TEMPLETON VARIABLE ANNUITY FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1995, AS SUPPLEMENTED JUNE 1, 1995,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON VARIABLE ANNUITY FUND DATED MAY 1, 1995,
WHICH CAN BE OBTAINED WITHOUT COST UPON REQUEST TO
TEMPLETON VARIABLE ANNUITY FUND,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 774-5001
TABLE OF CONTENTS
PAGE
General Information and History
Investment Practices and Restrictions
-Debt Securities
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Trustee Compensation
Principal Shareholder
Investment Management and Other Services
-Investment Management Agreement
-Management Fees
-The Investment Manager
-Business Manager
-Custodian
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing of Shares
Tax Status
Description of Shares
Performance Information
Financial Statements
GENERAL INFORMATION AND HISTORY
Templeton Variable Annuity Fund (the "Fund") was organized
as a Massachusetts business trust on February 5, 1987. The Fund
is registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end diversified management investment company.
The Fund's Shares are currently sold only to Templeton Funds
Annuity Company ("TFAC") to be held by Templeton Funds Retirement
Annuity and Templeton Immediate Variable Annuity Separate
Accounts (the "Separate Accounts") for use as the sole investment
vehicle for Templeton Retirement Annuities and Templeton
Immediate Variable Annuities (the "Annuities"). The Fund's
Shares may in the future be sold in connection with other
insurance products or as otherwise permitted by applicable
regulations and regulatory interpretations.
INVESTMENT PRACTICES AND RESTRICTIONS
Debt Securities. The Fund may invest in debt securities
which are rated at least Ca by Moody's Investors Service, Inc.
("Moody's"), or CC by Standard & Poor's Corporation ("S&P"), or
deemed to be of comparable quality by the Fund's investment
manager, Templeton Investment Counsel, Inc. (the "Investment
Manager"). As an operating policy, the Fund will invest no more
than 5% of its assets in debt securities rated lower than Baa by
Moody's or BBB by S&P. Bonds rated Ca by Moody's represent
obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings. Bonds
rated CC by S&P are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the
obligation. While such bonds may have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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.
Although they may offer higher yields than do higher rated
securities, low rated and unrated debt securities generally
involve greater volatility of price and risk of principal and
income, including the possibility of default by, or bankruptcy
of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more
limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may
diminish the Fund's ability to sell the securities at fair value
either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of
the issuer. Reduced secondary market liquidity for certain low
rated or unrated debt securities may also make it more difficult
for the Fund to obtain accurate market quotations for the
purposes of valuing the Fund's portfolio. Market quotations are
generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of low rated debt securities, especially in a thinly
traded market. Analysis of the creditworthiness of issuers of
low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of the Fund to achieve
its investment objective may, to the extent of investment in low
rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were
investing in higher rated securities.
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated
debt securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the
issuer of low rated debt securities defaults, the Fund may incur
additional expenses to seek recovery.
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, the Fund must distribute substantially
all of its income to Shareholders (see "Tax Status"). Thus, the
Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash so that it may
satisfy the distribution requirement.
Investment Restrictions. The Fund has imposed upon itself
certain fundamental investment restrictions which, together with
its investment objective and investment policy, are fundamental
policies which may not be changed without the approval of the
Fund's Shareholders. For this purpose, the provisions of the
1940 Act require the affirmative vote of the lesser of either (A)
67% or more of the Shares of the Fund present at a Shareholders'
meeting at which more than 50% of the outstanding Shares of the
Fund are present or represented by proxy or (B) more than 50% of
the outstanding Shares of the Fund. A vote of the Shareholders
satisfying these requirements will also satisfy the requirements
of the Fund's By-laws and the applicable provisions of
Massachusetts law.
a. Fundamental Investment Restrictions. In accordance
with these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Fund may invest in marketable securities secured by
real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests
therein), or purchase or sell commodity contracts, except that
the Fund may purchase or sell stock index futures contracts.
2. With respect to 75% of its total assets, invest
more than 5% of the total value of its assets in the securities
of any one issuer, or purchase more than 10% of any class of
securities of any one company, including more than 10% of its
outstanding voting securities (except for investments in
obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities).
3. Act as an underwriter or issue senior securities.
4. Lend money, except that the Fund may purchase
publicly-distributed bonds, debentures, notes and other evidences
of indebtedness and may buy from a bank or broker-dealer U.S.
government obligations with a simultaneous agreement by the
seller to repurchase them at the original purchase price plus
accrued interest.
5. Borrow money, for any purpose other than redeeming
its Shares or purchasing its Shares for cancellation, and then
only as a temporary measure up to an amount not exceeding 5% of
the value of its total assets.
6. Invest more than 25% of the Fund's total assets in
a single industry.
b. Non-Fundamental Investment Restrictions. As non-
fundamental policies, which may be changed by the Fund's Trustees
without Shareholder approval, the Fund will not invest more than
15% of its total assets in securities of foreign issuers which
are not listed on a recognized United States or foreign
securities exchange, or more than 10% of its total assets in
(a) securities with a limited trading market, (b) securities
subject to legal or contractual restrictions as to resale, and
(c) repurchase agreements not terminable within seven days. In
addition, as a non-fundamental policy, the Fund will not invest
more than 5% of its assets in debt securities rated lower than
Baa by Moody's Investors Service, Inc. or BBB by Standard &
Poor's Corporation.
