii) Distribution Plan - Class C Templeton Attached
International Bond Fund dated
July 18, 2007
EX-99.(m)(iii) Distribution Plan - Class R Templeton Attached
International Bond Fund dated
July 18, 2007
EX-99.(m)(iv) Distribution Plan - Class A Templeton Global Attached
Bond Fund dated December 3, 2007
EX-99.(m)(v) Distribution Plan - Class C Templeton Global Attached
Bond Fund dated December 3, 2007
EX-99.(n)(i) Multi-Class Plan - Templeton Income Trust on Attached
behalf of the Templeton Global Bond Fund
dated October 17, 2006
EX-99.(n)(ii) Multi-Class Plan - Templeton Income Trust Attached
on behalf of the Templeton International
Bond Fund dated July 18, 2007
EX?99.(p) Code of Ethics date May 2007 *
EX?99.(q)(i) Power of Attorney dated May 22, 2007 for Templeton *
Income Trust, a Massachusetts Business Trust
EX?99.(q)(ii) Power of Attorney dated May 22, 2007 for Templeton *
Income Trust, a Delaware Statutory Trust
|
* Incorporated by reference
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made effective as of the 3rd day of December, 2007, between TEMPLETON INCOME TRUST (hereinafter referred to as the "Trust"), on behalf of Templeton Global Bond Fund (the "Fund"), and FRANKLIN ADVISERS, INC. (hereinafter referred to as the "Manager").
In consideration of the mutual agreements herein made, the Trust, on behalf of the Fund, and the Manager understand and agree as follows:
(1) The Manager agrees, during the life of this Agreement, to manage the investment and reinvestment of the Fund's assets consistent with the provisions of the Trust Instrument of the Trust and the investment policies adopted and declared by the Trust's Board of Trustees. In pursuance of the foregoing, the Manager shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement those determinations. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised, subject to guidelines adopted by the Board of Trustees. It is understood that all acts of the Manager in performing this Agreement are performed by it outside the United States.
(2) The Manager is not required to furnish any personnel,overhead items or facilities for the Fund, including trading desk facilities or daily pricing of the Fund's portfolio.
(3) The Manager shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Trust's brokerage policies and, when applicable, the negotiation of commissions in connection therewith.
All decisions and placements shall be made in accordance with the following principles:
A. Purchase and sale orders will usually be placed with brokers which are selected by the Manager as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Manager in determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Manager shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund.
C. The Manager is authorized to allocate brokerage business to brokers
who have provided brokerage and research services, as such services
are defined in Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), for the Fund and/or other accounts, if any, for
which the Manager exercises investment discretion (as defined in
Section 3(a)(35) of the 1934 Act) and, as to transactions for which
fixed minimum commission rates are not applicable, to cause the Fund
to pay a commission for effecting a securities transaction in excess
of the amount another broker would have charged for effecting that
transaction, if the Manager determines in good faith that such amount
of commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Manager's overall
responsibilities with respect to the Fund and the other accounts, if
any, as to which it exercises investment discretion. In reaching such
determination, the Manager will not be required to place or attempt to
place a specific dollar value on the research or execution services of
a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good
faith, the Manager shall be prepared to show that all commissions were
allocated and paid for purposes contemplated by the Trust's brokerage
policy; that the research services provide lawful and appropriate
assistance to the Manager in the performance of its investment
decision-making responsibilities; and that the commissions paid were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to the
level of commission known to be charged by other brokers on comparable
transactions, but there shall be taken into account the Trust's
policies that (i) obtaining a low commission is deemed secondary to
obtaining a favorable securities price, since it is recognized that
usually it is more beneficial to the Fund to obtain a favorable price
than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies that are provided
for the Manager are useful to the Manager in performing its advisory
services under this Agreement. Research services provided by brokers
to the Manager are considered to be in addition to, and not in lieu
of, services required to be performed by the Manager under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Manager for any of
its accounts, and not all research may be used by the Manager for the
Fund. When execution of portfolio transactions is allocated to brokers
trading on exchanges with fixed brokerage commission rates, account
may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Manager, better prices and execution may be obtained on a commission basis or from other sources.
(4) The Fund agrees to pay to the Manager a monthly fee in dollars at an annual rate of 0.50% of the first $200 million of the daily net assets of the Fund during the month preceding each payment, reduced as follows: on such net assets in excess of $200 million up to and including $1.3 billion, a monthly fee equal on an annual basis to 0.45%; on such net assets in excess of $1.3 billion, a monthly fee equal on an annual basis to 0.40%, payable at the end of each calendar month. The Manager may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Manager shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein.
Notwithstanding the foregoing, if the total expenses of the Fund (including the fee to the Manager) in any fiscal year of the Trust exceed any expense limitation imposed by applicable State law, the Manager shall reimburse the Fund for such excess in the manner and to the extent required by applicable State law. The term "total expenses," as used in this paragraph, does not include interest, taxes, litigation expenses, distribution expenses, brokerage commissions or other costs of acquiring or disposing of any of the Fund's portfolio securities or any costs or expenses incurred or arising other than in the ordinary and necessary course of the Fund's business. When the accrued amount of such expenses exceeds this limit, the monthly payment of the Manager's fee will be reduced by the amount of such excess, subject to adjustment month by month during the balance of the Trust's fiscal year if accrued expenses thereafter fall below the limit.
(5) This Agreement shall be effective as of the date first written above and shall continue in effect until [November 30, 2009]. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter, provided that each such continuance shall be specifically approved annually by the vote of a majority of the Trust's Board of Trustees who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a meeting called for the purpose of voting on such approval and either the vote of (a) a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Trust is approved by vote of a majority of the Trust's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Manager no longer acts as Manager to the Fund, the Manager reserves the right to withdraw from the Fund the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Fund and the Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the Manager nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Manager of its duties under the Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Fund's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of any foreign government to which such assets might be exposed, or for failure, on the part of the custodian or otherwise, timely to collect payments, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross negligence on the Manager's part or by reason of reckless disregard of the Manager's duties under this Agreement. It is hereby understood and acknowledged by the Trust that the value of the investments made for the Fund may increase as well as decrease and are not guaranteed by the Manager. It is further understood and acknowledged by the Trust that investment decisions made on behalf of the Fund by the Manager are subject to a variety of factors that may affect the values and income generated by the Fund's portfolio securities, including general economic conditions, market factors and currency exchange rates, and that investment decisions made by the Manager will not always be profitable or prove to have been correct.
(10) It is understood that the services of the Manager are not deemed to be exclusive, and nothing in this Agreement shall prevent the Manager, or any affiliate thereof, from providing similar services to other investment companies and other clients, including clients that may invest in the same types of securities as the Fund, or, in providing such services, from using information furnished by others. When the Manager determines to buy or sell the same security for the Fund that the Manager or one or more of its affiliates has selected for clients of the Manager or its affiliates, the orders for all such security transactions shall be placed for execution by methods determined by the Manager, with approval by the Trust's Board of Trustees, to be impartial and fair.
(11) Pursuant to Section 6.2 of the Code of Conduct for Persons Registered with the Securities and Futures Commission (the "SFC"), the following information is included in this Agreement:
UNDERTAKINGS. Each party undertakes to notify the other party in the event of any material change to the information provided in this Agreement.
CERTAIN INFORMATION ABOUT THE MANAGER.
(i) The Manager's full name and address is:
Franklin Advisers, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
(ii) The Manager's registration status with the SFC is active.
CERTAIN INFORMATION ABOUT THE TRUST. The Trust's full name and verified address is:
Templeton Income Trust
500 East Broward Boulevard, Suite 2100
Fort Lauderdale, Florida 33394-3091
(12) This Agreement shall be construed in accordance with the laws of the State of Delaware, provided that nothing herein shall be construed as being inconsistent with applicable Federal and State securities laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Manager an agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders of shares of the Fund, nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the date first written above.
TEMPLETON INCOME TRUST
By:/s/DAVID P. GOSS --------------------------------- Name: David P. Goss Title: Vice President and Assistant Secretary |
FRANKLIN ADVISERS, INC.
By:/s/MICHAEL J. HASENSTAB, PH.D --------------------------------- Name: Michael J. Hasenstab, Ph.D Title: Senior Vice President |
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 18th day of July, 2007, between TEMPLETON INCOME TRUST (hereinafter referred to as the "Trust"), on behalf of Templeton International Bond Fund (the "Fund"), and Franklin Advisers, Inc. (hereinafter referred to as the "Manager").
In consideration of the mutual agreements herein made, the Trust, on behalf of the Fund, and the Manager understand and agree as follows:
(1) The Manager agrees, during the life of this Agreement, to manage the investment and reinvestment of the Fund's assets consistent with the provisions of the Trust Instrument of the Trust and the investment policies adopted and declared by the Trust's Board of Trustees. In pursuance of the foregoing, the Manager shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement those determinations. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised, subject to guidelines adopted by the Board of Trustees. It is understood that all acts of the Manager in performing this Agreement are performed by it outside the United States.
(2) The Manager is not required to furnish any personnel, overhead items or facilities for the Fund, including trading desk facilities or daily pricing of the Fund's portfolio.
(3) The Manager shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Trust's brokerage policies and, when applicable, the negotiation of commissions in connection therewith.
All decisions and placements shall be made in accordance with the following principles:
A. Purchase and sale orders will usually be placed with brokers which are selected by the Manager as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Manager in determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Manager shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund.
C. The Manager is authorized to allocate brokerage business to brokers who
have provided brokerage and research services, as such services are defined in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the
Fund and/or other accounts, if any, for which the Manager exercises investment
discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to
transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Manager determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the Fund
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Manager will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Manager shall be prepared to show that all commissions were allocated and paid
for purposes contemplated by the Trust's brokerage policy; that the research
services provide lawful and appropriate assistance to the Manager in the
performance of its investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether commissions were within
a reasonable range shall be based on any available information as to the level
of commission known to be charged by other brokers on comparable transactions,
but there shall be taken into account the Trust's policies that (i) obtaining a
low commission is deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies that are provided for the
Manager are useful to the Manager in performing its advisory services under this
Agreement. Research services provided by brokers to the Manager are considered
to be in addition to, and not in lieu of, services required to be performed by
the Manager under this Agreement. Research furnished by brokers through which
the Fund effects securities transactions may be used by the Manager for any of
its accounts, and not all research may be used by the Manager for the Fund. When
execution of portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of various services
provided by the broker.
D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Manager, better prices and execution may be obtained on a commission basis or from other sources.
(4) The Fund agrees to pay to the Manager a monthly fee in dollars at an annual rate of 0.50% of the first $200,000,000 of the daily net assets of the Fund during the month preceding each payment, reduced as follows: on such net assets in excess of $200,000,000 up to and including $1.3 billion, a monthly fee equal on an annual basis to 0.45%; on such net assets in excess of $1.3 billion, a monthly fee equal on an annual basis to 0.40%, payable at the end of each calendar month. The Manager may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Manager shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein.
Notwithstanding the foregoing, if the total expenses of the Fund (including the fee to the Manager) in any fiscal year of the Trust exceed any expense limitation imposed by applicable State law, the Manager shall reimburse the Fund for such excess in the manner and to the extent required by applicable State law. The term "total expenses," as used in this paragraph, does not include interest, taxes, litigation expenses, distribution expenses, brokerage commissions or other costs of acquiring or disposing of any of the Fund's portfolio securities or any costs or expenses incurred or arising other than in the ordinary and necessary course of the Fund's business. When the accrued amount of such expenses exceeds this limit, the monthly payment of the Manager's fee will be reduced by the amount of such excess, subject to adjustment month by month during the balance of the Trust's fiscal year if accrued expenses thereafter fall below the limit.
(5) This Agreement shall be effective as of the date first written above
and shall continue in effect until May 31, 2009. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the Investment
Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote of
(a) a majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Trust is approved by vote of a majority of the Trust's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Manager no longer acts as Manager to the Fund, the Manager reserves the right to withdraw from the Fund the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Fund and the Manager or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the Manager nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Manager of its duties under the Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Fund's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of any foreign government to which such assets might be exposed, or for failure, on the part of the custodian or otherwise, timely to collect payments, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross negligence on the Manager's part or by reason of reckless disregard of the Manager's duties under this Agreement. It is hereby understood and acknowledged by the Trust that the value of the investments made for the Fund may increase as well as decrease and are not guaranteed by the Manager. It is further understood and acknowledged by the Trust that investment decisions made on behalf of the Fund by the Manager are subject to a variety of factors that may affect the values and income generated by the Fund's portfolio securities, including general economic conditions, market factors and currency exchange rates, and that investment decisions made by the Manager will not always be profitable or prove to have been correct.
(10) It is understood that the services of the Manager are not deemed to be exclusive, and nothing in this Agreement shall prevent the Manager, or any affiliate thereof, from providing similar services to other investment companies and other clients, including clients that may invest in the same types of securities as the Fund, or, in providing such services, from using information furnished by others. When the Manager determines to buy or sell the same security for the Fund that the Manager or one or more of its affiliates has selected for clients of the Manager or its affiliates, the orders for all such security transactions shall be placed for execution by methods determined by the Manager, with approval by the Trust's Board of Trustees, to be impartial and fair.
(11) Pursuant to Section 6.2 of the Code of Conduct for Persons Registered with the Securities and Futures Commission (the "SFC"), the following information is included in this Agreement:
UNDERTAKINGS. Each party undertakes to notify the other party in the event of any material change to the information provided in this Agreement.
CERTAIN INFORMATION ABOUT THE MANAGER.
(i) The Manager's full name and address is:
Franklin Advisers, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
(ii) The Manager's registration status with the SFC is active.
CERTAIN INFORMATION ABOUT THE TRUST. The Trust's full name and verified address is:
Templeton Income Trust
500 East Broward Boulevard, Suite 2100
Fort Lauderdale, Florida 33394-3091
(12) This Agreement shall be construed in accordance with the laws of the State of Delaware, provided that nothing herein shall be construed as being inconsistent with applicable Federal and State securities laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Manager an agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders of shares of the Fund, nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the date first written above.
TEMPLETON INCOME TRUST
By:/s/DAVID P. GOSS
-----------------------------
Name: David P. Goss
Title: Vice President and
Assistant Secretary
|
FRANKLIN ADVISERS, INC.
By:/s/MICHAEL J. HASENSTAB, PH.D. ------------------------------- Name: Michael J. Hasenstab, Ph.D. Title: Senior Vice President |
TEMPLETON INCOME TRUST
500 E. Broward Boulevard, Suite 2100
Fort Lauderdale, Florida 33394-3091
Franklin Templeton Distributors, Inc.
100 Fountain Parkway
St. Petersburg, Florida 33716-1205
Re: Distribution Agreement
Gentlemen:
We are a Delaware statutory trust operating as an open-end management investment company. As such, our company, Templeton Income Trust (referred to herein as the "Company"), comprised of two series (Templeton International Bond Fund and Templeton Global Bond Fund) and any additional series that may be created in the future, is registered under the Investment Company Act of 1940, (the "1940 Act"), and its shares are registered under the Securities Act of 1933 (the "1933 Act"). We desire to begin issuing our authorized but unissued shares of common stock (the "Shares") to authorized persons in accordance with applicable Federal and State securities laws. Shares will be made available for the Funds (referred to herein as a "Fund" or collectively as the "Funds") formed as a series of the Company.
You have informed us that your company is registered as a broker-dealer under the provisions of the Securities Exchange Act of 1934 and that your company is a member of the National Association of Securities Dealers, Inc. You have indicated your desire to act as the exclusive selling agent and distributor for the Shares. We have been authorized to execute and deliver this Agreement to you by a resolution of our Board of Trustees passed at a meeting at which a majority of our Trustees, including a majority who are not otherwise interested persons of the Company and who are not interested persons of our investment adviser, its related organizations or with you or your related organizations, were present and voted in favor of the said resolution approving this Agreement.
1. Appointment of Underwriter. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive sales agent for our Shares (except for sales made directly by the Funds without sales charge) and agree that we will deliver such Shares as you may sell. You agree to use your best efforts to promote the sale of Shares, but are not obligated to sell any specific number of Shares.
2. Independent Contractor. You will undertake and discharge your obligations hereunder as an independent contractor and shall have no authority or power to obligate or bind us by your actions, conduct or contracts except that you are authorized to accept orders for the purchase or repurchase of Shares as our agent. You may appoint sub-agents or distribute through dealers or otherwise as you may determine from time to time, but this Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale or repurchase on our behalf or otherwise act as our agent for any purpose. You may allow such sub-agents or dealers such commissions or discounts not exceeding the total sales commission as you shall deem advisable so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws.
3. Offering Price. The Shares of the Funds shall be offered for sale at a price equivalent to their respective net asset value (as specified in the Fund's prospectus). On each business day on which the New York Stock Exchange is open for business, we will furnish you with the net asset value of the Shares which shall be determined in accordance with our then effective prospectus. All Shares will be sold in the manner set forth in our then effective prospectus.
4. Terms and Conditions of Sales. Shares of the Funds shall be offered for sale only in those jurisdictions where they have been properly registered or are exempt from registration, and only to those groups of people which the Board of Trustees may from time to time determine to be eligible to purchase such shares.
5. Payment of Shares. At or prior to the time of delivery of any of our Shares you will pay or cause to be paid to our Custodian or its successor, for our account, an amount in cash equal to the net asset value of such Shares. In the event that you pay for Shares sold by you prior to your receipt of payment from purchasers you are authorized to reimburse yourself for the net asset value of such Shares when received by you.
6. Purchases for Your Own Account. You shall not purchase our Shares for your own account for purposes of resale to the public, but you may purchase Shares for your own investment account upon your written assurance that the purchase is for investment purposes and that the Shares will not be resold except through redemption by us.
