<PAGE>
Templeton
Variable Annuity Fund
[PHOTO OF DAN JACOBS APPEARS HERE]
Dan Jacobs
President
Templeton Variable
Annuity Fund
- ---------------------
Your Fund's
Objective
The Templeton Variable Annuity Fund seeks long-term capital growth through a
flexible policy of investing primarily in stocks and debt obligations of
companies and governments of any nation.
February 15, 1995
Dear Contract Owner:
We are pleased to bring you the sixth annual report of the Templeton Variable
Annuity Fund, which covers the period ended December 31, 1994.
The past year has been a challenging one for global investors. In response to
rapid economic growth in the fourth quarter of 1993, the U.S. Federal Reserve
Board began raising short-term interest rates in February 1994 as a
pre-emptive move against inflation. Over the course of the year, the Federal
Reserve raised the federal funds rate (the interest rate banks charge each
other for overnight loans) on six occasions, from 3.0% to 5.5%. As a result,
interest rates rose worldwide, which increased investor uncertainty and led
to volatility and, in some cases, declines in global stock and bond markets.
This series of interest rate increases set a new tone for U.S. financial
markets and sent a message that the Federal Reserve has moved toward a more
restrictive and less accommodative economic policy. During the first half of
the year, cyclical stocks (those stocks whose prices tend to move in tandem
with the economy) performed
1
<PAGE>
relatively well. In the latter half of the year, growth-oriented stocks began to
gain momentum. Two growth stocks we added to the portfolio were Atlantic
Southeast Airlines Inc. and LDDS Communications Inc. We also found opportunities
in U.S. financial-related stocks, such as banks, savings and loans, and
insurance companies.
Since most European markets performed poorly due to rising interest rates, we
did not dramatically change our overall exposure there. We did, however, add to
our European pharmaceutical holdings by purchasing shares of Astra AB in Sweden,
Medeva PLC in the U.K., and Akzo NV in the Netherlands. We believe that Europe
remains very much a "stock picker's" market, with good values available for the
selective investor.
Emerging markets experienced an off year after an extremely successful 1993, and
we took advantage of cheaper stock prices by adding to our Latin American
holdings. For example, we increased our holdings in two telecommunication
companies, Telebras-Telecomunicacoes Brasileiras SA and Telefonos de Mexico.
While the recently devalued peso had a negative effect on Mexico's stock market,
history has shown that after a currency devaluation, stock prices usually
rebound as investors recognize new values. We believe that the Mexican stock
market will take time to regain the confidence of
Templeton Variable Annuity Fund
Geographic Distribution on 12/31/94
Based on Total Net Assets
[PIE CHART APPEARS HERE SHOWING
GEOGRAPHIC DISTRIBUTION OF THE FUND]
<TABLE>
<CAPTION>
Description Amount
- ----------- ------
<S> <C>
Canada 1.8%
Australia/New Zealand 4.7
Asia 8.6
Latin America 10.2
Europe 32.3
United States 34.1
Short-Term Obligations &
Other Net Assets 8.3
</TABLE>
investors, and we do not expect any quick returns from our incremental investing
there. For the longer term, we feel that Mexico holds good value, and for U.S.
investors, the dollar goes further now in buying peso-denominated assets. At the
end of the year, our Mexican holdings represented 3.4% of the Fund's total net
assets. Concern about devaluation of Argentina's currency, which has put
pressure on its stock market, may also provide opportunity to find stocks at
attractive prices.
In Asia, we decreased our exposure to Hong Kong, from 8.7% to 4.7% of total net
assets. Hong Kong stocks performed extremely well in the past few years, but
2
<PAGE>
- --------------------------------------------------------------------------------
Templeton Variable Annuity Fund
Top 10 Holdings on 12/31/94
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Telebras-Telecomunicacoes Brasileiras SA,
Telecommunications, Brazil 3.3%
- --------------------------------------------------------------------------------
Amerifed Financial Corp, Financial Services, U.S. 2.5%
- --------------------------------------------------------------------------------
News International PLC, Broadcasting &
Publishing, Australia 2.3%
- --------------------------------------------------------------------------------
Bayer AG, Chemicals, Germany 2.2%
- --------------------------------------------------------------------------------
Telefonos de Mexico SA, L. ADR,
Telecommunications, Mexico 2.1%
- --------------------------------------------------------------------------------
BBC Brown Boveri Ltd., br, Electrical &
Electronics, Switzerland 2.1%
- --------------------------------------------------------------------------------
Intel Corp., Electronic Components &
Instruments, U.S. 2.0%
- --------------------------------------------------------------------------------
Astra AB. B, Health & Personal Care, Sweden 2.0%
- --------------------------------------------------------------------------------
BankAmerica Corp., Banking, U.S. 1.9%
- --------------------------------------------------------------------------------
Compania de Telefonos de Chile SA, ADR,
Telecommunications, Chile 1.9%
- --------------------------------------------------------------------------------
</TABLE>
For a complete listing of portfolio holdings, please see page 6 of this report.