When an investment restriction states a maximum percentage
of the Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage
limitation be determined immediately after and as a result of the
Fund's acquisition of such security or property. Assets are
calculated as described in the Prospectus under the heading "How
to Sell Shares of the Fund." If the Fund receives from an issuer
of securities held by the Fund subscription rights to purchase
securities of that issuer, and if the Fund exercises such
subscription rights at a time when the Fund's portfolio holdings
of securities of that issuer would otherwise exceed the limits
set forth in investment restrictions 2 or 6 above, it will not
constitute a violation if, prior to receipt of securities upon
exercise of such rights, and after announcement of such rights,
the Fund has sold at least as many securities of the same class
and value as it would receive on exercise of such rights.
Risk Factors. The Fund has an unlimited right to purchase
securities in any foreign country, if they are listed on a stock
exchange, as well as a limited right to purchase such securities
if they are unlisted. Investors should consider carefully the
substantial risks involved in securities of companies and
governments of foreign nations, which are in addition to the
usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable
to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards,
and auditing practices and requirements may not be comparable to
those applicable to United States companies. 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
New York Stock Exchange ("NYSE") and securities of some foreign
companies are less liquid and more volatile than securities of
comparable United States companies. Commission rates in foreign
countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In
many foreign countries there is less government supervision and
regulation of stock exchanges, brokers and listed companies than
in the United States.
Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in
developed countries. These risks include (i) less social,
political and economic stability; (ii) the small current size of
the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation;
(v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to
private property; (vi) the absence, until recently in certain
Eastern European countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed
or reversed by unanticipated political or social events in such
countries.
In addition, many countries in which the Fund may invest
have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the United
States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks
of nationalization, expropriation and confiscatory taxation. The
communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future.
In the event of such expropriation, the Funds could lose a
substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern
European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values
and may be adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with
investing in the United States securities markets, and should be
considered highly speculative. Such risks include: (1) delays
in settling portfolio transactions and risk of loss arising out
of Russia's system of share registration and custody; (2) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (3) pervasiveness
of corruption and crime in the Russian economic system; (4)
currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (6) controls on foreign investment and local
practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars;
(7) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the
Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union; (8) the financial condition of
Russian companies, including large amounts of inter-company debt
which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of
international trade; (10) the risk that the Russian tax system
will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation; and (11) possible difficulty in identifying
a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares
are held through depositories that meet the requirements of the
1940 Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While the Fund will endeavor to ensure that its
interest continues to be appropriately recorded either itself or
through a custodian or other agent inspecting the share register
and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive the Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for the Fund to enforce
any rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse
to record transactions in the share register. This practice may
prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Investment Manager.
Further, this also could cause a delay in the sale of Russian
company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the
investment.
The Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency
exchange (to cover service charges) may be incurred, particularly
when the Fund changes investments from one country to another or
when proceeds of the sale of Shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from
transferring cash out of the country, withhold portions of
interest and dividends at the source, or impose other taxes, with
respect to the Fund's investments in securities of issuers of
that country. There is the possibility of expropriation,
cessation of trading on national exchanges, nationalization,
confiscatory or other taxation, 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 that
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 Fund's investments.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The Trustees consider at least annually the likelihood of
the imposition by any foreign government of exchange control
restrictions which would affect the liquidity of the Fund's
assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. The Trustees also consider
the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services--Custodian"). However,
in the absence of willful misfeasance, bad faith or gross
negligence on the part of the Investment Manager, any losses
resulting from the holding of the Fund's portfolio securities in
foreign countries and/or with securities depositories will be at
the risk of the Shareholders. No assurance can be given that the
Trustees' appraisal of the risks will always be correct or that
such exchange control restrictions or political acts of foreign
governments might not occur.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment manager to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions are placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions may be
negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other
remuneration in connection therewith, may be effected between any
of these funds, or between funds and private clients, under
procedures adopted by the Fund's Board of Trustees pursuant to
Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the
Franklin Templeton Group, as defined in the SEC Rule 17(j) under
the 1940 Act, who are employees of Franklin Resources, Inc. or
their subsidiaries, are permitted to engage in personal
securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within
24 hours after this clearance; (2) Copies of all brokerage
confirmations must be sent to the Compliance Officer and within
10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons
involved in preparing and making investment decisions must file
annual reports of their securities holdings each January and also
inform the Compliance Officer (or other designated personnel) if
they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a
fund or other client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five
years and other information with respect to each of the Trustees
and Executive Officers of the Fund are as follows:
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
CHARLES B. JOHNSON* President, chief executive
777 Mariners Island Blvd. officer, and director of
San Mateo, California Franklin Resources, Inc.;
Chairman of the Board chairman of the board and
and Vice President director of Franklin Advisers,
Inc. and Franklin Templeton
Distributors, Inc.; director
of Franklin Administrative
Services, Inc., General Host
Corporation, and Templeton
Global Investors, Inc.; and
officer and director, trustee
or managing general partner,
as the case may be, of most
other subsidiaries of Franklin
and of 55 of the investment
companies in the Franklin
Templeton Group.