7. Allocation of Expenses. We will pay the expenses:
(a) Of the preparation of the audited and certified financial statements of our company to be included in any Post-Effective Amendments ("Amendments") to our Registration Statement under the 1933 Act or 1940 Act, including the prospectus and statement of additional information included therein;
(b) Of the preparation, including legal fees, and of printing all Amendments or supplements filed with the Securities and Exchange Commission, including the copies of the prospectuses included in the Amendments and the first 10 copies of the definitive prospectuses or supplements thereto, other than those necessitated by your (including your "Parent's") activities or Rules and Regulations related to your activities where such Amendments or supplements result in expenses which we would not otherwise have incurred; and
(c) Of the preparation, printing and distribution of any reports or communications which we send to our existing shareholders.
(d) Of filing and other fees to Federal and State securities regulatory authorities necessary to continue offering our Shares of any of the Funds as you may require in connection with your duties as underwriter.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements thereto and statement of additional information which are necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all Amendments and supplements to our prospectuses and statement of additional information if the Amendment or supplement arises from your (including your "Parent's") activities or Rules and Regulations related to your activities and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales literature, of reports or other communications which we have prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our Shares.
8. Furnishing of Information. We will furnish to you such information with respect to the Funds and their Shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained when so signed will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our Shares for sale to the public under the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will furnish you with annual audited financial statements of our books and accounts certified by independent public accountants, with semi-annual financial statements prepared by us, and, from time to time, with such additional information regarding our financial condition as you may reasonably request.
9. Conduct of Business. Other than our currently effective prospectus, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of Federal and State securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such materials prior to their use and no such material shall be published if we shall reasonably and promptly object.
You shall comply with the applicable Federal and State laws and regulations where our Shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and in strict accordance with the applicable provisions of the Articles of Incorporation and By-Laws of the Fund.
In the absence of willful misfeasance, bad faith or gross negligence on your part, or of reckless disregard of your obligations hereunder, you shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder.
10. Other Activities. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares.
11. Term of Agreement. This Agreement shall become effective on the date of its execution, and shall remain in effect for a period of two (2) years. The Agreement is renewable annually thereafter with respect to the Fund for successive periods not to exceed one year (i) by a vote of a majority of the outstanding voting securities of the Funds or by a vote of the Board of Trustees of the Company, and (ii) by a vote of a majority of the trustees of the Company who are not parties to the Agreement or interested persons of any parties to the Agreement (other than as Trustees of the Company), cast in person at a meeting called for the purpose of voting on the Agreement.
This Agreement may at any time be terminated by the Funds without the payment of any penalty, (i) either by vote of the Board of Trustees of the Company or by vote of a majority of the outstanding voting securities of the Funds, on 60 days' written notice to you; or (ii) by you on 60 days' written notice to the Fund; and shall immediately terminate with respect to the Fund in the event of its assignment.
12. Suspension of Sales. We reserve the right at all times to suspend or limit the public offering of the Shares of the Funds upon two days' written notice to you.
13. Miscellaneous. This Agreement shall be subject to the laws of the State of California and shall be interpreted and construed to further promote the operation of the Company as an open-end investment company. As used herein the terms "Net Asset Value", "Offering Price", "Investment Company", "Open-End Investment Company", "Assignment", "Principal Underwriter", "Interested Person", "Parents", "Affiliated Person", and "Majority of the Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by signing each of the enclosed copies, whereupon this will become a binding agreement as of the date set forth below.
Very truly yours,
TEMPLETON INCOME TRUST
By:/s/DAVID P. GOSS
-----------------------
David P. Goss
Vice President and
Assistant Secretary
|
ACCEPTED:
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By:/s/PETER D. JONES ----------------------- Peter D. Jones President |
Dated as of December 3, 2007
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of February 16, 1996, by and between each Investment Company listed on Exhibit A, for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK, a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act") that invests and reinvests, for itself or on behalf of its Series, in Domestic Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of the Investment Company Act of 1940, as amended, and is eligible to receive and maintain custody of investment company assets pursuant to Section 17(f) and Rule 17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for each of its Series, desire to provide for the retention of the Custodian as a custodian of the assets of each Investment Company and each Series, on the terms and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a Master Custody Agreement for administrative convenience, this Agreement shall create a separate custody agreement for each Investment Company and for each Series designated on Exhibit A, as though each Investment Company had separately executed an identical custody agreement for itself and for each of its Series. No rights, responsibilities or liabilities of any Investment Company or Series shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law to be closed in The City of New York and, with respect to Foreign Securities, a London Business Day. "London Business Day" shall mean any day on which dealings and deposits in U.S. dollars are transacted in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1 hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1 hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of 1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1 hereof.
"Securities System Account" shall have the meaning provided in Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7 hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by telex, facsimile transmission, bankwire or other teleprocess or electronic instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby appoints and designates the Custodian as a custodian of the assets of each Fund, including cash denominated in U.S. dollars or foreign currency ("cash"), securities the Fund desires to be held within the United States ("Domestic Securities") and securities it desires to be held outside the United States ("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes referred to herein, collectively, as "Securities." The Custodian hereby accepts such appointment and designation and agrees that it shall maintain custody of the assets of each Fund delivered to it hereunder in the manner provided for herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the Custodian Securities and cash owned by the Funds, payments of income, principal or capital distributions received by the Funds with respect to Securities owned by the Funds from time to time, and the consideration received by the Funds for such Shares or other securities of the Funds as may be issued and sold from time to time. The Custodian shall have no responsibility whatsoever for any property or assets of the Funds held or received by the Funds and not delivered to the Custodian pursuant to and in accordance with the terms hereof. All Securities accepted by the Custodian on behalf of the Funds under the terms of this Agreement shall be in "street name" or other good delivery form as determined by the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust Company as a Subcustodian to hold assets of the Funds in accordance with the provisions of this Agreement. In addition, upon receipt of Proper Instructions and a certified copy of a resolution of the Board or of the Executive Committee, and certified by the Secretary or an Assistant Secretary, of an Investment Company, the Custodian may from time to time appoint one or more other Subcustodians or Foreign Custodians to hold assets of the affected Funds in accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign Custodian shall not have any duty or responsibility to manage or recommend investments of the assets of any Fund held by them or to initiate any purchase, sale or other investment transaction in the absence of Proper Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically segregate from any property owned by the Custodian, for the account of each Fund, all non-cash property delivered by each Fund to the Custodian hereunder other than Securities which, pursuant to Subsection 3.8 hereof, are held through a registered clearing agency, a registered securities depository, the Federal Reserve's book-entry securities system (referred to herein, individually, as a "Securities System"), or held by a Subcustodian, Foreign Custodian or in a Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall release and deliver Securities owned by a Fund and held by the Custodian in the following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such Securities for the account of the Fund and receipt by the Custodian, a Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a Subcustodian or a Foreign Custodian in connection with any repurchase agreement related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities are called, redeemed, retired or otherwise become payable; provided, that in any such case, the cash or other consideration is to be delivered to the Custodian, a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the name or nominee name of the Fund, the name or nominee name of the Custodian, the name or nominee name of any Subcustodian or Foreign Custodian; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new Securities are to be delivered to the Custodian, a Subcustodian or Foreign Custodian;
(g) to the broker selling the same for examination in accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, or reorganization of the issuer of such Securities, or pursuant to a conversion of such Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the surrender thereof in connection with the exercise of such warrants, rights or similar Securities or the surrender of interim receipts or temporary Securities for definitive Securities; provided that, in any such case, the new Securities and cash, if any, are to be delivered to the Custodian, a subcustodian or a Foreign Custodian;
(j) for delivery in connection with any loans of Securities made by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of adequate collateral as determined by the Fund (and identified in Proper Instructions communicated to the Custodian), which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the account of the Custodian, a Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry securities system, the Custodian will not be held liable or responsible for the delivery of Securities owned by the Fund prior to the receipt of such collateral;
(k) for delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a broker-dealer relating to compliance with the rules of registered clearing corporations and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent for delivery to the Transfer Agent or to the holders of Shares in connection with distributions in kind in satisfaction of requests by holders of Shares for repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of Proper Instructions, and a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary of the Fund, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom delivery of such securities shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a Subcustodian or a Foreign Custodian (other than bearer Securities) shall be registered in the name or nominee name of the appropriate Fund, in the name or nominee name of the Custodian or in the name or nominee name of any Subcustodian or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee, Subcustodian or Foreign Custodian harmless from any liability as a holder of record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts for each Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it hereunder from or for the account of each Fund, other than cash maintained by a Fund in a bank account established and used in accordance with Rule 17f-3 under the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to its credit as Custodian in the banking departments of the Custodian, a Subcustodian or a Foreign Custodian. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. In the event a Fund's account for any reason becomes overdrawn, or in the event an action requested in Proper Instructions would cause such an account to become overdrawn, the Custodian shall immediately notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts. The Custodian shall collect income payable with respect to Securities owned by each Fund, settle Securities trades for the account of each Fund and credit and debit each Fund's account with the Custodian in connection therewith as stated in this Subsection 3.5. This Subsection shall not apply to repurchase agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall effect the purchase of a Security by charging the account of the Fund on the contractual settlement date, and by making payment against delivery. If the seller or selling broker fails to deliver the Security within a reasonable period of time, the Custodian shall notify the Fund and credit the transaction amount to the account of the Fund, but the Custodian shall have no further liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall effect the sale of a Security by withdrawing a certificate or other indicia of ownership from the account of the Fund and by making delivery against payment, and shall credit the account of the Fund with the amount of such proceeds on the contractual settlement date. If the purchaser or the purchasing broker fails to make payment within a reasonable period of time, the Custodian shall notify the Fund, debit the Fund's account for any amounts previously credited to it by the Custodian as proceeds of the transaction and, if delivery has not been made, redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian receives timely and accurate Proper Instructions to enable the Custodian to effect settlement of any purchase or sale. If the Custodian does not receive such instructions within the required time period, the Custodian shall have no liability of any kind to any person, including the Fund, for failing to effect settlement on the contractual settlement date. However, the Custodian shall use its best reasonable efforts to effect settlement as soon as possible after receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with interest income payable on interest bearing Securities on payable date. Dividends and other amounts payable with respect to Domestic Securities and Foreign Securities shall be credited to the account of the Fund when received by the Custodian. The Custodian shall not be required to commence suit or collection proceedings or resort to any extraordinary means to collect such income and other amounts payable with respect to Securities owned by the Fund. The collection of income due the Fund on Domestic Securities loaned pursuant to the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is entitled. The Custodian shall have no liability to any person, including the Fund, if the Custodian credits the account of the Fund with such income or other amounts payable with respect to Securities owned by the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j) hereof) and the Custodian subsequently is unable to collect such income or other amounts from the payors thereof within a reasonable time period, as determined by the Custodian in its sole discretion. In such event, the Custodian shall be entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions the Custodian shall pay out monies of a Fund in the following cases or as otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or options
on futures contracts for the account of the Fund but only, except as otherwise
provided herein, (i) against the delivery of such securities, or evidence of
title to futures contracts or options on futures contracts, to the Custodian or
a Subcustodian registered pursuant to Subsection 3.3 hereof or in proper form
for transfer; (ii) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Subsection 3.8 hereof; or
(iii) in the case of repurchase agreements entered into between the Fund and the
Custodian, another bank or a broker-dealer (A) against delivery of the
Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of Securities owned by the Fund as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the Fund;
(d) for the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: custodian fees, interest, taxes, management, accounting, transfer agent and legal fees and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; and
(e) for the payment of any dividends or distributions declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY Western Trust Company or, upon receipt of Proper Instructions, another bank or trust company, which is itself qualified under the Investment Company Act to act as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out such of the duties of the Custodian hereunder as a Custodian may from time to time direct; provided, however, that the appointment of any Subcustodian shall not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may deposit and/or maintain Domestic Securities owned by a Fund in a Securities System in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions:
(a) the Custodian may hold Domestic Securities of the Fund in the Depository Trust Company or the Federal Reserve's book entry system or, upon receipt of Proper Instructions, in another Securities System provided that such securities are held in an account of the Custodian in the Securities System ("Securities System Account") which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
(b) the records of the Custodian with respect to Domestic Securities of the Fund which are maintained in a Securities System shall identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased for
the account of the Fund upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Securities System Account, and
(ii) the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian shall transfer
Domestic Securities sold for the account of the Fund upon (A) receipt of advice
from the Securities System that payment for such securities has been transferred
to the Securities System Account, and (B) the making of an entry on the records
of the Custodian to reflect such transfer and payment for the account of the
Fund. Copies of all advices from the Securities System of transfers of Domestic
Securities for the account of the Fund shall be maintained for the Fund by the
Custodian and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of the transfer to or from the
account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding domestic securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of a Fund, into which account or accounts may be transferred cash and/or Securities, including Securities maintained in an account by the Custodian pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer or futures commission merchant, relating to compliance with the rules of registered clearing corporations and of any national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, and (iii) for other proper corporate purposes, but only, in the case of this clause (iii), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Fund held by it and in connection with transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting materials and all notices relating to such Securities. If the Securities are registered otherwise than in the name of a Fund or a nominee of a Fund, the Custodian shall use its best reasonable efforts, consistent with applicable law, to cause all proxies to be promptly executed by the registered holder of such Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The Custodian shall transmit promptly to each Fund all written information (including, without limitation, pendency of calls and maturities of Securities and expirations of rights in connection therewith and notices of exercise of put and call options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from issuers of Securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to each Fund all written information received by the Custodian from issuers of the Securities whose tender or exchange is sought and from the party (or its agents) making the tender or exchange offer. If a Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three Business Days prior to the date of which the Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day furnish each Fund with a statement summarizing all transactions and entries for the account of the Fund for the preceding day. At the end of every month, the Custodian shall furnish each Fund with a list of the cash and portfolio securities showing the quantity of the issue owned, the cost of each issue and the market value of each issue at the end of each month. Such monthly report shall also contain separate listings of (a) unsettled trades and (b) when-issued securities. The Custodian shall furnish such other reports as may be mutually agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the Custodian to hold Foreign Securities and cash in custody accounts which have been established by the Custodian with (i) its foreign branches, (ii) foreign banking institutions, foreign branches of United States banks and subsidiaries of United States banks or bank holding companies (each a "Foreign Custodian") and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign Securities Depository"); provided, however, that the appropriate Board or Executive Committee has approved in advance the use of each such Foreign Custodian and Foreign Securities Depository and the contract between the Custodian and each Foreign Custodian and that such approval is set forth in Proper Instructions and a certified copy of a resolution of the Board or of the Executive Committee certified by the Secretary or an Assistant Secretary of the appropriate Investment Company. Unless expressly provided to the contrary in this Section 4, custody of Foreign Securities and assets held outside the United States by the Custodian, a Foreign Custodian or through a Foreign Securities Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of its foreign branches, Foreign Custodians and Foreign Securities Depositories to: (i) "foreign securities", as defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and cash equivalents in such amounts as the Custodian or an affected Fund may determine to be reasonably necessary to effect the Fund's Foreign Securities transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its books and records as belonging to the appropriate Fund, the Foreign Securities of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the Custodian and a Foreign Custodian shall be substantially in the form as delivered to the Investment Companies for their Boards' review, and shall not be amended in a way that materially adversely affects any Fund without the prior written consent of the Fund. Upon request, the Custodian shall certify to the Funds that an agreement between the Custodian and a Foreign Custodian meets the requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of a Fund, the Custodian will use its best reasonable efforts to arrange for the independent accountants or auditors of the Fund to be afforded access to the books and records of any Foreign Custodian insofar as such books and records relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper Instructions, the Custodian shall instruct the appropriate Foreign Custodian to transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to the extent explicitly provided herein, only in any of the cases specified in Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any of the cases specified in Subsection 3.6. Notwithstanding anything herein to the contrary, settlement and payment for Foreign Securities received for the account of a Fund and delivery of Foreign Securities maintained for the account of a Fund may be effected in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. Foreign Securities maintained in the custody of a Foreign Custodian may be maintained in the name of such entity or its nominee name to the same extent as set forth in Section 3.3 of this Agreement and each Fund agrees to hold any Foreign Custodian and its nominee harmless from any liability as a holder of record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by the Custodian and a Fund, require the Foreign Custodian to exercise reasonable care or, alternatively, impose a contractual liability for breach of contract without an exception based upon a standard of care in the performance of its duties and to indemnify and hold harmless the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Custodian's performance of such obligations, excepting, however, Citibank, N.A., and its subsidiaries and branches, where the indemnification is limited to direct money damages and requires that the claim be promptly asserted. At the election of a Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim, unless such subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event that the Custodian learns of a material adverse change in the financial condition of a Foreign Custodian or learns that a Foreign Custodian's financial condition has declined or is likely to decline below the minimum levels required by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be reasonably necessary to assist each Investment Company's Board in its annual review and approval of the continuance of all contracts or arrangements with Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means instructions of a Fund received by the Custodian via telephone or in Writing which the Custodian believes in good faith to have been given by Authorized Persons (as defined below) or which are transmitted with proper testing or authentication pursuant to terms and conditions which the Custodian may specify. Any Proper Instructions delivered to the Custodian by telephone shall promptly thereafter be confirmed in accordance with procedures, and limited in subject matter, as mutually agreed upon by the parties. Unless otherwise expressly provided, all Proper Instructions shall continue in full force and effect until canceled or superseded. If the Custodian requires test arrangements, authentication methods or other security devices to be used with respect to Proper Instructions, any Proper Instructions given by the Funds thereafter shall be given and processed in accordance with such terms and conditions for the use of such arrangements, methods or devices as the Custodian may put into effect and modify from time to time. The Funds shall safeguard any testkeys, identification codes or other security devices which the Custodian shall make available to them. The Custodian may electronically record any Proper Instructions given by telephone, and any other telephone discussions, with respect to its activities hereunder. As used in this Agreement, the term "Authorized Persons" means such officers or such agents of a Fund as have been properly appointed pursuant to a resolution of the appropriate Board or Executive Committee, a certified copy of which has been provided to the Custodian, to act on behalf of the Fund under this Agreement. Each of such persons shall continue to be an Authorized Person until such time as the Custodian receives Proper Instructions that any such officer or agent is no longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from a Fund:
(a) make payments to itself or others for minor expenses of handling Securities or other similar items relating to its duties under this Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the Securities and property of the Fund except as otherwise provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions (conveyed by telephone or in Writing), notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly given or executed by or on behalf of a Fund. The Custodian may receive and accept a certified copy of a resolution of a Board or Executive Committee as conclusive evidence (a) of the authority of any person to act in accordance with such resolution or (b) of any determination or of any action by the Board or Executive Committee as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information in its possession (to the extent permissible under applicable law) to the entity or entities appointed by the appropriate Board to keep the books of account of a Fund and/or compute the net asset value per Share of the outstanding Shares of a Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its activities under this Agreement which are required with respect to such activities under Section 31 of the Investment Company Act and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the appropriate Investment Company and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Investment Company and employees and agents of the Securities and Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund with a tabulation of Securities and Cash owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between each Investment Company, on behalf of each Fund, and the Custodian. In addition, should the Custodian in its discretion advance funds (to include overdrafts) to or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be entitled to prompt reimbursement of any amounts advanced. In the event of such an advance, and to the extent permitted by the 1940 Act and the Fund's policies, the Custodian shall have a continuing lien and security interest in and to the property of the Fund in the possession or control of the Custodian or of a third party acting in the Custodian's behalf, until the advance is reimbursed. Nothing in this Agreement shall obligate the Custodian to advance funds to or on behalf of a Fund, or to permit any borrowing by a Fund except for borrowings for temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such duties as are set forth herein or contained in Proper Instructions and shall use reasonable care in carrying out such duties. The Custodian shall be liable to a Fund for any loss which shall occur as the result of the failure of a Foreign Custodian engaged directly or indirectly by the Custodian to exercise reasonable care with respect to the safekeeping of securities and other assets of the Fund to the same extent that the Custodian would be liable to the Fund if the Custodian itself were holding such securities and other assets. Nothing in this Agreement shall be read to limit the responsibility or liability of the Custodian or a Foreign Custodian for their failure to exercise reasonable care with regard to any decision or recommendation made by the Custodian or Subcustodian regarding the use or continued use of a Foreign Securities Depository. In the event of any loss to a Fund by reason of the failure of the Custodian or a Foreign Custodian engaged by such Foreign Custodian or the Custodian to utilize reasonable care, the Custodian shall be liable to the Fund to the extent of the Fund's damages, to be determined based on the market value of the property which is the subject of the loss at the date of discovery of such loss and without reference to any special conditions or circumstances. The Custodian shall be held to the exercise of reasonable care in carrying out this Agreement, and shall not be liable for acts or omissions unless the same constitute negligence or willful misconduct on the part of the Custodian or any Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund agrees to indemnify and hold harmless the Custodian and its nominees from all taxes, charges, expenses, assessments, claims and liabilities (including legal fees and expenses) incurred by the Custodian or its nominess in connection with the performance of this Agreement with respect to such Fund, except such as may arise from any negligent action, negligent failure to act or willful misconduct on the part of the indemnified entity or any Foreign Custodian. The Custodian shall be entitled to rely, and may act, on advice of counsel (who may be counsel for a Fund) on all matters and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian need not maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in respect of Securities held by the Custodian, agent, Subcustodian or Foreign Custodian hereunder shall be made at the risk of the Funds. The Custodian shall have no liability for any loss occasioned by delay in the actual receipt of notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any payment, redemption or other transaction regarding securities in respect of which the Custodian has agreed to take action as provided in Section 3 hereof. The Custodian shall not be liable for any action taken in good faith upon Proper Instructions or upon any certified copy of any resolution of the Board and may rely on the genuineness of any such documents which it may in good faith believe to be validly executed. Notwithstanding the foregoing, the Custodian shall not be liable for any loss resulting from, or caused by, the direction of a Fund to maintain custody of any Securities or cash in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, civil disturbance, acts of war or terrorism, insurrection, revolution, nuclear fusion, fission or radiation or other similar occurrences, or events beyond the control of the Custodian. Finally, the Custodian shall not be liable for any taxes, including interest and penalties with respect thereto, that may be levied or assessed upon or in respect of any assets of any Fund held by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and accepts the limitations of liability as set forth in each Investment Company's Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of Limited Partnership. The Custodian agrees that each Fund's obligation hereunder shall be limited to the assets of the Fund, and that the Custodian shall not seek satisfaction of any such obligation from the shareholders of the Fund nor from any Board Member, officer, employee, or agent of the Fund or the Investment Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its execution and shall continue in full force and effect until terminated as hereinafter provided. This Agreement may be terminated by each Investment Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing to the other provided that any termination by an Investment Company shall be authorized by a resolution of the Board, a certified copy of which shall accompany such notice of termination, and provided further, that such resolution shall specify the names of the persons to whom the Custodian shall deliver the assets of the affected Funds held by the Custodian. If notice of termination is given by the Custodian, the affected Investment Companies shall, within 90 days following the giving of such notice, deliver to the Custodian a certified copy of a resolution of the Boards specifying the names of the persons to whom the Custodian shall deliver assets of the affected Funds held by the Custodian. In either case the Custodian will deliver such assets to the persons so specified, after deducting therefrom any amounts which the Custodian determines to be owed to it hereunder (including all costs and expenses of delivery or transfer of Fund assets to the persons so specified). If within 90 days following the giving of a notice of termination by the Custodian, the Custodian does not receive from the affected Investment Companies certified copies of resolutions of the Boards specifying the names of the persons to whom the Custodian shall deliver the assets of the Funds held by the Custodian, the Custodian, at its election, may deliver such assets to a bank or trust company doing business in the State of California to be held and disposed of pursuant to the provisions of this Agreement or may continue to hold such assets until a certified copy of one or more resolutions as aforesaid is delivered to the Custodian. The obligations of the parties hereto regarding the use of reasonable care, indemnities and payment of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i) create any fiduciary, joint venture or partnership relationship between the Custodian and any Fund or (ii) be construed as or constitute a prohibition against the provision by the Custodian or any of its affiliates to any Fund of investment banking, securities dealing or brokerages services or any other banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the other party hereto such instruments and other documents as such other party may reasonably request for the purpose of carrying out or evidencing the transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding relating to this Agreement is brought by a party hereto against the other party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (including allocated costs and disbursements of in-house counsel), in addition to any other relief to which the prevailing party may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or other communication hereunder shall be in Writing and shall be delivered to the intended recipient at the following address (or at such other address as the intended recipient shall have specified in a written notice given to the other parties hereto):
if to a Fund or Investment Company: if to the Custodian: [Fund or Investment Company] The Bank of New York c/o Franklin Resources, Inc. Mutual Fund Custody Manager 777 Mariners Island Blvd. BNY Western Trust Co. San Mateo, CA 94404 550 Kearney St., Suite 60 Attention: Chief Legal Officer San Francisco, CA 94108 |
14.5 Headings. The underlined headings contained herein are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the interpretation hereof.
14.6 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and both of which, when taken together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of New York (without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11 hereof regarding the Custodian's general standard of care, no failure, delay or default in performance of any obligation hereunder shall constitute an event of default or a breach of this agreement, or give rise to any liability whatsoever on the part of one party hereto to the other, to the extent that such failure to perform, delay or default arises out of a cause beyond the control and without negligence of the party otherwise chargeable with failure, delay or default; including, but not limited to: action or inaction of governmental, civil or military authority; fire; strike; lockout or other labor dispute; flood; war; riot; theft; earthquake; natural disaster; breakdown of public or common carrier communications facilities; computer malfunction; or act, negligence or default of the other party. This paragraph shall in no way limit the right of either party to this Agreement to make any claim against third parties for any damages suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any power, right, privilege or remedy hereunder, and no delay on the part of any person in the exercise of any power, right, privilege or remedy hereunder, shall operate as a waiver thereof; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of an agreement or instrument executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this Agreement, or the application of any such provision to any person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement is intended to provide any rights or remedies to any person other than the Investment Companies, for themselves and for the Funds, and the Custodian and their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict between this Agreement, including without limitation any amendments hereto, and any other agreement which may now or in the future exist between the parties, the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context hereof, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: /s/ Fred Ricciardi Its: Senior Vice President |
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/ Harmon E. Burns
Harmon E. Burns
Their: Vice President
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Their: Vice President & Secretary
|
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996.
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
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Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax-Free Income Fund California Corporation
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities
Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------------
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Tax-Advantaged International California Limited
Bond Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------------
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Investment Grade Intermediate Bond Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Adjustable U.S. Government Fund
Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
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Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
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|
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian (the "Custodian") and each Investment Company listed on Exhibit A, for itself and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission of instructions from each Fund to the Custodian, as and to the extent permitted by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners, as applicable, of each Investment Company have previously authorized each Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5 of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for the Fund ("FTISI"), and the Custodian requiring in connection with each use of the Terminal Link by or on behalf of the Fund use of an authorization code provided by the Custodian and at least two access codes established by the Fund. Each Fund represents that FTISI will maintain a transmission line to the Custodian and has been selected by the Fund to receive electronic data transmissions from the Custodian or the Fund and forward the same to the Fund or the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the Fund providing Certificates to the Custodian with respect to transactions involving Securities or for the transfer of money to be applied to the payment of dividends, distributions or redemptions of Fund Shares, and shall be utilized by the Custodian only for the purpose of providing notices to the Fund. Such use shall commence only after a Fund shall have established access codes and safekeeping procedures to safeguard and protect the confidentiality and availability of such access codes, and shall have reviewed the safekeeping procedures established by FTISI to assure that transmissions inputted by the Fund, and only such transmissions, are forwarded by FTISI to the Custodian without any alteration or omission. Each use of the Terminal Link by a Fund shall constitute a representation and warranty that the Terminal Link is being used only for the purposes permitted hereby, that at least two Officers have each utilized an access code, that such safekeeping procedures have been established by the Fund, that FTISI has safekeeping procedures reviewed by the Fund to assure that all transmissions inputted by the Fund, and only such transmissions, are forwarded by FTISI to the Custodian without any alteration or omission by FTISI, and that such use does not, to the Fund's knowledge, contravene the Investment Company Act of 1940, as amended, or the rules or regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment and services, including, but not limited to communications services, necessary for it to utilize the Terminal Link, and the Custodian shall not be responsible for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or through the Terminal Link and any proprietary data, software, processes, information and documentation (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of the Custodian. Each Fund shall, and shall cause others to which it discloses the Information, including without limitation FTISI, to keep the Information confidential, by using the same care and discretion it uses with respect to its own confidential property and trade secrets, and shall neither make nor permit any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to the Custodian any and all copies of the Information which are in the Fund's possession or under its control, or which the Fund distributed to third parties, including without limitation FTISI. The provisions of this Article shall not affect the copyright status of any of the Information which may be copyrighted and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to time without notice to the Funds or FTISI, except that the Custodian shall give the Funds notice not less than 75 days in advance of any modification which would materially adversely affect the Funds' operation. The Funds agree that neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link without the Custodian's prior written consent. Each Fund acknowledges that any software or procedures provided the Fund or FTISI as part of the Terminal Link are the property of the Custodian and, accordingly, agrees that any modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian and whether with or without the Custodian's consent, shall become the property of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized by the Custodian, the Funds or FTISI in connection with the Terminal Link, make no warranties or representations to any other party, express or implied, in fact or in law, including but not limited to warranties of merchantability and fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization codes and the access codes applicable to Terminal Link with extreme care, and irrevocably authorizes the Custodian to act in accordance with and rely on Certificates received by it through the Terminal Link. Each Fund acknowledges that it is its responsibility to assure that only its officers and authorized persons of FTISI use the Terminal Link on its behalf, and that the Custodian shall not be responsible nor liable for any action taken in good faith in reliance upon a Certificate, nor for any alteration, omission, or failure to promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing to
act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the Custodian or any manufacturer or supplier of its computer equipment, software or services relating to the Terminal Link be responsible for any special, indirect, incidental or consequential damages which a Fund or FTISI may incur or experience by reason of any malfunction of such equipment or software, even if the Custodian or any manufacturer or supplier has been advised of the possibility of such damages, nor with respect to the use of the Terminal Link shall the Custodian or any such manufacturer or supplier be liable for acts of God, or with respect to the following to the extent beyond such person's reasonable control: machine or computer breakdown or malfunction, interruption or malfunction of communication facilities, labor difficulties or any other similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or interruptions in, or delay or unavailability of, the Terminal Link as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, or (ii) the business day on which discovery should have occurred through the exercise of reasonable care. The Custodian shall promptly advise the Fund or FTISI whenever the Custodian learns of any errors, omissions or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of the Terminal Link, receipt of each Certificate the Custodian receives through the Terminal Link, and in the absence of such acknowledgment the Custodian shall not be liable for any failure to act in accordance with such Certificate and the Funds may not claim that such Certificate was received by the Custodian. Such acknowledgment, which may occur after the Custodian has acted upon such Certificate, shall be given on the same day on which such Certificate is received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers, thereunto duly authorized and their respective seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: /s/ Fred Ricciardi Title: Senior Vice President |
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/ Harmon E. Burns
Harmon E. Burns
Title: Vice President
By: /s/ Deborah R. Gatzek
Deborah R. Garzek
Title: Vice President & Secretary
|
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996.
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INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------------
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax-Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Tax-Advantaged International California Limited
Bond Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Investment Grade Intermediate Bond Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund -2000
Zero Coupon Fund -2005
Zero Coupon Fund -2010
Adjustable U.S. Government Fund
Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
------------------------------------------------------------------------------------------------------------------------------------
|
Amendment to Master Custody Agreement
Effective February 27, 1998, The Bank of New York and each of the Investment Companies listed in the Attachment appended to this Amendment, for themselves and each series listed in the Attachment, hereby amend the Master Custody Agreement dated as of February 16, 1996 by:
1. Replacing Exhibit A with the attached; and
2. Only with respect to the Investment Companies and series thereof listed in the Attachment, deleting paragraphs (a) and (b) of Subsection 3.5 and replacing them with the following:
(a) Promptly after each purchase of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such purchase: (a) the Series to which such Securities are to be
specifically allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount purchased and
accrued interest, if any; (d) the date of purchase and settlement; (e) the
purchase price per unit; (f) the total amount payable upon such purchase;
(g) the name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian shall, upon
receipt of Securities purchased by or for the Fund, pay to the broker
specified in the Proper Instructions out of the money held for the account
of such Series the total amount payable upon such purchase, provided that
the same conforms to the total amount payable as set forth in such Proper
Instructions.
(b) Promptly after each sale of Securities by the Fund, the Fund shall deliver to the Custodian Proper Instructions specifying with respect to each such sale: (a) the Series to which such Securities were specifically allocated; (b) the name of the issuer and the title of the Security; (c) the number of shares or the principal amount sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f) the total amount payable to the Fund upon such sale; (g) the name of the broker through whom or the person to whom the sale was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom the Securities are to be delivered. The Custodian shall deliver the Securities specifically allocated to such Series to the broker specified in the Proper Instructions against payment of the total amount payable to the Fund upon such sale, provided that the same conforms to the total amount payable as set forth in such Proper Instructions.
Investment Companies The Bank of New York
By: /s/ Elizabeth N. Cohernour By: /s/ Stephen E. Grunston
-------------------------- -----------------------
Name: Elizabeth N. Cohernour Name: Stephen E. Grunston
Title: Authorized Officer Title: Vice President
Attachment
|
INVESTMENT COMPANY SERIES
Franklin Mutual Series Fund Inc. Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin Valuemark Funds Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
|
PAGE
The Bank of New York
Master Custody Agreement
Exhibit A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996.
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
Franklin Valuemark Funds (cont.) Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
------------------------------------------- -------------------------------- -------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Growth Investments Fund
------------------------------------------- -------------------------------- -------------------------------------------------------
------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
------------------------------------------- -------------------------------- -------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
INTERVAL FUND
Franklin Floating Rate Trust Delaware Business Trust
------------------------------------------- -------------------------------- -------------------------------------------------------
|
AMENDMENT
Amendment made as of May 16, 2001 to that certain Master Custody Agreement dated as of February 16, 1996, as thereafter amended, between each of the investment companies listed on Schedule 1 hereto (each, a "Fund") and The Bank of New York ("Custodian") (such Master Custody Agreement hereinafter referred to as the "Custody Agreement").
W I T N E S S E T H :
WHEREAS, Rule 17f-7 under the Investment Company Act of 1940, as amended (the "Rule"), was adopted on June 12, 2000 by the Securities and Exchange Commission;
WHEREAS, the Fund and Custodian desire to amend the Custody Agreement to conform with the Rule;
NOW, THEREFORE, the Fund and Custodian hereby agree as follows:
A. The following new Article is hereby added to the Custody Agreement:
FOREIGN DEPOSITORIES
1. As used in this Article, the term "Foreign Depository" shall mean (a) Euroclear, (b) Clearstream Banking, societe anonyme, (c) each Eligible Securities Depository as defined in Rule 17f-7 under the Investment Company Act of 1940, as amended (the "Rule"), identified by Custodian to the Fund or its investment adviser(s) ("Adviser") from time to time, and (d) the respective successors and nominees of the foregoing.
2. Notwithstanding any other provision in this Agreement, the Fund hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon any delivery of a Certificate or any giving of Oral Instructions, Instructions, or Written Instructions, as the case may be, that the Fund or its Adviser has determined that the custody arrangements of each Foreign Depository provide reasonable safeguards against the custody risks associated with maintaining assets with such Foreign Depository within the meaning of the Rule.
3. With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence such as a person having responsibility for the safekeeping of the Fund's Foreign Assets (as defined in the Rule) would exercise: (i) to provide the Fund or Adviser with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Fund or Adviser of any material change in such risks. The Fund acknowledges and agrees that such analysis and monitoring shall be made on the basis of, and limited by, information gathered from Subcustodians or through publicly available information otherwise obtained by Custodian, and shall not include any evaluation of Country Risks. As used herein the term "Country Risks" shall mean with respect to any Foreign Depository: (a) the financial infrastructure of the country in which it is organized, (b) such country's prevailing settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country's regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the orderly execution of securities transactions or affect the value of securities.
B. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts, shall, together, constitute only one amendment.
IN WITNESS WHEREOF, the Fund and Custodian have caused this Amendment to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written.