investor sentiment toward them may be erratic in the near future due to the fact
that China's government is assuming control of Hong Kong in June 1997. Although
we believe that this may depress the valuations of these stocks, we are
beginning to find stocks of Hong Kong companies at attractive prices that should
perform well in any investment environment. We continue to be relatively
underweighted in Japan, since we feel that this market remains overvalued.
Southeast Asia outside of Hong Kong has good long-term prospects, but we are
having difficulty finding opportunities in the short term.
Although 1994 proved to be a difficult year for global stock markets, we are
optimistic about the future of international investing and are diligently
searching the world for undervalued securities. There are, of course, special
risks involved with global investing related to market, currency, economic,
political, and other factors. These risks are discussed in the Fund's
prospectus.
We appreciate your participation in the Templeton Variable Annuity Fund, and we
look forward to an improved investment environment in 1995.
Sincerely,
/s/ Daniel L. Jacobs
Daniel L. Jacobs
President
Templeton Variable Annuity Fund
3
<PAGE>
Performance Summary
The Templeton Variable Annuity Fund posted a total return of -4.06% for the one-
year period ended December 31, 1994. Of course, we have always maintained a
long-term perspective when managing the Fund, and we encourage contract owners
to view their investments in a similar manner. As you can see from the chart
below, the Fund delivered a cumulative total return of more than 140% since its
inception on February 16, 1988. Total return represents the change in the Fund's
net asset value and includes reinvestment of dividends and capital gains. It
does not include deductions at the Fund or contract level for cost of insurance
charges, administrative charges, premium tax charges, mortality and expense risk
charges or other charges that may be incurred under the variable annuity
contract for which the Fund serves as an underlying investment vehicle.
The graph to the right shows the favorable total return comparison between the
Fund and the unmanaged Morgan Stanley Capital International (MSCI) World Index
since the Fund's inception on February 16, 1988. It also shows how an investment
in the Templeton Variable Annuity Fund over the same period has kept your
purchasing power well-ahead of inflation, as measured by the Consumer Price
Index (CPI). Please remember that the Fund's performance differs from that of an
index because an index does not contain cash (the Fund generally carries a
certain percentage of cash at any given time) and includes no management charges
or other expenses. Of course, one cannot invest directly in an index, and past
performance is not indicative of future results.
Templeton Variable Annuity Fund
Total Return Index Comparison
$10,000 Investment (2/16/88 - 12/31/94)
[GRAPH APPEARS HERE SHOWING COMPARISON BETWEEN TEMPLETON VARIABLE ANNUITY FUND*,
MSCI WORLD INDEX AND CPI]
<TABLE>
<CAPTION>
2/16/88 12/31/94
------- --------
<S> <C> <C>
Templeton Variable Annuity Fund* $10,000 $24,099
MSCI World Index 10,000 17,250
Consumer Price Index (CPI) 10,000 12,934
</TABLE>
Templeton Variable Annuity Fund
Periods Ended 12/31/94
<TABLE>
<CAPTION>
Since
Inception
One-Year Five-Year (2/16/88)
<S> <C> <C> <C>
Average Annual
Total Return/1/ -4.06% 11.39% 13.65%
Cumulative
Total Return/2/ -4.06% 71.48% 140.99%
</TABLE>
1. Average annual total return represents the average annual change in value of
an investment, assuming reinvestment of dividends and capital gains. See note
below.
2. Cumulative total return represents the change in the Fund's net asset value
over the specified periods, assuming reinvestment of dividends and capital
gains. See note below.