HARRIS J. ASHTON Chairman of the Board,
Metro Center president and chief executive
1 Station Place officer of General Host
Stamford, Connecticut Corporation (nursery and craft
Trustee centers); and a director of
RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-
S Foods.
NICHOLAS F. BRADY* Chairman of Templeton Emerging
102 East Dover Street Markets Investment Trust PLC;
Easton, Maryland chairman of Templeton Latin
Trustee America Investment Trust PLC;
chairman of Darby Overseas
Investments, Ltd. (an
investment firm), (1994-
present); director of the
Amerada Hess Corporation,
Capital Cities/ABC, Inc.,
Christiana Companies, and the
H.J. Heinz Company; Secretary
of the United States
Department of the Treasury
(1988-January 1993); and
chairman of the board of
Dillion, Read & Co. Inc.
(investment banking) prior
thereto.
F. BRUCE CLARKE Retired; formerly, credit
19 Vista View Blvd. adviser of the National Bank
Thornhill, Ontario of Canada, Toronto.
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; and president of
R.R. 3 Clairhaven Investments, Ltd.
Stouffville, Ontario and other private investment
Trustee companies.
S. JOSEPH FORTUNATO Member of the law firm of
200 Campus Drive Pitney, Hardin, Kipp & Szuch;
Florham Park, New Jersey and a director of General Host
Trustee Corporation.
JOHN Wm. GALBRAITH President of Galbraith
360 Central Avenue Properties, Inc. (personal
Suite 1300 investment company); director
St. Petersburg, Florida of Gulfwest Banks, Inc. (bank
Trustee holding company) (1995-
present) and Mercantile Bank
(1991-present); vice chairman
of Templeton, Galbraith &
Hansberger Ltd. (1986-1992);
and chairman of Templeton
Funds Management, Inc. (1974-
1991).
ANDREW H. HINES, JR. Consultant, Triangle
150 2nd Avenue N. Consulting Group; chairman of
St. Petersburg, Florida the board and chief executive
Trustee officer of Florida Progress
Corporation (1982-February
1990) and director of various
of its subsidiaries; chairman
and director of Precise Power
Corporation; executive-in-
residence of Eckerd College
(1991-present); and a director
of Checkers Drive-In
Restaurants, Inc.
RUPERT H. JOHNSON, JR.* Executive vice president and
777 Mariners Island Blvd. director of Franklin
San Mateo, California Resources, Inc.; president and
Trustee director of Franklin Advisers,
Inc.; executive vice president
and director of Franklin
Templeton Distributors, Inc.;
director of Franklin
Administrative Services, Inc.;
and officer and/or director,
trustee or managing general
partner, as the case may be,
of most other subsidiaries of
Franklin, and of 42 of the
investment companies in the
Franklin Group of Funds.
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; formerly,
Wilmington, DE economic analyst, U.S.
Trustee Government.
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland 20817 services); director of Fund
Trustee America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI
Communications Corporation,
Fusion Systems Corporation,
Infovest Corporation, and
Medimmune, Inc.; formerly,
chairman of Hambrecht and
Quist Group; director of H&Q
Healthcare Investors; and
president of the National
Association of Securities
Dealers, Inc.
FRED R. MILLSAPS Manager of personal
2665 NE 37th Drive investments (1978-present);
Fort Lauderdale, FL chairman and chief executive
Trustee officer of Landmark Banking
Corporation (1969-1978);
financial vice president of
Florida Power and Light (1965-
1969); vice president of The
Federal Reserve Bank of
Atlanta (1958-1965); and a
director of various other
business and nonprofit
organizations.
DANIEL L. JACOBS Executive vice president and
500 East Broward Blvd. director of Templeton
Suite 1400 Investment Counsel, Inc.;
Fort Lauderdale, Florida director of Templeton Global
President Investors, Inc.; and president
or vice president of certain
of the Templeton Funds.
JOHN R. KAY Vice president of the
500 East Broward Blvd. Templeton Funds; vice
Suite 1400 president and treasurer of
Fort Lauderdale, Florida Templeton Global Investors,
Vice President Inc. and Templeton Worldwide,
Inc.; assistant vice president
of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller
of the Keystone Group, Inc.
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith &
Nassau, Bahamas Hansberger Ltd.; director of
Vice President global equity research for
Templeton Worldwide, Inc.;
president or vice president of
the Templeton Funds; formerly,
investment administrator with
Roy West Trust Corporation
(Bahamas) Limited (1984-1985).