EACH INVESTMENT COMPANY LISTED ON SCHEDULE 1
HERETO
By: /s/ MURRAY L. SIMPSON
----------------------
Title: Vice President
|
Tax Identification No:
THE BANK OF NEW YORK
By: /s/ IRA R. ROSNER
------------------
Title: Ira R. Rosner
Vice President
|
AMENDMENT TO MASTER CUSTODY AGREEMENT
SCHEDULE 1
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Foreign Custody Manager Agreement dated as of May 16, 2001.
-----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
-----------------------------------------------------------------------------------------------------------------------------------
Franklin Custodian Funds, Inc. Maryland Corporation DynaTech Series
Growth Series
Income Series
Utilities Series
Franklin Floating Rate Master Trust Delaware Business Trust Franklin Floating Rate Master Series Trust
Franklin Gold and Precious Metals Fund Delaware Business Trust
Franklin Growth and Income Fund Delaware Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Global Government Income Fund
Franklin Total Return Fund
Franklin Managed Trust Delaware Business Trust Franklin Rising Dividends Fund
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Beacon Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin Aggressive Growth Fund
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Large Cap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund I
Franklin Small Cap Growth Fund II
Franklin Strategic Income Fund
Franklin Technology Fund
Franklin U.S. Long-Short Fund
Franklin Templeton Fund Allocator Series Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton International Trust Templeton Pacific Growth Fund
Franklin Templeton Variable Insurance Massachusetts Business Fund Franklin Aggressive Growth Securities Fund
Products Trust Franklin Global Communications Securities Fund
Franklin Global Health Care Securities Fund
Franklin Growth and Income Securities Fund
Franklin High Income Fund
Franklin Income Securities Fund
Franklin Large Cap Growth Securities Fund
Franklin Money Market Fund
Franklin Natural Resources Securities Fund
Franklin Real Estate Fund
Franklin Rising Dividends Securities Fund
Franklin Small Cap Fund
Franklin Strategic Income Securities Fund
Franklin S&P 500 Index Fund
Franklin Technology Securities Fund
Franklin U.S. Government Fund
Franklin Value Securities Fund
Franklin Zero Coupon Fund - 2005
Franklin Zero Coupon Fund - 2010
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Global Income Securities Fund
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund
Franklin Value Fund
CLOSED END FUNDS:
Franklin Floating Rate Trust Delaware Business Trust
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
-----------------------------------------------------------------------------------------------------------------------------------
Revised 5/1/01
|
AMENDED AND RESTATED FOREIGN CUSTODY MANAGER AGREEMENT
AGREEMENT made as of May 16, 2001 between Each Investment Company Listed on Schedule 1 attached hereto (each a "Fund") and The Bank of New York ("BNY").
W I T N E S S E T H:
WHEREAS, each Fund appointed BNY as a Foreign Custody Manager on the terms and conditions contained in a certain Foreign Custody Agreement made as of July 30, 1998 or May 7, 1998, and effective as of February 27, 1998 (the "Prior Agreement");
WHEREAS, each Fund and BNY desire to amend and restate the Prior Agreement;
WHEREAS, BNY desires to continue to serve as a Foreign Custody Manager and perform the duties set forth herein on the terms and conditions contained herein;
NOW THEREFORE, in consideration of the mutual promises hereinafter contained in this Agreement, each Fund and BNY hereby agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:
1. "BOARD" shall mean the board of directors or board of trustees, as the case may be, of the Fund.
2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in the Rule.
3. "MONITORING SYSTEM" shall mean a system established by BNY to fulfill the Responsibilities (as herein defined) specified in clauses (d) and (e) of Section 1 of Article III of this Agreement.
4. "RESPONSIBILITIES" shall mean the responsibilities delegated to BNY under the Rule (as herein defined) as a Foreign Custody Manager with respect to each Specified Country (as herein defined) and each Eligible Foreign Custodian selected by BNY, as such responsibilities are more fully described in Article III of this Agreement.
5. "RULE" shall mean Rule 17f-5 under the Investment Company Act of 1940, as amended on June 12, 2000.
6. "SPECIFIED COUNTRY" shall mean each country listed on Schedule 2 attached hereto and each country, other than the United States, constituting the primary market for a security with respect to which the Fund has given settlement instructions to BNY as custodian (the "Custodian") under its Custody Agreement with the Fund.
ARTICLE II.
BNY AS A FOREIGN CUSTODY MANAGER
1. Each Fund on behalf of its Board hereby delegates to BNY with respect to each Specified Country the Responsibilities.
2. BNY accepts the Board's delegation of Responsibilities with respect to each Specified Country and agrees in performing the Responsibilities as a Foreign Custody Manager to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Fund's Foreign Assets (as defined in the Rule) would exercise.
3. BNY shall provide to the Board at such times as the Board deems reasonable and appropriate based on the circumstances of the Fund's foreign custody arrangements written reports notifying the Board of the placement of assets of the Fund with a particular Eligible Foreign Custodian within a Specified Country and of any material change in the arrangements (including the contract governing such arrangements) with respect to Foreign Assets (as defined in the Rule) of the Fund with any such Eligible Foreign Custodian.
ARTICLE III.
RESPONSIBILITIES
1. Subject to the provisions of this Agreement, BNY shall with respect to each Specified Country select an Eligible Foreign Custodian. In connection therewith, BNY shall: (a) determine that assets of the Fund held by such Eligible Foreign Custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market in which such Eligible Foreign Custodian operates, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those contained in paragraph (c)(1) of the Rule; (b) determine that the Fund's foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract with the Custodian which will provide reasonable care for the Fund's assets based on the standards specified in paragraph (c)(1) of the Rule; (c) determine that each contract with an Eligible Foreign Custodian shall include the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or, alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines will provide, in their entirety, the same or a greater level of care and protection for the assets of the Fund as such specified provisions; (d) monitor pursuant to the Monitoring System the appropriateness of maintaining the assets of the Fund with a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule and the performance of the
contract governing such arrangement; and (e) advise the Fund whenever BNY determines under the Monitoring System that an arrangement (including, any material change in the contract governing such arrangement) described in preceding clause (d) no longer meets the requirements of the Rule.
2. For purposes of clause (d) of preceding Section 1 of this Article, BNY's determination of appropriateness shall not include, nor be deemed to include, any evaluation of Country Risks associated with investment in a particular country. For purposes hereof, "Country Risks" shall mean systemic risks of holding assets in a particular country including but not limited to (a) an Eligible Foreign Custodian's use of any depositories that act as or operate a system or a transnational system for the central handling of securities or any equivalent book-entries; (b) such country's financial infrastructure; (c) such country's prevailing custody and settlement practices; (d) nationalization, expropriation or other governmental actions; (e) regulation of the banking or securities industry; (f) currency controls, restrictions, devaluations or fluctuations; and (g) market conditions which affect the orderly execution of securities transactions or affect the value of securities.
ARTICLE IV.
REPRESENTATIONS
1. Each Fund hereby represents that: (a) this Agreement has been duly authorized, executed and delivered by the Fund, constitutes a valid and legally binding obligation of the Fund enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on the Fund prohibits the Fund's execution or performance of this Agreement; (b) this Agreement has been approved and ratified by the Board at a meeting duly called and at which a quorum was at all times present, and (c) the Board or the Fund's investment advisor has considered the Country Risks associated with investment in each Specified Country and will have considered such risks prior to any settlement instructions being given to the Custodian with respect to such country.
2. BNY hereby represents that: (a) BNY is duly organized and existing under the laws of the State of New York, with full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; (b) this Agreement has been duly authorized, executed and delivered by BNY, constitutes a valid and legally binding obligation of BNY enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on BNY prohibits BNY's execution or performance of this Agreement; and (c) BNY has established the Monitoring System.
ARTICLE V.
CONCERNING BNY
1. BNY shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, the Fund except to the extent the same arises out of the failure of BNY to exercise the care, prudence and diligence required by Section 2 of Article II hereof. In no event shall BNY be liable to the Fund, the Board, or any third party for special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement.
2. The Fund shall indemnify BNY and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, BNY by reason or as a result of any action or inaction, or arising out of BNY's performance hereunder, provided that the Fund shall not indemnify BNY to the extent any such costs, expenses, damages, liabilities or claims arises out of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof.
3. For its services hereunder, the Fund agrees to pay to BNY such compensation and out-of-pocket expenses as shall be mutually agreed.
4. BNY shall have only such duties as are expressly set forth herein. In no event shall BNY be liable for any Country Risks associated with investments in a particular country.
ARTICLE VI.
LIMITED LIABILITY OF EACH FUND
BNY acknowledges that is has received notice of and accepts the limitations of liability as set forth in each Fund's Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of Limited Partnership. BNY agrees that each Fund's obligation hereunder shall be limited to the assets of the Fund, and that BNY shall not seek satisfaction of any such obligation from the shareholders of the Fund nor from any Board Member, officer, employee, or agent of the Fund.
ARTICLE VII.
MISCELLANEOUS
1. This Agreement shall be deemed a separate agreement between each Fund and BNY and constitutes the entire agreement between each Fund and BNY as a foreign
custody manager, and no provision in the Custody Agreement between a Fund and the Custodian shall affect the duties and obligations of BNY hereunder, nor shall any provision in this Agreement affect the duties or obligations of the Custodian under the Custody Agreement with a Fund.
2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to BNY, shall be sufficiently given if received by it at its offices at 100 Church Street, 10th Floor,, New York, New York 10286, or at such other place as BNY may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if received by it at its offices at 777 Mariners' Island Boulevard, San Mateo, California 94404, Attention: Secretary, or at such other place as the Fund may from time to time designate in writing.
4. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided however, that this Agreement shall not be assignable by either party without the written consent of the other.
5. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Fund and BNY hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. The Fund hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. The Fund and BNY each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.
6. The parties hereto agree that in performing hereunder, BNY is acting solely on behalf of the Fund and no contractual or service relationship shall be deemed to be established hereby between BNY and any other person by reason of this Agreement.
7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.
8. This Agreement shall terminate simultaneously with the termination of the Custody Agreement between the Fund and the Custodian, and may otherwise be terminated by either party giving to the other party a notice in writing specifying the date
of such termination, which shall be not less than thirty (30) days after the date of such notice.
IN WITNESS WHEREOF, the Fund and BNY have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written.
EACH INVESTMENT COMPANY LISTED ON SCHEDULE 1
HERETO
By: /s/ MURRAY L. SIMPSON
----------------------
Title: Vice President
|
THE BANK OF NEW YORK
By: /s/ IRA R. ROSNER
-------------------
Title: Ira R. Rosner
Vice President
|
AMENDED AND RESTATED FOREIGN CUSTODY MANAGER AGREEMENT
SCHEDULE 1
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Foreign Custody Manager Agreement dated as of May 16, 2001.
-----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
-----------------------------------------------------------------------------------------------------------------------------------
Franklin Custodian Funds, Inc. Maryland Corporation DynaTech Series
Growth Series
Income Series
Utilities Series
Franklin Floating Rate Master Trust Delaware Business Trust Franklin Floating Rate Master Series Trust
Franklin Gold and Precious Metals Fund Delaware Business Trust
Franklin Growth and Income Fund Delaware Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Global Government Income Fund
Franklin Total Return Fund
Franklin Managed Trust Delaware Business Trust Franklin Rising Dividends Fund
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Beacon Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin Aggressive Growth Fund
Franklin Biotechnology Discovery Fund
Franklin Blue Chip Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Large Cap Growth Fund
Franklin Natural Resources Fund
Franklin Small Cap Growth Fund I
Franklin Small Cap Growth Fund II
Franklin Strategic Income Fund
Franklin Technology Fund
Franklin U.S. Long-Short Fund
Franklin Templeton Fund Allocator Series Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton International Trust Templeton Pacific Growth Fund
Franklin Templeton Variable Insurance Massachusetts Business Fund Franklin Aggressive Growth Securities Fund
Products Trust Franklin Global Communications Securities Fund
Franklin Global Health Care Securities Fund
Franklin Growth and Income Securities Fund
Franklin High Income Fund
Franklin Income Securities Fund
Franklin Large Cap Growth Securities Fund
Franklin Money Market Fund
Franklin Natural Resources Securities Fund
Franklin Real Estate Fund
Franklin Rising Dividends Securities Fund
Franklin Small Cap Fund
Franklin Strategic Income Securities Fund
Franklin S&P 500 Index Fund
Franklin Technology Securities Fund
Franklin U.S. Government Fund
Franklin Value Securities Fund
Franklin Zero Coupon Fund - 2005
Franklin Zero Coupon Fund - 2010
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Global Income Securities Fund
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund
Franklin Value Fund
CLOSED END FUNDS:
Franklin Floating Rate Trust Delaware Business Trust
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
-----------------------------------------------------------------------------------------------------------------------------------
Revised 5/1/01
|
SCHEDULE 2
WORLDWIDE NETWORK OF SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Argentina Banco Rio de La Plata
Australia National Australia Bank Limited
Austria Bank Austria AG
Bahrain HSBC Bank Middle East
Bangladesh Standard Chartered Bank PLC
Belgium Banque Bruxelles Lambert
Benin Societe Generale de Banques en Cote d'lvoire
Bermuda Bank of Bermuda Limited
Bolivia Citibank, N.A.
Botswana Barclays Bank of Botswana Ltd.
Brazil BankBoston, N.A.
Bulgaria ING Bank
Burkina Faso Societe Generale de Banques en Cote d'lvoire
Canada Royal Bank of Canada
Chile BankBoston, N.A.
China The Standard Chartered Bank
Colombia Cititrust Colombia S.A.
Costa Rica Banco BCT
Croatia Privredna Banka Zabreb d.d.
Cyprus Bank of Cyprus
Czech Republic Ceskoslovenska Obchodni Banka A.S.
Denmark Danske Bank
EASDAQ Banque Bruxelles Lambert
Ecuador Citibank, N.A.
Egypt Citibank, N.A.
Estonia Hansabank, Ltd.
Euromarket Clearstream
Euromarket Euroclear
Finland Merita Bank plc
France BNP PARIBAS/Credit Agricole Indosuez
Germany Dresdner Bank AG
Ghana Barclays Bank of Ghana Ltd.
Greece BNP PARIBAS
Guinea Bissau Societe Generale de Banques en Cote d'lvoire
Hong Kong The Hongkong and Shanghai Banking Corp. Limited
Hungary Citibank Budapest Rt.
Iceland Landsbanki Islands
India The Hongkong and Shanghai Banking Corp.Limited/
Deutsche Bank
Indonesia The Hongkong and Shanghai Banking Corp. Limited
Ireland Allied Irish Banks plc
Israel Bank Leumi Le-Israel B.M.
Italy Banca Commerciale Italiana/BNP PARIBAS
Ivory Coast Societe Generale de Banques en Cote d'lvoire
Jamaica CIBC Trust & Merchant Bank Jamaica Ltd.
Japan The Bank of Tokyo-Mitsubishi Limited/The Fuji
Bank, Limited
Jordan HSBC Bank Middle East
Kazakhstan ABN/AMRO
Kenya Barclays Bank of Kenya Limited
Latvia Hansabanka Limited
Lebanon HSBC Bank Middle East
Lithuania Vilniaus Bankas
Luxembourg Banque et Caisse d'Epargne de L'Etat
Malaysia HSBC Bank Malaysia Berhad
Mali Societe Generale de Banques en Cote d'lvoire
Malta HSBC Bank Malta p.l.c.
Mauritius Hongkong and Shanghai Banking Corp.
Mexico Banco Nacional de Mexico
Morocco Banque Commerciale du Maroc
Namibia Stanbic Bank Namibia Limited
Netherlands Fortis Bank (Nederland) N.V.
New Zealand National Nominees Limited
Niger Societe Generale de Banques en Cote d'lvoire
Nigeria Stanbic Merchant Bank Nigeria Limited
Norway Den norske Bank ASA
Oman HSBC Bank Middle East
Pakistan Standard Chartered Bank
Palestinian Autonomous Area HSBC Bank Middle East, Ramallah
Panama BankBoston, N.A.
Peru Citibank, N.A.
Philippines The Hongkong and Shanghai Banking Corp., Limited
Poland Bank Handlowy w Warszawie S.A.
Portugal Banco Comercial Portugues, S.A.
Qatar HSBC Bank Middle East, Doha
Romania ING Bank
Russia Credit Suisse First Boston AO/
Vneshtorgbanke (Min Fin Bonds only)
Senegal Societe Generale de Banques en Cote d'lvoire
Singapore United Overseas Bank Limited/Development Bank
of Singapore
Slovakia Ceskoslovenska Obchodni Banka, A.S. Bratislava
Slovenia Bank Austria Creditanstalt d.d. Ljubljana
South Africa Standard Bank of South Africa Limited/Societe
Generale,
Johannesburg Branch
South Korea Standard Chartered Bank
Spain Banco Bilbao Vizcaya Argentaria SA /
Banco Santander Central Hispano
Sri Lanka Standard Chartered Bank
Swaziland Stanbic Bank Swaziland Limited
Sweden Skandinaviska Enskilda Banken
Switzerland Credit Suisse First Boston
Taiwan The Hongkong and Shanghai Banking Corporation,
Limited
Thailand Standard Chartered Bank/Bangkok Bank Public
Company Ltd.
Togo Societe Generale de Banques en Cote d'lvoire
Trinidad & Tobago Republic Bank Limited
Tunisia Banque Internationale Arabe de Tunisie
Turkey Osmanli Bankasi A.S.(Ottoman Bank)
Ukraine ING Bank
United Kingdom The Bank of New York/The Depository & Clearing
Centre (DCC)
United States The Bank of New York
Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Zambia Barclays Bank of Zambia Limited
Zimbabwe Barclays Bank of Zimbabwe Limited
|
SCHEDULE 2
WORLDWIDE NETWORK OF SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
Argentina Citibank, N.A.
Australia National Australia Bank Limited
Austria Bank Austria Creditanstalt AG
Bahrain HSBC Bank Middle East Limited
Bangladesh The Hongkong and Shanghai Banking Corporation, Limited
Belgium ING Belgium SA/NV
Benin Societe Generale de Banques en Cote d'lvoire
Bermuda Butterfield Trust Bermuda Limited
Botswana Barclays Bank of Botswana Ltd.