MARTIN L. FLANAGAN Senior vice president,
777 Mariners Island Blvd. treasurer and chief financial
San Mateo, CA officer of Franklin Resources,
Vice President Inc.; director and executive
vice president of Templeton
Investment Counsel, Inc.;
director, president and chief
executive officer of Templeton
Global Investors, Inc.;
director or trustee,
president or vice president of
various Templeton Funds;
accountant, Arthur Andersen &
Company (1982-1983); and a
member of the International
Society of Financial Analysts
and the American Institute of
Certified Public Accountants.
THOMAS M. MISTELE Senior vice president of
700 Central Avenue Templeton Global Investors,
St. Petersburg, FL Inc.; vice president of
Secretary Franklin Templeton
Distributors, Inc.; secretary
of the Templeton Funds;
formerly, attorney, Dechert
Price & Rhoads (1985-1988) and
Freehill, Hollingdale & Page
(1988); and judicial clerk,
U.S. District Court (Eastern
District of Virginia) (1984-
1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton
Suite 1400 Funds; senior vice president
Fort Lauderdale, FL of Templeton Worldwide, Inc.,
Treasurer Templeton Global Investors,
Inc., and Templeton Funds
Trust Company; formerly,
senior tax manager, Ernst &
Young (certified public
accountants) (1977-1989).
JACK L. COLLINS Assistant treasurer, Templeton
700 Central Avenue Funds; assistant vice
St. Petersburg, FL president of Franklin
Assistant Treasurer Templeton Investor Services,
Inc.; formerly, partner, Grant
Thornton, independent public
accountants.
JEFFREY L. STEELE Partner, Dechert Price &
1500 K Street, N.W. Rhoads.
Washington, D.C.
Assistant Secretary
* These are Trustees who are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the
Trustees, except that Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
TRUSTEE COMPENSATION
All of the Fund's Officers and Trustees also hold positions
with other investment companies in the Franklin Templeton Group.
No compensation is paid by the Fund to any officer or trustee who
is an officer, trustee or employee of the Investment Manager or
its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount
of which is based on the level of assets in each fund.
Accordingly, the Fund currently pays the independent Trustees and
Mr. Brady an annual retainer of $100.00. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred
in attending meetings, paid pro rata by each Franklin Templeton
Fund in which they serve. No pension or retirement benefits are
accrued as part of Fund expenses.
The following table shows the total compensation paid to the
Trustees by the Fund and by all investment companies in the
Franklin Templeton Group:
Number of
Franklin Total
Aggregate Templeton Fund Compensation
Compensation Boards on from All Funds
from the Which Trustee in Franklin
Name of Trustee Fund* Serves Templeton Group*
Harris J. Ashton $1,525 54 $319,925
Nicholas F. Brady 1,525 23 86,125
F. Bruce Clarke 2,025 19 95,275
Hasso-G von 1,525 19 75,275
Diergardt-Naglo
S. Joseph Fortunato 1,525 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 2,025 23 106,125
Betty P. Krahmer 1,525 23 75,275
Gordon S. Macklin 1,525 51 303,695
Fred R. Millsaps 2,025 23 106,125
______________
* For the fiscal year ended December 31, 1994.
PRINCIPAL SHAREHOLDER
As of March 31, 1995, TFAC, on behalf of the Separate
Accounts, owned of record 594,635 Shares (100%) of the Fund.
However, TFAC will exercise voting rights attributable to these
Shares in accordance with voting instructions received by holders
of the Annuities or any other policies for which the Fund serves
as the underlying investment vehicle. To this extent, TFAC does
not exercise control over the Fund by virtue of the voting rights
from its ownership of Fund Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreement. The Investment Manager of
the Fund is Templeton Investment Counsel, Inc., a Florida
corporation with offices in Fort Lauderdale, Florida. The
Investment Management Agreement, dated October 30, 1992, was
approved by shareholders of the Fund on October 30, 1992, and was
amended and restated on February 25, 1994. It was last approved
by the Board of Trustees, including a majority of the Trustees
who were not parties to the Agreement or interested persons of
any such party, at a meeting on February 24, 1995, and will
continue through April 30, 1996. The Management Agreement will
continue from year to year thereafter, subject to approval
annually by the Board of Trustees or by vote of the holders of a
majority of the outstanding shares of the Fund (as defined in the
1940 Act) and also, in either event, with the approval of a
majority of those Trustees who are not parties to the Management
Agreement or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
The Management Agreement requires the Investment Manager to
manage the investment and reinvestment of the Fund's assets. The
Investment Manager is not required to furnish any overhead items
or facilities for the Fund, including daily pricing or trading
desk facilities, although such expenses are paid by some
investment advisers of some other investment companies.
The Management Agreement provides that the Investment
Manager will select brokers and dealers for execution of the
Fund's portfolio transactions consistently with the Fund's
brokerage policy. (See "Brokerage Allocation.") Although
services provided by broker-dealers in accordance with the Fund's
brokerage policy may incidentally help reduce the expenses of or
otherwise benefit the Investment Manager and other investment
advisory clients of the Investment Manager and of its affiliates,
as well as the Fund, the value of any such services is
indeterminable and is not used to offset the Investment Manager's
fee.