Brazil Citibank, N.A.
Bulgaria ING Bank N.V.
Burkina Faso Societe Generale de Banques en Cote d'lvoire
Canada Royal Bank of Canada
Cayman Islands The Bank of New York
Channel Islands The Bank of New York
Chile Citibank, N.A.
China The Hongkong and Shanghai Banking Corporation, Ltd.
Shanghai and Shenzhen
Colombia Cititrust Colombia S.A.
Costa Rica Banco BCT
Croatia Privredna banka Zabreb d.d.
Cyprus BNP Paribas Securities Athens
Czech Republic ING N.V. Prague
Denmark Danske Bank
Ecuador Banco de la Produccion SA
Egypt Citibank, N.A.
Estonia Hansabank, Ltd.
Euromarket Clearstream Banking Luxembourg
Euromarket Euroclear Bank
Finland Nordea Bank Finland plc
France BNP Paribas Securities Services/CACEIS
Germany BHF-BANK AG
Ghana Barclays Bank of Ghana Ltd.
Greece BNP Paribas Securities Services
Guinea Bissau Societe Generale de Banques en Cote d'lvoire
Hong Kong The Hongkong and Shanghai Banking Corporation, Limited
Hungary ING Bank Hungary Rt.
Iceland Landsbanki Islands
India Deutsche Bank AG Mumbai/HSBC
Indonesia The Hongkong and Shanghai Banking Corporation, Limited
Ireland The Bank of New York
Israel Bank Leumi Le-Israel B.M.
Italy Intesa Sanpaolo S.p.A
Ivory Coast Societe Generale de Banques en Cote d'lvoire -
Abidjian
Jamaica FirstCaribbean International Securities Limited
Japan The Bank of Tokyo-Mitsubishi UFJ Ltd./
Mizuho Corporate Bank, Limited
Jordan HSBC Bank Middle East Limited
Kazakhstan The Hongkong and Shanghai Banking Corporation Limited
Kenya Barclays Bank of Kenya Limited
Latvia Hansabanka Limited
Lebanon HSBC Bank Middle East Limited
Lithuania SEBVilniaus Bankas AB
Luxembourg Banque et Caisse d'Epargne de l'Etat
Malaysia HSBC Bank Malaysia Berhad
Mali Societe Generale de Banques en Cote d'lvoire
Malta HSBC Bank Malta p.l.c.
Mauritius The Hongkong and Shanghai Banking Corporation Limited
Mexico Banco Nacional de Mexico
Morocco Attijariwafa Bank
Namibia Standard Bank Namibia Ltd.
Netherlands ING Bank
New Zealand National Australia Bank
Niger Societe Generale de Banques en Cote d'lvoire
Nigeria Stanbic Bank Nigeria Limited
Norway DnB NOR Bank ASA
Oman HSBC Bank Middle East Limited
Pakistan Standard Chartered Bank
Palestinian Autonomous
Area HSBC Bank Middle East, Ramallah
Panama HSBC Bank (Panama) S.A.
Peru Citibank del Peru
Philippines The Hongkong and Shanghai Banking Corporation, Limited
Poland ING Bank Slaski
Portugal Banco Comercial Portugues, S.A.
Qatar HSBC Bank Middle East Limited, Doha
Romania ING Bank Bucharest
Russia ING Bank (Eurasia)
Vneshtorgbanke (MinFin Bonds only)
Senegal Societe Generale de Banques en Cote d'lvoire
Serbia Bank Austria Creditanstalt AG - Vienna
Singapore United Overseas Bank Limited/
DBS Bank Ltd.
Slovak Republic ING Bank N.V.
Slovenia Bank Austria Creditanstalt d.d. Ljubljana
South Africa Standard Bank of South Africa Limited
South Korea The Hongkong and Shanghai Banking Corporation,
Limited
Spain Banco Bilbao Vizcaya Argentaria SA /
Santander Investment Services, S.A.
Sri Lanka The Hongkong and Shanghai Banking Corporation, Limited
Swaziland Standard Bank Swaziland Limited
Sweden Skandinaviska Enskilda Banken
Switzerland Credit Suisse, Zurich
Taiwan The Hongkong and Shanghai Banking Corporation, Limited
Thailand The Hongkong and Shanghai Banking Corporation,
Limited/Bangkok Bank Public Company Ltd.
Togo Societe Generale de Banques en Cote d'lvoire
Trinidad & Tobago Republic Bank Limited
Tunisia Banque Internationale Arabe de Tunisie
Turkey Turkye Garanti Bankasi A.S. (Garanti Bank)
Ukraine ING Bank Ukraine
United Arab Emirates HSBC Bank Middle East Limited, Dubai
United Kingdom The Bank of New York/Deutsche Bank AG (The Depository
& Clearing Centre)
United States The Bank of New York
Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Vietnam The Hongkong and Shanghai Banking Corporation, Limited
Zambia Barclays Bank of Zambia Limited
Zimbabwe Barclays Bank of Zimbabwe Limited
REV. 3/19/07
|
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master Custody Agreement dated as of February 16, 1996.
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin California Limited-Term Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin Capital Growth Fund Delaware Statutory Trust
Franklin Custodian Funds, Inc. Maryland Corporation Franklin Dynatech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Floating Rate Master Trust Delaware Statutory Trust Franklin Floating Rate Master Series
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Global Trust Delaware Statutory Trust Fiduciary Large Capitalization Growth and Income Fund
Fiduciary Small Capitalization Growth and Income Fund
Franklin Global Real Estate Fund
Franklin International Smaller Companies Growth Fund
Franklin Templeton Core Fixed Income Fund
Franklin Templeton Core Plus Fixed Income Fund
Franklin Templeton Emerging Market Debt
Opportunities Fund
Franklin Templeton High Income Fund
Franklin Gold and Precious Metals Fund Delaware Statutory Trust
Franklin High Income Trust Delaware Statutory Trust Franklin High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Adjustable U.S. Government Securities Fund
Trust Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Limited Maturity U.S. Govt Securities Fund
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Total Return Fund
Franklin Managed Trust Delaware Statutory Trust Franklin Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Statutory Trust Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
-----------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Beacon Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Franklin New York Tax-Free Income Fund Delaware Statutory Trust
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Insured Tax-Free Income Fund
Trust Franklin New York Intermediate-Term Tax-Free Income
Fund
Franklin New York Limited-Term Tax-Free Income
Fund
Franklin New York Tax-Exempt Money Fund
Franklin Real Estate Securities Trust Delaware Statutory Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Statutory Trust
Franklin Strategic Series Delaware Statutory Trust Franklin Aggressive Growth Fund
Franklin Biotechnology Discovery Fund
Franklin Flex Cap Growth Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II
Franklin Strategic Income Fund
Franklin Technology Fund
Franklin U.S. Long-Short Fund
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Tax-Exempt Money Fund California Corporation
Franklin Tax-Free Trust Delaware Staturory Trust Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Double Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Federal Limited-Term Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Templeton Fund Allocator Series Delaware Statutory Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
Franklin Templeton Money Fund Trust Delaware Statutory Trust Franklin Templeton Money Fund
Franklin Templeton Variable Insurance Delaware Statutory Trust Franklin Flex Cap Growth Securities Fund
Products Trust Franklin Global Communications Securities Fund
Franklin Global Real Estate Securities Fund
Franklin Growth and Income Securities Fund
Franklin High Income Securities Fund
Franklin Income Securities Fund
Franklin Large Cap Growth Securities Fund
Franklin Large Cap Value Securities Fund
Franklin Money Market Fund
Franklin Rising Dividends Securities Fund
Franklin Small-Mid Cap Growth Securities Fund
Franklin Small Cap Value Securities Fund
Franklin Strategic Income Securities Fund
Franklin Templeton VIP Founding Funds
Allocation Fund
Franklin U.S. Government Fund
Franklin Zero Coupon Fund - 2010
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Global Income Securities Fund
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Value Investors Trust Massachusetts Business Franklin All Cap Value Fund
Trust Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Institutional Fiduciary Trust Massachusetts Business Franklin Cash Reserves Fund
Trust Money Market Portfolio
The Money Market Portfolios Delaware Statutory Trust The Money Market Portfolio
Templeton Global Investment Trust Delaware Statutory Trust Templeton Income Fund
CLOSED END FUNDS:
Franklin Mutual Recovery Fund Delaware Statutory Trust
Franklin Templeton Limited Duration Delaware Statutory Trust
Income Trust
Franklin Universal Trust Massachusetts Business
Trust
------------------------------------------------------------------------------------------------------------------------------
BONY Master Custody Exhibit A Revised as of 11/1/07
|
AMENDED AND RESTATED FOREIGN CUSTODY MANAGER AGREEMENT
SCHEDULE 1
The following is a list of the Investment Companies and their respective
Series for which the Custodian shall serve under the Foreign Custody Manager
Agreement dated as of May 16, 2001.
------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
------------------------------------------------------------------------------------------------------------------------------
Franklin Capital Growth Fund Delaware Statutory Trust
Franklin Custodian Funds, Inc. Maryland Corporation Franklin Dynatech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin Utilities Fund
Franklin Floating Rate Master Trust Delaware Statutory Trust Franklin Floating Rate Master Series
Franklin Global Trust Delaware Statutory Trust Fiduciary Large Capitalization Growth and Income Fund
Fiduciary Small Capitalization Growth and Income Fund
Franklin Global Real Estate Fund
Franklin International Smaller Companies Growth Fund
Franklin Templeton Core Fixed Income Fund
Franklin Templeton Core Plus Fixed Income Fund
Franklin Templeton Emerging Market Debt Opportunities
Fund
Franklin Templeton High Income Fund
Franklin Gold and Precious Metals Fund Delaware Statutory Trust
Franklin High Income Trust Delaware Statutory Trust Franklin High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Balanced Fund
Trust Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Total Return Fund
Franklin Managed Trust Delaware Statutory Trust Franklin Rising Dividends Fund
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Beacon Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Franklin Real Estate Securities Trust Delaware Statutory Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Statutory Trust
Franklin Strategic Series Delaware Statutory Trust Franklin Aggressive Growth Fund
Franklin Biotechnology Discovery Fund
Franklin Flex Cap Growth Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II
Franklin Strategic Income Fund
Franklin Technology Fund
Franklin U.S. Long-Short Fund
Franklin Templeton Fund Allocator Series Delaware Statutory Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
Franklin Templeton Variable Insurance Delaware Statutory Trust Franklin Flex Cap Growth Securities Fund
Products Trust Franklin Global Communications Securities Fund
Franklin Global Real Estate Securities Fund
Franklin Growth and Income Securities Fund
Franklin High Income Securities Fund
Franklin Income Securities Fund
Franklin Large Cap Growth Securities Fund
Franklin Large Cap Value Securities Fund
Franklin Money Market Fund
Franklin Rising Dividends Securities Fund
Franklin Small Mid-Cap Growth Securities Fund
Franklin Small Cap Value Securities Fund
Franklin Strategic Income Securities Fund
Franklin U.S. Government Fund
Franklin Zero Coupon Fund - 2010
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Global Income Securities Fund
Franklin Value Investors Trust Massachusetts Business Franklin All Cap Value Fund
Trust Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
CLOSED END FUNDS:
Franklin Mutual Recovery Fund Delaware Statutory Trust
Franklin Templeton Limited Duration Delaware Statutory Trust
Income Trust
Franklin Universal Trust Massachusetts Business
Trust
------------------------------------------------------------------------------------------------------------------------------
Revised as of 6/22/07
|
Filename:fcgfex99gviii.txt
Type:EX-99.G
Comment/Description:
(this header is not part of the document)
SCHEDULE 2
WORLDWIDE NETWORK OF SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
Argentina Citibank, N.A.
Australia National Australia Bank Limited
Austria Bank Austria Creditanstalt AG
Bahrain HSBC Bank Middle East Limited
Bangladesh The Hongkong and Shanghai Banking Corporation, Limited
Belgium ING Belgium SA/NV
Benin Societe Generale de Banques en Cote d'lvoire
Bermuda Butterfield Trust Bermuda Limited
Botswana Barclays Bank of Botswana Ltd.
Brazil Citibank, N.A.
Bulgaria ING Bank N.V.
Burkina Faso Societe Generale de Banques en Cote d'lvoire
Canada Royal Bank of Canada
Cayman Islands The Bank of New York
Channel Islands The Bank of New York
Chile Citibank, N.A.
China The Hongkong and Shanghai Banking Corporation, Ltd.
Shanghai and Shenzhen
Colombia Cititrust Colombia S.A.
Costa Rica Banco BCT
Croatia Privredna banka Zabreb d.d.
Cyprus BNP Paribas Securities Athens
Czech Republic ING N.V. Prague
Denmark Danske Bank
Ecuador Banco de la Produccion SA
Egypt Citibank, N.A.
Estonia Hansabank, Ltd.
Euromarket Clearstream Banking Luxembourg
Euromarket Euroclear Bank
Finland Nordea Bank Finland plc
France BNP Paribas Securities Services/CACEIS
Germany BHF-BANK AG
Ghana Barclays Bank of Ghana Ltd.
Greece BNP Paribas Securities Services
Guinea Bissau Societe Generale de Banques en Cote d'lvoire
Hong Kong The Hongkong and Shanghai Banking Corporation, Limited
Hungary ING Bank Hungary Rt.
Iceland Landsbanki Islands
India Deutsche Bank AG Mumbai/HSBC
Indonesia The Hongkong and Shanghai Banking Corporation, Limited
Ireland The Bank of New York
Israel Bank Leumi Le-Israel B.M.
Italy Intesa Sanpaolo S.p.A
Ivory Coast Societe Generale de Banques en Cote d'lvoire -
Abidjian
Jamaica FirstCaribbean International Securities Limited
Japan The Bank of Tokyo-Mitsubishi UFJ Ltd./
Mizuho Corporate Bank, Limited
Jordan HSBC Bank Middle East Limited
Kazakhstan The Hongkong and Shanghai Banking Corporation Limited
Kenya Barclays Bank of Kenya Limited
Latvia Hansabanka Limited
Lebanon HSBC Bank Middle East Limited
Lithuania SEBVilniaus Bankas AB
Luxembourg Banque et Caisse d'Epargne de l'Etat
Malaysia HSBC Bank Malaysia Berhad
Mali Societe Generale de Banques en Cote d'lvoire
Malta HSBC Bank Malta p.l.c.
Mauritius The Hongkong and Shanghai Banking Corporation Limited
Mexico Banco Nacional de Mexico
Morocco Attijariwafa Bank
Namibia Standard Bank Namibia Ltd.
Netherlands ING Bank
New Zealand National Australia Bank
Niger Societe Generale de Banques en Cote d'lvoire
Nigeria Stanbic Bank Nigeria Limited
Norway DnB NOR Bank ASA
Oman HSBC Bank Middle East Limited
Pakistan Standard Chartered Bank
Palestinian Autonomous
Area HSBC Bank Middle East, Ramallah
Panama HSBC Bank (Panama) S.A.
Peru Citibank del Peru
Philippines The Hongkong and Shanghai Banking Corporation, Limited
Poland ING Bank Slaski
Portugal Banco Comercial Portugues, S.A.
Qatar HSBC Bank Middle East Limited, Doha
Romania ING Bank Bucharest
Russia ING Bank (Eurasia)
Vneshtorgbanke (MinFin Bonds only)
Senegal Societe Generale de Banques en Cote d'lvoire
Serbia Bank Austria Creditanstalt AG - Vienna
Singapore United Overseas Bank Limited/
DBS Bank Ltd.
Slovak Republic ING Bank N.V.
Slovenia Bank Austria Creditanstalt d.d. Ljubljana
South Africa Standard Bank of South Africa Limited
South Korea The Hongkong and Shanghai Banking Corporation,
Limited
Spain Banco Bilbao Vizcaya Argentaria SA /
Santander Investment Services, S.A.
Sri Lanka The Hongkong and Shanghai Banking Corporation, Limited
Swaziland Standard Bank Swaziland Limited
Sweden Skandinaviska Enskilda Banken
Switzerland Credit Suisse, Zurich
Taiwan The Hongkong and Shanghai Banking Corporation, Limited
Thailand The Hongkong and Shanghai Banking Corporation,
Limited/Bangkok Bank Public Company Ltd.
Togo Societe Generale de Banques en Cote d'lvoire
Trinidad & Tobago Republic Bank Limited
Tunisia Banque Internationale Arabe de Tunisie
Turkey Turkye Garanti Bankasi A.S. (Garanti Bank)
Ukraine ING Bank Ukraine
United Arab Emirates HSBC Bank Middle East Limited, Dubai
United Kingdom The Bank of New York/Deutsche Bank AG (The Depository
& Clearing Centre)
United States The Bank of New York
Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Vietnam The Hongkong and Shanghai Banking Corporation, Limited
Zambia Barclays Bank of Zambia Limited
Zimbabwe Barclays Bank of Zimbabwe Limited
REV. 3/19/07
|
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment") is made and entered into as of December 3, 2007 by and among TEMPLETON INCOME TRUST, a Massachusetts business trust (the "Assignor"), on behalf of its Templeton Global Bond Fund series, and TEMPLETON INCOME TRUST, a Delaware statutory trust (the "Assignee"), on behalf of its Templeton Global Bond Fund series, and JPMorgan Chase Bank (the "Bank"), formerly The Chase Manhattan Bank, N.A.
W I T N E S S E T H:
WHEREAS, pursuant to a certain Agreement and Plan of Reorganization dated as of December 3, 2007 between Assignor and Assignee, Assignor has conveyed and transferred to Assignee certain assets of Assignor; and
WHEREAS, in connection with such conveyance of assets, Assignor and Assignee have agreed that Assignor shall transfer and assign to Assignee all rights, title and interests of Assignor in and to certain contracts to which Assignor is a party; and
WHEREAS, Assignor and Assignee have further agreed that Assignee shall expressly assume all of the obligations of Assignor arising under such contracts from and after the date of this Assignment; and
WHEREAS, the Assignor and the Bank are parties to a certain Custody Agreement dated as of June 1, 1984, amended September 1, 1985 and amended and restated as of February 10, 1986 and May 15, 1996, and as further amended by Amendments dated July 5, 1996 and March 2, 1998, and as further amended by a certain Amendment No. 2 dated July 23, 1998 and a certain Amendment No. 3 dated as of May 1, 2001 (collectively, the "Custody Agreement"); and
WHEREAS, the parties hereto desire that the Custody Agreement be transferred from Assignor to Assignee, as more specifically set forth below.
NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Transfer and Assignment. Assignor hereby sells, transfers and assigns to Assignee, its successors and assigns, all rights, title and interests of Assignor in, to and under the Custody Agreement.
2. Assumption of Obligations. Assignee hereby assumes and agrees to observe and perform all of the obligations and duties of Assignor under the Custody Agreement from and after the date of this Assignment.
3. Consent to Assignment. Notwithstanding the provisions of Section 22 of the Custody Agreement, the Bank hereby acknowledges, consents and agrees to the foregoing assignment and assumption of the Custody Agreement.
4. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of the State of New York, without reference to the conflicts of laws provisions thereof.
5. Binding Effect. This Assignment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.
6. Counterparts. This Assignment may be executed in any number of counterparts, each of which so executed shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed as of the day and year first above written.
TEMPLETON INCOME TRUST, a Massachusetts business trust, on behalf of its Templeton Global Bond Fund series
By: /s/David P. Goss -------------------------------- Name: David P. Goss Title: Vice President and Assistant Secretary |
TEMPLETON INCOME TRUST, a Delaware statutory trust, on behalf of its Templeton Global Bond Fund series
By: /s/Craig S. Tyle --------------------------------- Name: Craig S. Tyle Title: Vice President and Assistant Secretary |
JPMORGAN CHASE BANK
By: /s/April Johnston -------------------------------- Name: April Johnston Title: Vice President |
2
FUND ADMINISTRATION AGREEMENT BETWEEN
TEMPLETON INCOME TRUST
AND
FRANKLIN TEMPLETON SERVICES, LLC
AGREEMENT dated as of July 18, 2007, between Templeton Income Trust (the "Investment Company"), an investment company registered under the Investment Company Act of 1940 ("1940 Act"), on behalf of Templeton International Bond Fund (the "Fund"), a separate series of the Investment Company, and Franklin Templeton Services, LLC ("FTS" or "Administrator").
In consideration of the mutual promises herein made, the parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to provide the following services to the Fund:
(a) providing office space, telephone, office equipment and supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf of the Fund;
(d) supervising preparation of periodic reports to shareholders, notices of dividends, capital gains distributions and tax credits; and attending to routine correspondence and other communications with individual shareholders when asked to do so by the Fund's shareholder servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio, including collecting quotations from pricing services engaged by the Fund; providing fund accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund, including custodians, transfer agents, public accounting firms, law firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements under the federal securities laws, including the 1940 Act and the rules and regulations thereunder, and under other applicable state and federal laws; and maintaining books and records for the Fund (other than those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income tax returns, and monitoring the Fund's compliance with subchapter M of the Internal Revenue Code, as amended, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal securities laws, and rules and regulations thereunder; state and foreign laws and regulations applicable to the operation of investment companies; the Fund's investment objectives, policies and restrictions; and the Code of Ethics and other policies adopted by the Investment Company's Board of Trustees ("Board") or by the Fund's investment adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without limitation Forms N-1A and N-SAR, proxy statements, information statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to pay any compensation to the officers of the Investment Company. Nothing in this Agreement shall obligate FTS to pay for the services of third parties, including attorneys, auditors, printers, pricing services or others, engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Company agrees, during the life of this Agreement, to pay to FTS as compensation for the foregoing a monthly fee equal on an annual basis to 0.20% of the Fund's average daily net assets, payable at the end of each calendar month.
From time to time, FTS may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in the purchase price of its services. FTS shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of each affected Fund's expenses, as if such waiver or limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one year after its execution and thereafter from year to year to the extent continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time on sixty (60) days' written notice without payment of penalty, provided that such termination by the Investment Company shall be directed or approved by the vote of a majority of the Board of the Investment Company in office at the time or by the vote of a majority of the outstanding voting securities of the Investment Company (as defined by the 1940 Act); and shall automatically and immediately terminate in the event of its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence on the part of FTS, or of reckless disregard of its duties and obligations hereunder, FTS shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON SERVICES, LLC
By:/s/JIMMY D. GAMBILL ------------------------- Jimmy D. Gambill President |
TEMPLETON INCOME TRUST
By:/s/DAVID P. GOSS ------------------------- David P. Goss Vice President and Assistant Secretary |
FUND ADMINISTRATION AGREEMENT BETWEEN
TEMPLETON INCOME TRUST
AND
FRANKLIN TEMPLETON SERVICES, LLC
AGREEMENT dated as of December 3, 2007, between Templeton Income Trust (the "Investment Company"), an investment company registered under the Investment Company Act of 1940 ("1940 Act"), on behalf of Templeton Global Bond Fund (the "Fund"), a separate series of the Investment Company, and Franklin Templeton Services, LLC ("FTS" or "Administrator").
In consideration of the mutual promises herein made, the parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to provide the following services to the Fund:
(a) providing office space, telephone, office equipment and supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf of the Fund;
(d) supervising preparation of periodic reports to shareholders, notices of dividends, capital gains distributions and tax credits; and attending to routine correspondence and other communications with individual shareholders when asked to do so by the Fund's shareholder servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio, including collecting quotations from pricing services engaged by the Fund; providing fund accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund, including custodians, transfer agents, public accounting firms, law firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements under the federal securities laws, including the 1940 Act and the rules and regulations thereunder, and under other applicable state and federal laws; and maintaining books and records for the Fund (other than those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income tax returns, and monitoring the Fund's compliance with subchapter M of the Internal Revenue Code, as amended, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal securities laws, and rules and regulations thereunder; state and foreign laws and regulations applicable to the operation of investment companies; the Fund's investment objectives, policies and restrictions; and the Code of Ethics and other policies adopted by the Investment Company's Board of Trustees ("Board") or by the Fund's investment adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without limitation Forms N-1A and N-SAR, proxy statements, information statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to pay any compensation to the officers of the Investment Company. Nothing in this Agreement shall obligate FTS to pay for the services of third parties, including attorneys, auditors, printers, pricing services or others, engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Company agrees, during the life of this Agreement, to pay to FTS as compensation for the foregoing a monthly fee equal on an annual basis to 0.15% of the first $200 million of the average daily net assets of the Fund during the month preceding each payment, reduced as follows: on such net assets in excess of $200 million up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, FTS may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in the purchase price of its services. FTS shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of each affected Fund's expenses, as if such waiver or limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one year after its execution and thereafter from year to year to the extent continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time on sixty (60) days' written notice without payment of penalty, provided that such termination by the Investment Company shall be directed or approved by the vote of a majority of the Board of the Investment Company in office at the time or by the vote of a majority of the outstanding voting securities of the Investment Company (as defined by the 1940 Act); and shall automatically and immediately terminate in the event of its assignment (as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence on the part of FTS, or of reckless disregard of its duties and obligations hereunder, FTS shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON SERVICES, LLC
By: /s/JIMMY D. GAMBILL ---------------------- Jimmy D. Gambill President |
TEMPLETON INCOME TRUST
By: /s/DAVID P. GOSS ---------------------- David P. Goss Vice President and Assistant Secretary |
FRANKLIN TEMPLETON INVESTOR SERVICES, LLC
TRANSFER AGENT AND SHAREHOLDER SERVICES AGREEMENT
Investment Company: TEMPLETON INCOME TRUST
Date: December 3, 2007
The parties to this Agreement are the Investment Company named above ("Investment Company"), an open-end investment company registered as such under the Investment Company Act of 1940 ("1940 Act"), on behalf of each class of shares of each series of the Investment Company which now exists or may hereafter be created (individually, a "Fund" and collectively, the "Funds") and FRANKLIN TEMPLETON INVESTOR SERVICES, LLC ("FTIS"), a registered transfer agent formerly known as Franklin Administrative Services, Inc. This Agreement supersedes prior Shareholder Services Agreements between the parties, as stated below in section 16(d).
That, for and in consideration of the mutual promises hereinafter set forth, the Investment Company and FTIS agree as follows:
1. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:
(a) "Articles" shall mean the Articles of Incorporation, Declaration of Trust or Agreement of Limited Partnership, as appropriate, of the Investment Company as the same may be amended from time to time;
(b) "Authorized Person" shall be deemed to include any person, whether or not such person is an officer or employee of the Investment Company, duly authorized to give Oral Instructions or Written Instructions on behalf of the Investment Company, as indicated in a resolution of the Investment Company's Board which was valid at the time of this Agreement, or as indicated in a certificate furnished to FTIS pursuant to Section 4(c) hereof;
(c) "Board" shall mean the Investment Company's Board of Directors, Board of Trustees or Managing General Partners, as appropriate;
(d) "Custodian" shall mean a custodian and any sub-custodian of securities and other property which the Investment Company may from time to time deposit, or cause to be deposited or held under the name or account of such custodian pursuant to the Custody Agreement;
(e) "Oral Instructions" shall mean instructions (including without limitation instructions received by telephone, facsimile, electronic mail or other electronic mail), other than written instructions, actually received by FTIS from a person reasonably believed by FTIS to be an Authorized Person;
(f) "Shares" shall mean shares of each class of capital stock, beneficial interest or limited partnership interest, as appropriate, of each series of the Investment Company; and
(g) "Written Instructions" shall mean a written communication signed by a person reasonably believed by FTIS to be an Authorized Person and actually received by FTIS.
2. Appointment of FTIS. The Investment Company hereby appoints FTIS as transfer agent for Shares of the Investment Company, as service agent in connection with dividend and distribution functions, and as shareholder servicing agent for the Investment Company, and FTIS accepts such appointment and agrees to perform the following duties.
3. Compensation.
(a) Payment to FTIS:
(i) Compensation for Servicing: The Investment Company will compensate FTIS for the performance of its obligations hereunder in accordance with the fees set forth in the written schedule of fees annexed hereto as Schedule A and incorporated herein. FTIS will bill the Investment Company as soon as practicable after the end of each calendar month, in accordance with Schedule A. The Investment Company will promptly pay to FTIS the amount of such billing.
(ii) Reimbursement for Out-of-Pocket Expenses: The Investment Company will reimburse FTIS for out-of-pocket disbursements paid to third parties by FTIS in the performance of its obligations hereunder including, but not limited to, the items specified in the written schedule of out-of-pocket expenses paid to third parties annexed hereto as Schedule B and incorporated herein. Unspecified out-of-pocket expenses shall be limited to those out-of-pocket expenses reasonably incurred by FTIS in the performance of its obligations hereunder, subject to approval by the Board. Reimbursement by the Investment Company for out-of-pocket disbursements paid by FTIS in any month shall be made as soon as practicable after the receipt of an itemized bill from FTIS.
(b) Beneficial Owner Servicing Fees to Third Parties: Subject to the limitation set forth in paragraph (d) below, the Investment Company will reimburse FTIS for servicing fee payments ("Beneficial Owner Servicing Fees") made by FTIS on the Investment Company's behalf to institutions that:
(i) maintain a master account with a Fund in the institution's name ("Omnibus Account") on behalf of numerous beneficial owners of Omnibus Account assets; or
(ii) maintain a master account with a Fund in the institution's name on behalf of an employer sponsored retirement plan (a "Plan Account") and provide, directly or indirectly under separate contract with the retirement plan, participant level accounting for each plan participant with a beneficial ownership in Plan Account assets.
Each beneficial owner with an interest in Fund shares held in an Omnibus Account and each plan participant with an interest in Fund shares held in a Plan Account is referred to in this Agreement as a "Beneficial Owner".
(c) Networked Account Servicing Fees to Third Parties: Subject to the limitation set forth in paragraph (d) below, the Investment Company will reimburse FTIS for servicing fee payments ("Networked Account Servicing Fees") made by FTIS on the Investment Company's behalf to an institution for each Fund account (a "Networked Account") maintained by FTIS in which servicing is shared with that institution by the exchange of account data through the National Securities Clearing Corporation (NSCC) networking system.
(d) Maximum Reimbursement Amount for Beneficial Owner Servicing Fees and Networked Account Servicing Fees. The Investment Company authorizes FTIS to negotiate Beneficial Owner Servicing Fees and Networked Account Servicing Fees on the Investment Company's behalf and shall reimburse FTIS for those fees negotiated and paid up to the "Maximum Reimbursement Amount". The Maximum Reimbursement Amount for each fiscal year of the Investment Company, calculated on the basis of all Omnibus Accounts and all Networking Accounts open during that fiscal year, shall equal the total amount (including out-of-pocket expenses) that would otherwise have been payable by the Investment Company to FTIS under the terms of this Agreement if (i) all Beneficial Owners for which Beneficial Owner Servicing fees were paid had been Fund shareholders of record; and (ii) all Networked Accounts for which Networked Account Servicing Fees were paid had been Full Service Accounts (as defined in Schedule A).
(e) Compensation Adjustments. Any compensation agreed to hereunder may be adjusted from time to time by mutual agreement by attaching revised Schedules A or B to this Agreement.
4. Documents. In connection with the appointment of FTIS, the Investment Company shall, within a reasonable period of time for FTIS to prepare to perform its duties hereunder, deliver to FTIS the following documents:
(a) If applicable, specimens of the certificates for the Shares;
(b) All account application forms and other documents relating to Shareholder accounts or to any plan, program or service offered by the Investment Company;
(c) A certificate identifying the Authorized Persons and specimen signatures of Authorized Persons who will sign Written Instructions; and
(d) All documents and papers necessary under the laws of the Investment Company's state of domicile, under the Investment Company's Articles, and as may be required for the due performance of FTIS's duties under this Agreement or for the due performance of additional duties as may from time to time be agreed upon between the Investment Company and FTIS.
5. Duties of the Transfer Agent. FTIS shall be responsible for administering and/or performing transfer agent functions; for acting as service agent in connection with dividend and distribution functions; and for performing shareholder account and administrative agent functions in connection with the issuance, transfer, exchange, redemption or repurchase (including coordination with the Custodian) of Shares. FTIS shall be bound to follow its usual and customary operating standards and procedures, as they may be amended from time to time, and each current prospectus and Statement of Additional Information (hereafter, collectively, the "prospectus") of the Investment Company. Without limiting the generality of the foregoing, FTIS agrees to perform the specific duties listed on Schedule C.
The duties to be performed by FTIS shall not include the engagement, supervision or compensation of any service providers, or any registrations or fees of any kind, which are required by the laws of any foreign country in which the Fund may choose to invest portfolio assets or sell Shares.
6. (a) Distributions Payable in Shares. In the event that the Board of the Investment Company shall declare a distribution payable in Shares, the Investment Company shall deliver to FTIS written notice of such declaration signed on behalf of the Investment Company by an officer thereof, upon which FTIS shall be entitled to rely for all purposes, certifying (i) the number of Shares involved, and (ii) that all appropriate action has been taken to effect such distribution.
(b) Distributions Payable in Cash; Redemption Payments. In the event that the Board of the Investment Company shall declare a distribution payable in cash, the Investment Company shall deliver to FTIS written notice of such declaration signed on behalf of the Investment Company by an officer thereof, upon which FTIS shall be entitled to rely for all purposes, certifying (i) the amount per share to be distributed, (ii) the record and payment dates for the distribution, and (iii) that all appropriate action has been taken to effect such distribution. Once the amount and validity of any dividend or redemption payments to shareholders have been determined, the Investment Company shall transfer the payment amounts from the Investment Company's accounts to an account or accounts held in the name of FTIS, as paying agent for the shareholders, in accordance with any applicable laws or regulations, and FTIS shall promptly cause payments to be made to the shareholders.
7. Recordkeeping and Other Information. FTIS shall create, maintain and preserve all necessary records in accordance with all applicable laws, rules and regulations. Such records are the property of the Investment Company, and FTIS will promptly surrender them to the Investment Company upon request or upon termination of this Agreement. In the event of such a request or termination, FTIS shall be entitled to make and retain copies of all records surrendered, and to be reimbursed by the Investment Company for reasonable expenses actually incurred in making such copies. FTIS will take reasonable actions to maintain the confidentiality of the Investment Company's records, which may nevertheless be disclosed to the extent required by law or by this Agreement, or to the extent permitted by the Investment Company.
8. Other Duties. In addition, FTIS shall perform such other duties and functions, and shall be paid such amounts therefor, as may from time to time be agreed upon in writing between the Investment Company and FTIS. Such other duties and functions shall be reflected in a written amendment to Schedule C, and the compensation for such other duties and functions shall be reflected in a written amendment to Schedule A.
9. Reliance by Transfer Agent; Instructions.
(a) FTIS will be protected in acting upon Written or Oral Instructions reasonably believed to have been executed or orally communicated by an Authorized Person and will not be held to have any notice of any change of authority of any person until receipt of a Written Instruction thereof from an officer of the Investment Company. FTIS will also be protected in processing Share certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Investment Company and the proper countersignature of FTIS.
(b) At any time FTIS may apply to any Authorized Person of the Investment Company for Written Instructions, or may seek advice at the Investment Company's expense from legal counsel for the Investment Company, with respect to any matter arising in connection with this Agreement. FTIS shall not be liable for any action taken or not taken or suffered by it in good faith in accordance with such Written Instructions or in accordance with the opinion of counsel for the Investment Company. Written Instructions requested by FTIS will be provided by the Investment Company within a reasonable period of time.
10. Acts of God, etc. FTIS will not be liable or responsible for delays or errors by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties, fire, mechanical breakdown beyond its control, earthquake, flood or catastrophe, acts of God, insurrection, war, riots or failure beyond its control of transportation, communication or power supply.