When the Investment Manager determines to buy or sell the
same securities for the Fund that the Investment Manager or one
or more of its affiliates has selected for one or more of its
other clients or for clients of its affiliates, the orders for
all such securities transactions are placed for execution by
methods determined by the Investment Manager, with approval by
the Fund's Board of Trustees, to be impartial and fair, in order
to seek good results for all parties (see "Investment Practices
and Restrictions--Trading Policies"). Records of securities
transactions of persons who know when orders are placed by the
Fund are available for inspection at least four times annually by
the compliance officer of the Fund so that the non-interested
Trustees (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Management Agreement provides that the Investment
Manager shall have no liability to the Fund or any Shareholder of
the Fund for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the
performance by the Investment Manager of its duties under the
Management 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 wars or political acts of any foreign governments to
which such assets might be exposed, except for any liability,
loss or damage resulting from willful misfeasance, bad faith or
gross negligence in the performance of the Investment Manager's
duties or by reason of reckless disregard of its obligations and
duties under the Management Agreement. The Management Agreement
will terminate automatically in the event of its assignment, and
may be terminated by the Fund at any time without payment of any
penalty on 60 days' written notice, with the approval of a
majority of the Fund's Trustees in office at the time or by vote
of a majority of the outstanding Shares of the Fund (as defined
in the 1940 Act).
Management Fees. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.50% of its average daily net assets, reduced to 0.45% of such
net assets in excess of $200,000,000 and further reduced to 0.40%
of such net assets in excess of $1,300,000,000. During the
fiscal years ended December 31, 1994, 1993, and 1992, the
Investment Manager received fees of $66,500, $54,283 and $50,260,
respectively.
The Investment Manager. The Investment Manager is an
indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
on the NYSE. Charles B. Johnson (a Trustee and officer of the
Fund), Rupert H. Johnson, Jr. (a Trustee of the Fund), and R.
Martin Wiskemann are principal shareholders of Franklin and own,
respectively, approximately 20%, 16% and 9.2% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers.
Business Manager. Templeton Funds Annuity Company (the
"Business Manager"), 700 Central Avenue, P.O. Box 33030, St.
Petersburg, Florida 33733-8030, telephone (813) 823-8712,
performs certain administrative functions as Business Manager for
the Fund pursuant to a Business Management Agreement dated
October 30, 1992. Prior to January 1, 1992, these administrative
functions were performed by Templeton Funds Management, Inc.
The Business Management Agreement requires the Business
Manager to be responsible for various activities on behalf of the
Fund, including:
- providing office space, telephone, office equipment and
supplies for the Fund;
- paying compensation of the Fund's officers for services
rendered as such;
- authorizing expenditures and approving bills for
payment on behalf of the Fund;
- preparation of annual and semi-annual reports, notices
of dividends, capital gains distributions and tax
credits;
- daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of the Fund's
Shares, earnings reports and other financial data;
- monitoring relationships with organizations serving the
Fund, including its custodian and printers;
- providing trading desk facilities for the Fund;
- supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations
promulgated thereunder, with state regulatory
requirements, maintaining books and records for the
Fund (other than those maintained by the custodian),
and filing tax reports, other than the Fund's income
tax returns; and
- providing executive, clerical and secretarial help
needed to carry out its responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Fund's average daily net assets, reduced to 0.135%
annually of such net assets in excess of $200,000,000, further
reduced to 0.10% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net
assets in excess of $1,200,000,000. Since the Business Manager's
fee covers services often provided by investment advisers to
other funds, the Fund's combined expenses for advisory and
administrative services together may be higher than those of some
other investment companies. During the fiscal years ended
December 31, 1994, 1993, and 1992, TFAC received business
management fees of $19,950, $16,285 and $15,076, respectively.
The Business Manager has voluntarily agreed to limit the
total expenses (excluding interest, taxes, brokerage commissions
and extraordinary expenses) of the Fund to an annual rate of
1.00% of the Fund's average net assets through May 1, 1996. As
long as this expense limitation continues, it may lower the
Fund's expenses and increase its total return. After May 1,
1996, the expense limitation may be terminated or revised at any
time, at which time the Fund's expenses may increase and its
total return may be reduced depending on the total assets of the
Fund.
The Business Manager is relieved of liability to the Fund
for any act or omission in the course of its performance under
the Business Management Agreement in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under the Agreement. The Business
Management Agreement may be terminated by the Fund at any time on
60 days' written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by
vote of a majority of the Trustees (as defined in the 1940 Act),
and shall terminate automatically and immediately in the event of
its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned
subsidiary of Franklin.
Custodian. The Chase Manhattan Bank, N.A., pursuant to an
Agreement dated as of January 27, 1988, serves as custodian of
the Fund's securities and cash, which are kept at the custodian's
principal office, MetroTech Center, Brooklyn, New York 11245, and
at the offices of its branches and agencies throughout the world.
Compensation for the services of the custodian is based on a
schedule of charges agreed on from time to time. The custodian
generally domestically, and frequently abroad, does not actually
hold certificates for the securities in its custody, but instead
has book records with domestic and foreign securities
depositories, which in turn have book records with the transfer
agents of the issuers of the securities.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C, 20005 is legal counsel for the Fund.
Independent Accountants. The firm of McGladrey & Pullen,
LLP, 555 Fifth Avenue, New York, New York 10017, serves as
independent accountants for the Fund. Its audit services
comprise examination of the Fund's financial statements and
review of the Fund's filings with the Securities and Exchange
Commission ("SEC") and the Internal Revenue Service ("IRS").
Reports to Shareholders. The Fund's fiscal year ends on
December 31. Shareholders will be provided at least semiannually
with reports showing the portfolio of the Fund and other
information, including an annual report with financial statements
audited by independent accountants. Shareholders who would like
to receive an interim quartrely report may phone Fund Information
at 1-800-292-9293.
BROKERAGE ALLOCATION
The Management Agreement provides that the Investment
Manager is responsible for selecting members of securities
exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of
the portfolio transactions of the Fund and, when applicable, the
negotiation of commissions in connection therewith. All
decisions and placements are made in accordance with the
following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable 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 Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any
foreign securities held by the Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, for transactions as to
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 Investment Manager in making
the selection in question determines in good faith that
such amount of commission is reasonable in relation to
the value of the brokerage and research services
provided by such broker, viewed in terms of either that
particular transaction or the Investment Manager's
overall responsibilities with respect to the Fund and
the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination,
the Investment Manager is not required to place or to
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 those
services. In demonstrating that such determinations
were made in good faith, the Investment Manager shall
be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's
brokerage policy, that the research services provide
lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-
making responsibilities and that the commissions paid
were within a reasonable range. The determination that
commissions were within a reasonable range shall be
based on any available information as to the level of
commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into
account the Fund'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 which are provided for the Investment Manager
are useful to the Investment Manager in performing its
advisory services under its Management Agreement with
the Fund. Research services provided by brokers to the
Investment Manager are considered to be in addition to,
and not in lieu of, services required to be performed
by the Investment Manager under its Management
Agreement with the Fund. Research furnished by brokers
through whom the Fund effects securities transactions
may be used by the Investment Manager for any of its
accounts, and not all such research may be used by the
Investment Manager for 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, including quotations outside the United
States for daily pricing of foreign securities held in
the Fund's portfolio.
4. 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
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
5. Sales of shares of investment companies registered
under the 1940 Act which have either the same
investment adviser, or an investment adviser affiliated
with the Investment Manager, made by a broker is one
factor among others to be taken into account in
deciding to allocate portfolio transactions (including
agency transactions, principal transactions, purchases
in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution"
as defined in paragraph 1 above, and that such
allocation shall be within the scope of the Fund's
other policies as stated above; and provided further,
that in every allocation made to a broker in which such
sale of shares is taken into account there shall be no
increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set
forth in paragraph 3 above, on the basis of best
execution alone or best execution plus research
services, without taking account of or placing any
value upon such sale of shares.
Insofar as known to the Fund's management, no Trustee or
officer of the Fund, nor the Investment Manager or any person
affiliated with any of them, has any material direct or indirect
interest in any broker employed by or on behalf of the Fund. The
total brokerage commissions on portfolio transactions for the
Fund during the fiscal years ended December 31, 1994, 1993, and
1992 were $19,000, $12,220 and $13,000, respectively. All
portfolio transactions are allocated to broker-dealers only when
their prices and execution, in the judgment of the Investment
Manager, are equal to the best available within the scope of the
Fund's policies. There is no fixed method used in determining
which broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's
Shares may be purchased and redeemed. See "Sale and Redemption
of Shares".
The net asset value of the Fund's Shares is determined as of
the scheduled closing time of the NYSE (generally 4:00 p.m., New
York time), every Monday through Friday (exclusive of national
business holidays), except on days during which no Shares are
tendered for redemption and no order to purchase or sell Shares
is received by the Fund. The Fund's offices will be closed and
net asset value will not be calculated on those days on which the
NYSE is closed, which currently are: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern exchanges
and over-the-counter markets is normally completed well before
the close of business in New York on each day on which the NYSE
is open. Trading of European or Far Eastern securities
generally, or in a particular country or countries, may not take
place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business
days in New York and on which the Fund's net asset value is not
calculated. The Fund calculates net asset value per Share, and
therefore effects sales, redemptions and repurchases of its
Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of many of
the portfolio securities used in such calculation and if events
occur which materially affect the value of those foreign
securities, they will be valued at fair market value as
determined by the management and approved in good faith by the
Board of Trustees.
The Board of Trustees may establish procedures under which
the Fund may suspend the right of redemption for the whole or any
part of any period during which (1) the NYSE is closed other than
for customary weekend and holiday closings, (2) trading on the
NYSE is restricted, (3) an emergency exists, as determined under
rules and regulations of the SEC, as a result of which disposal
of securities owned by the Fund is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the
SEC may by order permit for the protection of the holders of the
Fund's Shares. Any subscription may be rejected by the Fund.