11. Duty of Care and Indemnification. FTIS will indemnify the Investment Company against and hold it harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit resulting from willful misfeasance, bad faith or gross negligence on the part of FTIS, and arising out of, or in connection with, its duties hereunder. However, FTIS shall have no liability for or obligation to indemnify the Investment Company against any losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) incurred by the Investment Company as a result of: (i) any action taken in accordance with Written or Oral Instructions; (ii) any action taken in accordance with written or oral advice reasonably believed by FTIS to have been given by counsel for the Investment Company; (iii) any action taken as a result of any error or omission in any record (including but not limited to magnetic tapes, computer printouts, hard copies and microfilm copies) delivered, or caused to be delivered, by the Investment Company to FTIS in connection with this Agreement; or (iv) any action taken in accordance with shareholder instructions which meet the standards described in the Investment Company's current prospectus, including without limitation oral instructions which meet the standards described in the section of the prospectus dealing with telephone transactions, so long as FTIS believes such instructions to be genuine. The obligations of the parties hereto under this Section shall survive the termination of this Agreement.
12. Term and Termination.
(a) This Agreement shall be effective as of the date first written above, shall continue through November 30, 2008, and thereafter shall continue automatically for successive annual periods ending on December 31 of each year, provided such continuance is specifically approved at least annually by the Investment Company's Board.
(b) Either party hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. Upon such termination, FTIS will (i) deliver to such successor a certified list of shareholders of the Investment Company (with names and addresses) and an historical record of the account of each Shareholder and the status thereof; (ii) surrender all other relevant records in accordance with section 7 of this Agreement, above, and (iii) cooperate in the transfer of such duties and responsibilities, including provisions for assistance from FTIS's personnel in the establishment of books, records and other data by such successor or successors. FTIS shall be entitled to charge the Investment Company a reasonable fee for services rendered and expenses actually incurred in performing its duties under this paragraph.
13. Amendment. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties.
14. Subcontracting. The Investment Company agrees that FTIS may, in its discretion, subcontract for all or any portion of the services described under this Agreement or the Schedules hereto; provided that the appointment of any such agent shall not relieve FTIS of its responsibilities hereunder.
15. Data Processing System, Program and Information
(a) The Investment Company shall not, solely by virtue of this Agreement, obtain any rights, title and interest in and to the computer systems and programs, including all related documentation, employed by FTIS in connection with rendering services hereunder; provided however, that the records prepared, maintained and preserved by FTIS pursuant to this Agreement shall be the property of the Investment Company.
(b) Any modifications, changes and improvements in the automatic data processing system (the "System") or in the manner in which the services are rendered shall be made or provided as follows, and provided further that modifications for which the Investment Company will be required to bear any expenses shall be made only as set forth herein.
(i) FTIS shall, at no expense to the Investment Company, make any revisions in the System necessary to (1) perform the services which it has contracted to perform and (2) create and maintain the records which it has contracted to create and maintain hereunder or (3) enhance or update the System to the extent and in the manner necessary to maintain said System. However, if specific reprogramming, coding or other changes are necessary in the records of the Investment Company or in its shareholder accounts in order to complete a system revision, the costs for completing work specific to the Investment Company shall be subject to a subsequent agreement between the parties. The System is at all times to be competitive with that which is generally available to the mutual fund industry from transfer agents.
(ii) To the extent that the System is modified to comply with changes in the accounting or record-keeping rules applicable to mutual funds, the Investment Company agrees to pay a reasonable pro rata portion of the costs of the design, revision and programming of the System; provided, however, that if the Investment Company's pro rata portion exceeds $1,000 per 12 month period, the Investment Company's obligation to pay a reasonable pro rata portion shall be conditioned upon FTIS's having obtained prior Written Instructions from the Investment Company for any charge. The determination that such modifications or revisions are necessary, and that the System as so modified produces records which comply with the record-keeping requirements, as amended, shall be by mutual agreement; provided, however, that upon written request by the Investment Company, FTIS will provide the Investment Company with a written opinion of counsel to FTIS to the effect that the modifications were required b changes in the applicable laws or regulations and that the System, as modified, complies with the laws or regulations as amended. Upon completion of the changes FTIS shall render a statement to the Investment Company, in reasonably detailed form, identifying the nature of the revisions, the services, expenses and costs, and the basis for determining the Investment Company's reasonable pro rata portion. Any determination by FTIS of the Investment Company's pro rata portion based upon the ratio of the number of shareholder accounts of the Investment Company to the total number of shareholder accounts of all clients for which FTIS provides comparable services shall conclusively be presumed to be reasonable unless the nature of the change to the System relates to certain types of shareholder accounts, in which case the pro rata portion will be determined on a mutually agreeable basis.
(iii) If system improvements are requested by the Investment Company and are not otherwise required under this subsection 15(b), FTIS shall be entitled to request a reasonable fee before agreeing to make the improvements and shall be entitled to refuse to make any requested improvements which FTIS reasonably believes to be incompatible with its systems providing services to other funds.
16. Miscellaneous.
(a) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Investment Company or FTIS shall be sufficiently given if addressed to that party and received by it at its office at the place described in the Investment Company's most recent registration statement or at such other place as it may from time to time designate in writing.
(b) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other party.
(c) This Agreement shall be construed in accordance with the laws of the State of California applicable to contracts between California residents which are to be performed primarily within California.
(d) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts shall, together, constitute only one instrument. This Agreement supersedes all prior Shareholder Services Agreements between the parties, and supersedes all prior agreements between the parties relating to the subject matters of this Agreement to the extent they are inconsistent with this Agreement.
(e) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
(f) It is understood and expressly stipulated that neither the holders of Shares of the Investment Company nor any member of the Board, officer, agent or employee of the Investment Company shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Investment Company only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate officers thereunder duly authorized as of the day and year first above written.
TEMPLETON INCOME TRUST FRANKLIN TEMPLETON
INVESTOR SERVICES, LLC
BY:/s/ROBERT C. ROSSELOT /s/BASIL K. FOX, JR.
-------------------- -------------------------
NAME: Robert C. Rosselot Basil K. Fox, Jr.
TITLE: Secretary President
|
ANNUAL BASE SERVICING FEE FOR EACH FULL SERVICE ACCOUNT. A "Full Service Account" is an account maintained by FTIS for a Fund shareholder of record, other than a Networked Account (as defined in Section 3(c) of this Agreement) or an account on which Beneficial Owner Servicing Fees (as defined in Section 3(b) of this Agreement) are paid.
EQUITY FUND $24.00 per annum FIXED INCOME FUND $28.00 per annum MONEY FUND $19.50 per annum CLOSED ACCOUNT $ 3.50 per annum (pro-rated beginning |
with the calendar month in which the account is closed and continuing through the month of the following calendar year in which the account is purged from the operative record system)
ANNUAL BASE SERVICING FEE FOR EACH NETWORKED ACCOUNT (as defined in Section 3(c)
of this Agreement):
EQUITY FUND $12.00 per annum FIXED INCOME FUND $14.00 per annum MONEY FUND $10.00 per annum CLOSED ACCOUNT $ 3.50 per annum (pro-rated beginning |
with the calendar month in which the account is closed and continuing through the month of the following calendar year in which the account is purged from the operative record system)
ANNUAL BASE SERVICING FEE FOR EACH BENEFICIAL OWNER (as defined in Section 3(b)
of this Agreement):
OPEN ACCOUNT $6.00 per annum
PARTICIPANT LEVEL RECORD KEEPING BY OR ON BEHALF OF FTIS FOR A PARTICIPANT
DIRECTED PLAN (as defined in Section 3(b)(ii) of this Agreement): Fifteen (15)
basis points per annum of the average net asset value of Fund shares held by a Participant Directed Plan. The average net assets invested by a Participant Directed Plan shall be computed in the same manner as the Fund uses to compute its average net assets.
OUT-OF-POCKET EXPENSES
In addition to Beneficial Owner Servicing Fees and Networked Account Servicing Fees paid in accordance with Section 3 of this Agreement, the Investment Company shall reimburse FTIS monthly for the following out-of-pocket expenses paid to third parties in connection with the servicing of Accounts as required under the terms of this Agreement:
o postage, mailing, freight, forms and stationary expenses associated with delivery of shareholder communications such as prospectuses, reports, tax information, proxies, shareholder statements and transaction confirmations.
o telephone costs associated with servicing shareholders in accordance with this agreement
o ACH, Federal Reserve and bank charges for check clearance, electronic funds transfers, and wire transfers
o Data Storage: Retention of electronic and paper account records; costs associated with data storage of account records and transactions records via magnetic tape, microfilm and microfiche
o insurance against loss of Share certificates when in transit
o terminals transmitting lines and any expenses incurred in connection with such terminals and lines established and/or maintained by FTIS to perform its obligations under this agreement
o Amounts paid to independent accounting firms to perfom independent audits of FTIS and the issuance of reports such as a SAS 70
o Amounts paid in connection with use of national data bases to comply with requirements for locating lost shareholders
o Proxy solicitation and tabulation expenses
o NSCC Networking/Commission Settlement Expenses. Cost to utilize NSCC system to send commissions to brokerage firms; NSCC Fee, NSCC Year End Fee, NSF Draft Fee Credit
o IBM Global Services - Cost of sending out eStatements
o all other miscellaneous expenses reasonably incurred by FTIS in the performance of its obligations under the Agreement
This Schedule B may be amended by FTIS upon not less than 30 days' written notice to the Investment Company, subject to approval by the Board.
o Upon receipt of proper authorization, record the transfer of Fund shares ("Shares") in its transfer records in the name(s) of the appropriate legal shareholder(s) of record;
o Upon receipt of proper authorization, redeem Shares, debit shareholder accounts and provide for payment to Shareholders; and
o If the Fund issues certificated Shares, upon receipt of proper authorization, countersign as transfer agent and deliver certificates upon issuance, countersign certificates to reflect ownership transfers, and cancel certificates when redeemed.
AS SHAREHOLDER SERVICE AGENT FOR THE INVESTMENT COMPANY, FTIS WILL:
o Receive from the Investment Company, from the Investment Company's Principal Underwriter or from a Fund shareholder, in a manner acceptable to FTIS, information necessary to record Share sales and redemptions and to generate sale and/or redemption confirmations;
o Mail, or electronically transmit, sale and/or redemption confirmations;
o Accept and process payments from investors and their broker-dealers or other agents for the purchase of Shares;
o Support the use of automated systems for payment and other share transactions, such as NSCC Fund/Serv and Networking and other systems which may be reasonably requested by FTIS customers;
o Keep records as necessary to implement any deferred sales charges, exchange restrictions or other policies of the Investment Company affecting Share transactions, including without limitation any restrictions or policies applicable to certain classes of shares, as stated in the applicable prospectus;
o Requisition Shares in accordance with instructions of the Principal Underwriter;
o Open, maintain and close shareholder accounts;
o Establish registration of ownership of Shares in accordance with generally accepted form;
o Maintain records of (i) issued Shares and (ii) number of Shareholders and their aggregate Shareholdings classified according to their residence in each State of the United States or foreign country;
o Accept and process telephone exchanges and redemptions for Shares in accordance with a Fund's Telephone Exchange and Redemption Privileges as described in the Fund's current prospectus;
o Maintain and safeguard records for each Shareholder showing name(s), address, number of any certificates issued, and number of Shares registered in such name(s), together with continuous proof of the outstanding Shares and dealer identification, and reflecting all current changes. On request, provide information as to an investor's qualification for Cumulative Quantity Discount. Provide all accounts with, at minimum, quarterly and year-end historical confirmation statements;
o Provide on request a duplicate set of records for file maintenance in the Investment Company's office;
o Provide for the proper allocation of proceeds of share sales to the Investment Company and to the Principal Underwriter, in accordance with the applicable prospectus;
o Redeem Shares and provide for the preparation and delivery of liquidation proceeds;
o Provide for the processing of redemption checks, and maintain checking account records;
o Exercise reasonable and good-faith business judgment in the registration of Share transfers, pledges and releases from pledges in accordance with the California Uniform Commercial Code - - Investment Securities;
o From time to time make transfers of certificates for such Shares as may be surrendered for transfer properly endorsed, and countersign new certificates issued in lieu thereof;
o Upon receipt of proper documentation, place stop transfers, obtain necessary insurance forms, and reissue replacement certificates against lost, stolen or destroyed Share certificates;
o Check surrendered certificates for stop transfer restrictions. Although FTIS cannot insure the genuineness of certificates surrendered for cancellation, it will employ all due reasonable care in deciding the genuineness of such certificates and the guarantor of the signature(s) thereon;
o Cancel surrendered certificates and record and countersign new certificates;
o Certify outstanding Shares to auditors;
o In connection with any meeting of Shareholders, upon receiving
appropriate detailed instructions and written materials prepared by the
Investment Company and proxy proofs checked by the Investment Company,
provide for: (a) the printing of proxy cards, (b) the delivery to
Shareholders of all reports, prospectuses, proxy cards and related proxy
materials of suitable design for enclosing, (c) the receipt and tabulation
of executed proxies, (d) solicitation of Shareholders for their votes and
(e) delivery of a list of Shareholders for the meeting;
o Answer routine written correspondence, email, and telephone inquiries about individual accounts. Prepare monthly reports for correspondence volume and correspondence data necessary for the Investment Company's Semi-Annual Report on Form N-SAR;
o Provide for the preparation and delivery of dealer commission statements and checks;
o Maintain and furnish the Investment Company and its Shareholders with such information as the Investment Company may reasonably request for the purpose of compliance by the Investment Company with the applicable tax and securities laws of applicable jurisdictions;
o Mail confirmations of transactions to investors and dealers in a timely fashion;
o Provide for the payment or reinvestment of income dividends and/or capital gains distributions to Shareholders of record, in accordance with the Investment Company's and/or Shareholder's instructions, provided that:
(a) The Investment Company shall notify FTIS in writing promptly upon declaration of any such dividend and/or distribution, and in any event at least forty-eight (48) hours before the record date;
(b) Such notification shall include the declaration date, the record date, the payable date, the rate, and, if applicable, the reinvestment date and the reinvestment price to be used; and
(c) Prior to the payable date, the Investment Company shall furnish FTIS with sufficient fully and finally collected funds to make such distribution;
o Prepare and file annual U.S. information returns of dividends and capital gain distributions, gross redemption proceeds, foreign person's U.S. source income, and other U.S. federal and state information returns as required, and mail payee copies to shareholders; report and pay U.S. backup withholding on all reportable payments; report and pay U.S. federal income taxes withheld from distributions and other payments made to nonresidents of the U.S.; prepare and mail to shareholders any notice required by the Internal Revenue Code as to taxable dividends, tax-exempt interest dividends, realized net capital gains distributed and/or retained, foreign taxes paid and foreign source income distributed or deemed distributed, U.S. source income and any tax withheld on such income, dividends received deduction information, or other applicable tax information appropriate for dissemination to shareholders of the Investment Company;
o Comply with all U.S. federal income tax requirements regarding the collection of tax identification numbers and other required shareholder certifications and information pertaining to shareholder accounts; respond to all notifications from the U.S. Internal Revenue Service regarding the application of the U.S. backup withholding requirements including tax identification number solicitation requirements;
o Prepare transfer journals;
o Set up wire order Share transactions on file;
o Provide for receipt of payment for Share transactions, and update the transaction file;
o Produce delinquency and other trade file reports;
o Provide dealer commission statements and provide for payments thereof for the Principal Underwriter;
o Sort and print shareholder information by state, social code, price break, etc.; and
o Mail promptly the Statement of Additional Information of the Investment Company to each Shareholder upon request.
In connection with the Investment Company's Systematic Withdrawal Plan, FTIS will:
o Make payment of amounts withdrawn periodically by the Shareholder pursuant to the Program by redeeming Shares, and confirm such redemptions to the Shareholder; and
o Provide confirmations of all redemptions, reinvestment of dividends and distributions, and any additional investments in the Program, including a summary confirmation at the year-end.
Stradley Ronon Stevens & Young, LLP 2600 One Commerce Square Philadelphia, PA 19103 Telephone: (215) 564-8000 Facsimile: (215) 564-8120
November 27, 2007
Board of Trustees of
Templeton Income Trust
One Franklin Parkway
San Mateo, California 94403-1906
Subject: Post-Effective Amendment No. 31 to the Registration Statement on
Form N-1A relating to Templeton Income Trust, a Delaware statutory
trust (the "Trust")
Registration No. 33-06510; FILE NO. 811-04706
Ladies and Gentlemen:
We have acted as counsel to Templeton Income Trust, a Delaware statutory trust (the "Trust"), including its two series, Templeton Global Bond Fund and Templeton International Bond Fund (together, the "Series"), in connection with the preparation and filing with the U.S. Securities and Exchange Commission of Post-Effective Amendment No. 31 (the "Amendment") to the Registration Statement on Form N-1A under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, of the Trust. Pursuant to Rule 414 under the 1933 Act, the Amendment is being filed, in part, in connection with the Trust's adopting as its own the Registration Statement on Form N-1A of Templeton Income Trust, a Massachusetts business trust (the "MA Trust").
We have reviewed the Trust's Agreement and Declaration of Trust, By-laws and resolutions adopted by the Trust's Board of Trustees, the Agreement and Plan of Reorganization dated November 26, 2007, the form of which was approved by the MA Trust's shareholders at a meeting held on March 21, 2007, as adjourned to April 11, 2007 (the "Agreement"), and such other legal and factual matters as we have deemed appropriate.
This opinion is based exclusively on the Delaware Statutory Trust Act and does not extend to the securities or "blue sky" laws of the State of Delaware or other States.
We have assumed the following for purposes of this opinion:
1. The shares of the Series will be issued in accordance with the Trust's Agreement and Declaration of Trust, By-laws, the Agreement and resolutions of the Trust's Board of Trustees relating to the creation, authorization and issuance of shares.
2. The Series' shares will be issued against payment therefor as described in the Series' then-current Prospectus, Statement of Additional Information relating thereto, or the Agreement, and that such payment will have been at least equal to the applicable offering price.
On the basis of the foregoing, it is our opinion that, when issued and paid for upon the terms provided in the Agreement or the Amendment, the shares of beneficial interest, without a par value, of the Series to be issued pursuant to the Amendment will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the U.S. Securities and Exchange Commission as an exhibit to the Amendment.