TAX STATUS
The Fund intends to qualify and elect to be taxed as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). In any fiscal
year in which the Fund so qualifies and distributes at least 90%
of its investment company taxable income, the Fund will be
relieved of federal income tax on the investment company taxable
income and net capital gains distributed to its Shareholders, the
Separate Accounts. However, because the Separate Accounts are
not separate entities and their operations form a part of TFAC,
TFAC will be liable for any federal income taxes which become
payable with respect to the income of the Separate Accounts. The
Separate Accounts will bear their allocable share of such
liabilities. Under current law, no item of dividend income,
interest income or realized capital gain of the Separate Accounts
attributable, at a minimum, to appreciation after January 1,
1985, will be taxed to TFAC to the extent it is applied to
increase the reserves under the Contracts.
Amounts not distributed on a timely basis in accordance with
a calendar year distribution requirement are also subject to a
nondeductible 4% excise tax unless the exception described below
applies. To avoid the tax if it otherwise applies, the Fund must
distribute during each calendar year, (i) at least 98% of its
ordinary income (not taking into account any capital gains or
losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses for the twelve-month period
ending on October 31 of the calendar year (adjusted for certain
ordinary losses), and (iii) all ordinary income and capital gains
for previous years that were not distributed during such years.
To avoid application of the excise tax, the Fund intends to make
its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid
on December 31 of the calendar if it is declared by the Fund
during October, November, or December of that year to
Shareholders of record on a date in such a month and paid by the
Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (a Separate
Account) in the calendar year in which the distributions are
declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described
above will not apply in a given calendar year to the Fund if all
of its Shareholders at all times during the calendar year are
segregated asset accounts of life insurance companies where the
shares are held in connection with variable contracts. (For this
purpose, any shares of a regulated investment company
attributable to an investment not exceeding $250,000 made in
connection with the organization of the company is not taken into
account.) Accordingly, if this condition regarding the ownership
of Shares of the Fund is met, the excise tax will be inapplicable
to the Fund even if the calendar year distribution requirement is
not met.
The Fund may invest in shares of foreign corporation which
may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross
income is investment-type income. If the Fund receives a so-
called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to tax on a portion of the excess
distribution, whether or not the corresponding income is
distributed by the Fund to Shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the Fund held the
PFIC shares. The Fund itself will be subject to tax on the
portion, if any, of an excess distribution that is so allocated
to prior Fund taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from
the sale of PFIC shares are treated as excess distributions.
Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess
distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment
with respect to PFIC shares. Under an election that currently is
available in some circumstances, the Fund generally would be
required to include in its gross income its share of the earnings
of a PFIC on a current basis, regardless of whether distributions
are received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to
market the Fund's PFIC shares at the end of each taxable year
(and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund
could, in limited circumstances, incur nondeductible interest
charges. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among
other things, the character of gains, the amount of gain or loss
and the timing of the recognition of income with respect to PFIC
shares, as well as subject the Fund itself to tax on certain
income from PFIC shares, the amount that must be distributed to
Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
shares.
Income received by the Fund from sources within a foreign
country may be subject to withholding taxes and other taxes
imposed by that country. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.
Under the Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues
income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time that
Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain types of financial
contracts, gains or losses attributable to fluctuations in the
value of foreign currency between the date of acquisition of the
security or contract and the date of disposition also are treated
as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or
decrease the amount of the Fund's net investment income to be
distributed to its Shareholders as ordinary income.
Debt securities purchased by the Fund may be treated for
federal income tax purposes as having original issue discount.
Original issue discount essentially represents interest for
federal income tax purposes and can be defined generally as the
excess of the stated redemption price at maturity over the issue
price. Original issue discount, whether or not any income is
actually received by the Fund, is treated for U.S. federal income
tax purposes as ordinary income earned by the Fund, and therefore
is subject to the distribution requirements of the Code.
Generally, the amount of original issue discount included in the
income of the Fund each year is determined on the basis of a
constant yield to maturity which takes into account the
compounding of accrued but unpaid interest.
Some of the debt securities may be purchase by the Fund at a
discount which exceeds the original issue discount on such debt
securities, if any. This additional discount represents market
discount for Federal income tax purposes. The gain realized on
the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does
not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day
the debt security is held by the Fund at a constant rate over the
time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes
into account the semiannual compounding of interest.
Certain futures contracts in which the Fund may invest are
"section 1256 contacts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-
term capital gains or losses ("60-40"), except for certain
foreign currency gains and losses which will be treated as
ordinary in character. Also, section 1256 contracts held by the
Fund at the end of each taxable year (and, in some cases, for
purposes of the 4% excise tax, on October 31 of each year) are
"marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized.
The hedging transactions undertaken by the Fund may result
in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by
the Fund. In addition, losses realized by the Fund on positions
that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences to the
Fund of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when
distributed to Shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the elections made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders,
and which will be taxed to Shareholders as ordinary income or
long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such
hedging transactions.
The requirements under the Code relating to the
qualification of the Fund as a regulated investment company may
limit the extent to which the Fund may engage in futures
contracts.