Very truly yours,
Stradley Ronon Stevens & Young, LLP
By:/s/ KRISTIN H. IVES -------------------------------- Kristin H. Ives, a Partner |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated October 18, 2007, relating to the financial statements and financial highlights which appear in the August 31, 2007 Annual Report to Shareholders of Templeton Income Trsut, which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Independent Registered Public Accounting Firm" in such Registration Statement.
/s/PRICEWATERHOUSECOOPERS LLP San Francisco, California November 26, 2007 |
TEMPLETON INTERNATIONAL BOND FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), by TEMPLETON INCOME TRUST (the "Trust") for the use of the Class A shares of its series named TEMPLETON INTERNATIONAL BOND FUND (the "Fund"), which Plan shall take effect on the date the shares of the Fund are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Trust (the "Board"), including a majority of the trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan (the "non-interested trustees"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Trust on behalf of the Fund and Franklin Advisers, Inc. ("FAI") and the terms of the Distribution Agreement between the Trust on behalf of the Fund and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of FAI under the Investment Management Agreement was fair and not excessive; however, the Board also recognized that uncertainty may exist from time to time with respect to whether payments to be made by the Fund to FAI, Distributors, or others or by FAI or Distributors to others may be deemed to constitute distribution expenses. Accordingly, the Board determined that the Plan should provide for such payments and that adoption of the Plan would be prudent and in the best interests of the Fund and its shareholders. Such approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by Distributors or others in the promotion and distribution of the shares of the Fund, as well as for shareholder services provided for existing shareholders of the Fund. Distribution expenses may include, but are not limited to, the expenses of the printing of prospectuses and reports used for sales purposes, preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses; or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. Shareholder service expenses may include, but are not limited to, the expenses of assisting in establishing and maintaining customer accounts and records, assisting with purchase and redemption requests, arranging for bank wires, monitoring dividend payments from the Fund on behalf of customers, forwarding certain shareholder communications from the Fund to customers, receiving and answering correspondence, and aiding in maintaining the investment of their respective customers in the Fund. These expenses may also include any distribution or service fees paid to securities dealers or their firms or others. Agreements for the payment of distribution and service fees to securities dealers or their firms or others shall be in a form which has been approved from time to time by the Board, including the non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average daily net assets of the Fund. Said payment shall be made quarterly by the Fund to Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, FAI, Distributors or other parties on behalf of the Fund, FAI or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of the Board, including the non-interested trustees, cast in person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested trustees, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Trust on behalf of the Fund and FAI.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 2 hereof without approval by a majority of the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by a vote of the non-interested trustees cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's non-interested trustees shall be committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Trust and Distributors as evidenced by their execution hereof.
TEMPLETON INCOME TRUST, on behalf of
TEMPLETON INTERNATIONAL BOND FUND
By: /s/ROBERT C. ROSSELOT
----------------------------------
Name: Robert C. Rosselot
Title: Secretary
|
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By: /s/PETER D. JONES ---------------------------------- Name: Peter D. Jones Title: President |
Dated as of July 18, 2007
CLASS C DISTRIBUTION PLAN
I. Investment Company: TEMPLETON INCOME TRUST
II. Fund: TEMPLETON INTERNATIONAL BOND FUND - CLASS C
III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares (as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.40%
B. Service Fee: 0.25%
Preamble to Class C Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment Company named above ("Investment Company") for the Class C shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class C shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Franklin Advisers, Inc.. ("FAI") and the terms of the Distribution Agreement between the Investment Company and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of FAI, under the Investment Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
Distribution Plan
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per
annum of the Class' average daily net assets represented by shares of the
Class, as may be determined by the Fund's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from
time to time by the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph 1(a) above to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Trustees, including the non-interested Trustees. In addition, such fees may be used to pay for advancing the commission costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, FAI, Distributors or other parties on behalf of the Fund, FAI or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies reimbursed to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested Board members, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Fund and FAI.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof.
Date: July 18, 2007
TEMPLETON INCOME TRUST, on behalf of
TEMPLETON INTERNATIONAL BOND FUND
By: /s/ROBERT C. ROSSELOT
----------------------------
Name: Robert C. Rosselot
Secretary
|
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By: /s/PETER D. JONES
--------------------------------
Name: Peter D. Jones
President
|
CLASS R DISTRIBUTION PLAN
I. Investment Company: Templeton Income Trust
II. Fund: Templeton International Bond Fund - Class R
III. Maximum Per Annum Rule 12b-1 Fees for Class R Shares: 0.50%
(as a percentage of average daily net assets of the class)
Preamble to Class R Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") by the Investment Company named above ("Investment Company") for the Class R shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date shares of the Class are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Franklin Advisers, Inc. ("FAI") and the terms of the Distribution Agreement between the Investment Company and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of FAI, under the Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
Distribution Plan
1. The Fund shall pay to Distributors as compensation for its services or for payment by Distributors to dealers or others, or the Fund shall pay directly to others, a quarterly fee not to exceed the above-stated maximum fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Investment Company's Board from time to time, as distribution and/or service fees pursuant to distribution and servicing agreements which have been approved from time to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1 above may be treated as compensation for Distributors' distribution-related services including compensation for amounts advanced to securities dealers or their firms or others (including retirement plan recordkeepers) selling shares of the Class who have executed an agreement with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the non-interested Board members, with respect to the sale of Class shares. In addition, Distributors may use such monies paid to it pursuant to Paragraph 1 above to assist in the distribution and promotion of shares of the Class. Such payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others (including retirement plan recordkeepers) who have executed agreements with the Investment Company, Distributors or its affiliates, or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels.
(b) The monies paid to Distributors or others pursuant to paragraph 1 above may also be used to pay Distributors, dealers or others (including retirement plan recordkeepers) for, among other things, furnishing personal services and maintaining shareholder or beneficial owner accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, FAI, Distributors or other parties on behalf of the Fund, FAI or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan. In determining whether there is a reasonable likelihood that the continuation of the Plan will benefit the Fund and its shareholders, the Board may, but is not obligated to, consider that Distributors has incurred substantial costs and has entered into an arrangement with a third party which third party has agreed to purchase from Distributors the entitlement of Distributors to receive the payments described in Paragraph 1(a) above, which purchase will generate the cash flow needed to pay for the distribution activities for the Class.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated with respect to the shares of the Class at any time, without penalty, by vote of a majority of the outstanding voting securities of such Class or by vote of a majority of the non-interested Board members of the Investment Company, on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Management Agreement between the Fund and FAI. Upon termination of this Plan with respect to the Class, the obligation of the Fund to make payments pursuant to this Plan with respect to such Class shall terminate, and the Fund shall not be required to make payments hereunder beyond such termination date with respect to expenses incurred in connection with Class shares sold prior to such termination date.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the outstanding voting securities of the Class of the Fund.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof.
Date: July 18, 2007
TEMPLETON INCOME TRUST, on behalf of
TEMPLETON INTERNATIONAL BOND FUND
By /s/ROBERT C. ROSSELOT
--------------------------------
Name: Robert C. Rosselot
Secretary
|
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By /s/PETER D. JONES
-------------------------------
Name: Peter D. Jones
President
|
4
3
S:\FTLEGAL\TIncomeTrust -- MA Corp\TIBF\Class R 12b-1 Plan.doc
TEMPLETON GLOBAL BOND FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), by TEMPLETON INCOME TRUST (the "Trust") for the use of the Class A shares of its series named TEMPLETON GLOBAL BOND FUND (the "Fund"), which Plan shall take effect on the date the shares of the Fund are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Trust (the "Board"), including a majority of the trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan (the "non-interested trustees"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Trust on behalf of the Fund and Franklin Advisers, Inc. ("FAI") and the terms of the Distribution Agreement between the Trust on behalf of the Fund and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of FAI under the Investment Management Agreement was fair and not excessive; however, the Board also recognized that uncertainty may exist from time to time with respect to whether payments to be made by the Fund to FAI, Distributors, or others or by FAI or Distributors to others may be deemed to constitute distribution expenses. Accordingly, the Board determined that the Plan should provide for such payments and that adoption of the Plan would be prudent and in the best interests of the Fund and its shareholders. Such approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by Distributors or others in the promotion and distribution of the shares of the Fund, as well as for shareholder services provided for existing shareholders of the Fund. Distribution expenses may include, but are not limited to, the expenses of the printing of prospectuses and reports used for sales purposes, preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses; or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. Shareholder service expenses may include, but are not limited to, the expenses of assisting in establishing and maintaining customer accounts and records, assisting with purchase and redemption requests, arranging for bank wires, monitoring dividend payments from the Fund on behalf of customers, forwarding certain shareholder communications from the Fund to customers, receiving and answering correspondence, and aiding in maintaining the investment of their respective customers in the Fund. These expenses may also include any distribution or service fees paid to securities dealers or their firms or others. Agreements for the payment of distribution and service fees to securities dealers or their firms or others shall be in a form which has been approved from time to time by the Board, including the non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average daily net assets of the Fund. Said payment shall be made quarterly by the Fund to Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, FAI, Distributors or other parties on behalf of the Fund, FAI or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of the Board, including the non-interested trustees, cast in person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested trustees, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Trust on behalf of the Fund and FAI.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 2 hereof without approval by a majority of the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by a vote of the non-interested trustees cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's non-interested trustees shall be committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Trust and Distributors as evidenced by their execution hereof.
TEMPLETON INCOME TRUST, on behalf of
TEMPLETON GLOBAL BOND FUND
By: /s/ROBERT C. ROSSELOT ---------------------- Name: Robert C. Rosselot Title: Secretary |
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By: /s/PETER D. JONES ----------------------- Name: Peter D. Jones Title: President |
Dated as of December 3, 2007
CLASS C DISTRIBUTION PLAN
I. Investment Company: TEMPLETON INCOME TRUST
II. Fund: TEMPLETON GLOBAL BOND FUND - CLASS C
III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares (as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.40%
B. Service Fee: 0.25%
Preamble to Class C Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment Company named above ("Investment Company") for the Class C shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class C shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Franklin Advisers, Inc.. ("FAI") and the terms of the Distribution Agreement between the Investment Company and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of FAI, under the Investment Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
Distribution Plan
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay (i) to Distributors for payment to dealers or others, or (ii) directly to others, an amount not to exceed the above-stated maximum service fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Fund's Board from time to time, as a service fee pursuant to servicing agreements which have been approved from time to time by the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph 1(a) above to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Trustees, including the non-interested Trustees. In addition, such fees may be used to pay for advancing the commission costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, FAI, Distributors or other parties on behalf of the Fund, FAI or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies reimbursed to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested Board members, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Fund and FAI.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof.
Date: December 3, 2007
TEMPLETON INCOME TRUST, on behalf of
TEMPLETON GLOBAL BOND FUND
By: /s/ROBERT C. ROSSELOT
-------------------------
Name: Robert C. Rosselot
Secretary
|
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By: /s/PETER D. JONES
-------------------------
Name: Peter D. Jones
President
|
MULTIPLE CLASS PLAN
on behalf of
Templeton Income Trust
This Multiple Class Plan (the "Plan") has been adopted unanimously by the Board of Trustees of Templeton Income Trust (the "Investment Company") for its series, Templeton Global Bond Fund (the "Fund"). The Board has determined that the Plan, including the expense allocation methods among the classes, is in the best interests of each class of the Fund, the Fund and the Investment Company as a whole. The Plan sets forth the provisions relating to the establishment of multiple classes of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer three classes of shares, to be known as Class A Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% - 5.75%. Class C Shares shall not be subject to any front-end sales charges, but shall charge a 12b-1 distribution fee of 1.00%. Advisor Class Shares shall not be subject to any front-end sales charges or 12b-1 distribution fee.
3. Class A Shares shall not be subject to a contingent deferred sales charge ("CDSC"), except in the following limited circumstances. On investments of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser of the then-current net asset value or the original net asset value at the time of purchase applies to redemptions of those investments within the contingency period of 18 months from the calendar month following their purchase. The CDSC is waived in certain circumstances, as described in the Fund's prospectus.
Class C Shares redeemed within 12 months of their purchase of their purchase shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances as described in the Fund's prospectus.
Advisor Class Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1 Plan") associated with the Class A Shares may be used to compensate Franklin Templeton Distributors, Inc. (the "Distributor") or others for expenses incurred in the promotion and distribution of the Class A Shares. Such expenses include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of the Distributor's overhead expenses attributable to the distribution of the Class A Shares, as well as any distribution or shareholder servicing fees paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class A Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class C Shares has two components. The first component is a shareholder servicing fee, to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class C Shares, the Distributor or its affiliates. The second component is an asset-based sales charge to be retained by the Distributor during the first year after the sale of shares and, in subsequent years, to be paid to dealers or retained by the Distributor to be used in the promotion and distribution of Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class Shares and, therefore, the Advisor Class Shares shall not be subject to deductions relating to 12b-1 fees.
The Rule 12b-1 Plans for the Class A and Class C Shares shall operate in accordance with Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class C and Advisor Class shall relate to differences in Rule 12b-1 plan expenses, as described in the applicable Rule 12b-1 Plans; however, to the extent that the Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class C and Advisor Class.
7. Shares of Class A, Class C and Advisor Class may be exchanged for shares of another investment company within the Franklin Templeton Group of Funds according to the terms and conditions stated in each fund's prospectus, as it may be amended from time to time, to the extent permitted by the Investment Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary responsibilities under the Investment Company Act of 1940 and otherwise, will monitor the Fund for the existence of any material conflicts between the interests of the various classes of shares. The Board members, including a majority of the independent Board members, shall take such action as is reasonably necessary to eliminate any such conflict that may develop. Templeton Global Advisors Limited and Franklin Templeton Distributors, Inc. shall be responsible for alerting the Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of the Board members, including a majority of the Board members who are not interested persons of the Investment Company.
11. I, Robert C. Rosselot, Secretary of Templeton Income Trust, do hereby certify that this Multiple Class Plan was adopted on behalf of Templeton Global Bond Fund, by a majority of the Trustees of the Trust on October 17, 2006.
/s/ROBERT C. ROSSELOT ---------------------------- Robert C. Rosselot Secretary |
MULTIPLE CLASS PLAN
on behalf of
Templeton Income Trust
This Multiple Class Plan (the "Plan") has been adopted unanimously by the Board of Trustees of Templeton Income Trust (the "Investment Company") for its series, Templeton International Bond Fund (the "Fund"). The Board has determined that the Plan, including the expense allocation methods among the classes, is in the best interests of each class of the Fund, the Fund and the Investment Company as a whole. The Plan sets forth the provisions relating to the establishment of multiple classes of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A Shares, Class C Shares, Class R Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% - 5.75%. Class C Shares and Class R Shares shall not be subject to any front-end sales charges, but shall charge a 12b-1 distribution fee of 0.65% and 0.50%, respectively. Advisor Class Shares shall not be subject to any front-end sales charges or 12b-1 distribution fee.
3. Class A Shares shall not be subject to a contingent deferred sales charge ("CDSC"), except in the following limited circumstances. On investments of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser of the then-current net asset value or the original net asset value at the time of purchase applies to redemptions of those investments within the contingency period of 18 months from the calendar month following their purchase. The CDSC is waived in certain circumstances, as described in the Fund's prospectus.
Class C Shares redeemed within 12 months of their purchase, and Class R Shares redeemed within 18 months of their purchase, shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances as described in the Fund's prospectus.
Advisor Class Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1 Plan") associated with the Class A Shares may be used to compensate Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses incurred in the promotion and distribution of the Class A Shares. Such expenses include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of the Distributor's overhead expenses attributable to the distribution of the Class A Shares, as well as any distribution or shareholder servicing fees paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class A Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class C Shares has two components. The first component is a shareholder servicing fee, to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class C Shares, the Distributor or its affiliates. The second component is an asset-based sales charge to be retained by the Distributor during the first year after the sale of shares and, in subsequent years, to be paid to dealers or retained by the Distributor to be used in the promotion and distribution of Class C Shares, in a manner similar to that described above for Class A Shares.
The Rule 12b-1 Plan associated with the Class R Shares may be used to compensate the Distributor or others for distribution activities and/or for providing shareholder services. Distribution fees paid under the Rule 12b-1 Plan may be retained by the Distributor to compensate the Distributor for amounts advanced to securities dealers or their firms or others (including retirement plan recordkeepers) with respect to the sale of Class R Shares. In addition, such distribution fee payments may be retained by the Distributor to be used in the promotion and distribution of Class R Shares in a manner similar to that described above for Class A Shares, or may be paid out to dealers or others (including retirement plan recordkeepers) that perform similar distribution activities. Shareholder servicing fees may be paid to the Distributor or to securities firms or others (including retirement plan recordkeepers) who have executed a servicing agreement for Class R Shares with the Investment Company, the Distributor or its affiliates as compensation for providing personal assistance to shareholders or beneficial owners in servicing their accounts.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class Shares and, therefore, the Advisor Class Shares shall not be subject to deductions relating to 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class C and Class R Shares shall operate in accordance with Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class C, Class R and Advisor Class shall relate to differences in Rule 12b-1 plan expenses, as described in the applicable Rule 12b-1 Plans; however, to the extent that the Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class C, Class R and Advisor Class.
7. Shares of Class A, Class C, Class R and Advisor Class may be exchanged for shares of another investment company within the Franklin Templeton Group of Funds according to the terms and conditions stated in each fund's prospectus, as it may be amended from time to time, to the extent permitted by the Investment Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary responsibilities under the Investment Company Act of 1940 and otherwise, will monitor the Fund for the existence of any material conflicts between the interests of the various classes of shares. The Board members, including a majority of the independent Board members, shall take such action as is reasonably necessary to eliminate any such conflict that may develop. Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc. shall be responsible for alerting the Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of the Board members, including a majority of the Board members who are not interested persons of the Investment Company.
11. I, Robert C. Rosselot, Secretary of Templeton Income Trust, do hereby certify that this Multiple Class Plan was adopted on behalf of Templeton International Bond Fund, by a majority of the Trustees of the Trust on July 18, 2007.
/s/ROBERT C. ROSSELOT -------------------------- Robert C. Rosselot Secretary |