Distributions of any investment company taxable income are
treated as ordinary income for tax purposes in the hands of the
Separate Accounts, even though distributed as additional Shares
of the Fund rather than in cash. Similarly, net capital gains
(the excess of any net long-term capital gains over net short-
term capital losses) will be, to the extent distributed by the
Fund and designated by the Fund as capital gain dividends,
treated as long-term capital gains in the hands of the Separate
Accounts, even though distributed as additional Shares of the
Fund, regardless of the length of time the Separate Accounts may
have held the Shares.
To comply with regulations under Section 817(h) of the Code,
the Fund must diversify its investments so that on the last day
of each quarter of a calendar year no more than 55% of the value
of its assets is represented by any one investment, no more than
70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is
represented by any four investments. Generally, securities of a
single issuer are treated as one investment. However, for this
purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate
issuer. Any security issued, guaranteed or insured (to the
extent so guaranteed or insured) by the United States or an
instrumentality of the United States is treated as a U.S.
Government security.
Reference is made to the prospectus for the Separate Account
for information regarding the federal income tax treatment of
distributions to the Separate Account.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights, so that the
holders of a plurality of the Shares voting for the election of
Trustees at a meeting at which 50% of the outstanding Shares are
present can elect all the Trustees and, in such event, the
holders of the remaining Shares voting for the election of
Trustees will not be able to elect any person or persons to the
Board of Trustees.
The Declaration of Trust provides that the holders of not
less than two-thirds of the outstanding Shares of the Fund may
remove a person serving as Trustee either by declaration in
writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the
removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding
Shares of the Fund.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration of Trust disclaims liability
of the Shareholders, Trustees or officers of the Fund for acts or
obligations of the Fund, which are binding only on the assets and
property of the Fund. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of
any Shareholder held personally liable for the obligations of the
Fund. The risk of a Shareholder incurring financial loss on
account of Shareholder liability is limited to circumstances in
which the Fund itself would be unable to meet its obligations
and, thus, should be considered remote.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective
investors. Performance information for the Fund will not be
advertised unless accompanied by comparable performance
information for a separate account to which the Fund offers its
Shares.
Quotations of average annual total return for the Fund will
be expressed in terms of the average annual compounded rate of
return for periods in excess of one year or the total return for
periods less than one year of a hypothetical investment in the
Fund over a period of one year (or, if less, up to the life of
the Fund) calculated pursuant to the following formula: P(1 +
T)n = ERV (where P = a hypothetical initial payment of $1,000, T
= the average annual total return for periods of one year or more
or the total return for periods of less than one year, n = the
number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period).
All total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. The Fund's
average annual total return for the one- and five-year periods
ended December 31, 1994 and for the period from February 16, 1988
(commencement of operations) through December 31, 1994 were -
4.06%, 11.39% and 13.65%, respectively.
Performance information for the Fund may be compared, in
reports and promotional literature, to: (i) the Standard &
Poor's 500 Stock Index, Dow Jones Industrial Average, or other
unmanaged indices so that investors may compare the Fund's
results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities market
in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, Inc., a widely used independent research
firm which ranks mutual funds by overall performance, investment
objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Quotations of total return for the Fund will not take into
account charges and deductions against any separate accounts to
which the Fund's Shares are sold or charges and deductions
against Templeton Retirement Annuities, Templeton Immediate
Variable Annuities, or any other participations or policies for
which the Fund may serve as the underlying investment vehicle,
although comparable performance information for a separate
account will take such charges into account. Performance
information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time
period on which the calculations are based. Performance
information should be considered in light of the Fund's
investment objective and policies, characteristics and quality of
the portfolio and the market conditions during the given time
period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, the Fund and the Investment Manager may
also refer to the following information:
(1) The Investment Manager's and its affiliates' market
share of international equities managed in mutual funds
prepared or published by Strategic Insight or a similar
statistical organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a
similar financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including
age characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws
and a reduction of foreign exchange controls, and
improving communication technology, of various
countries as published by various statistical
organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder,
Sir John Templeton,* advocating the virtues of
diversification and long-term investing, including the
following:
_______________
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Fund's Board on April 16, 1995. He is no longer
involved with the investment management process.
- "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
- "Diversify by company, by industry and by country."
- "Always maintain a long-term perspective."
- "Invest for maximum total real return."
- "Invest - don't trade or speculate."
- "Remain flexible and open-minded about types of
investment."
- "Buy low."
- "When buying stocks, search for bargains among quality
stocks."
- "Buy value, not market trends or the economic outlook."
- "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
- "Do your homework or hire wise experts to help you."
- "Aggressively monitor your investments."
- "Don't panic."
- "Learn from your mistakes."
- "Outperforming the market is a difficult task."
- "An investor who has all the answers doesn't even
understand all the questions."
- "There's no free lunch."
- "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also
refer to the number of Shareholders in the Fund or the aggregate
number of shareholders in the Franklin Templeton Funds or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's
December 31, 1994 Annual Report to Shareholders are incorporated
herein by reference.