The Business Manager is reimbursing the Fund for total expenses exceeding 1% of
average daily net assets. Without these reductions, the Fund's total return
would have been lower. The fee waiver may be discontinued at any time.
Note: Total return figures do not include deductions at the Fund or contract
level for cost of insurance charges, administrative charges, premium tax
charges, mortality and expense risk charges or other charges that may be
incurred under the variable annuity contract for which the Fund serves as an
underlying investment vehicle.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic and political climates of the countries where
investments are made, and shares, when redeemed, may be worth more or less than
their initial cost. Past performance is not indicative of future results.
4
<PAGE>
Templeton Variable Annuity Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 19.50 $ 14.99 $15.20 $11.76 $ 13.63
------- ------- ------ ------ --------
Income from investment
operations:
Net investment income .21 .24 .37 .31 .27
Net realized and unrealized gain
(loss) (.96) 5.31 1.16 3.58 (1.80)
------- ------- ------ ------ --------
Total from investment operations (.75) 5.55 1.53 3.89 (1.53)
------- ------- ------ ------ --------
Distributions:
Dividends from net investment
income -- (.24) (.39) (.29) (.26)
Distributions from net realized
gains (.79) (.80) (1.33) (.16) (.08)
Distributions from other sources -- -- (.02) -- --
------- ------- ------ ------ --------
Total distributions (.79) (1.04) (1.74) (.45) (.34)
------- ------- ------ ------ --------
Change in net asset value (1.54) 4.51 (.21) 3.44 (1.87)
------- ------- ------ ------ --------
Net asset value, end of year $ 17.96 $ 19.50 $14.99 $15.20 $ 11.76
======= ======= ====== ====== ========
TOTAL RETURN (4.06)% 37.24% 10.17% 33.29% (11.25)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $12,569 $12,698 $9,258 $9,147 $ 6,185
Ratio of expenses to average net
assets 1.49% 1.37% 1.52% 1.62% 2.00%
Ratio of expenses, net of
reimbursement, to average net
assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to
average net assets 1.09% 1.36% 2.06% 2.33% 2.24%
Portfolio turnover rate 19.85% 22.13% 27.86% 25.84% 24.12%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS: 88.4%
- -------------------------------------------------------------------------------
Appliances & Household Durables: 1.8%
Sony Corp. Jpn. 4,000 $ 227,022
- -------------------------------------------------------------------------------
Automobiles: 2.1%
General Motors Corp. U.S. 4,000 169,000
Volvo AB, B Swe. 5,000 94,206
-----------
263,206
- -------------------------------------------------------------------------------
Banking: 12.4%
Banco de Andalucia Sp. 1,727 192,873
Bangkok Bank Public Co. Ltd., fgn. Thai. 10,000 106,752
BankAmerica Corp. U.S. 6,000 237,000
Bankinter SA Sp. 1,400 115,616
Banque Nationale de Paris NV, ADR Fr. 700 32,550
Barclays PLC, ADR U.K. 2,500 95,625
Barnett Banks Inc. U.S. 1,500 57,563
Chemical Banking Corp. U.S. 6,000 215,250
Grupo Financiero Banamex Accival
SA, C Mex. 10,000 29,400
Grupo Financiero Banamex Accival
SA, L Mex. 500 1,440
Grupo Financiero Serfin SA, B Mex. 22,100 41,990
HSBC Holdings PLC H.K. 12,200 131,658
National Australia Bank Ltd. Aus. 14,000 112,225
NationsBank Corp. U.S. 4,200 189,525
-----------
1,559,467
- -------------------------------------------------------------------------------
Broadcasting & Publishing: 2.6%
Grupo Televisa SA, GDS Mex. 1,000 31,750
News International PLC Aus. 87,200 295,360
-----------
327,110
- -------------------------------------------------------------------------------
Building Materials & Components: 1.4%
*Cementos Paz del Rio, ADR Col. 4,000 80,000
Pioneer International Ltd. Aus. 37,000 91,789
-----------
171,789
- -------------------------------------------------------------------------------
Business & Public Services: 3.7%
Columbia Healthcare Corp. U.S. 4,575 166,988
Ecco SA Fr. 1,875 222,571
*Healthcare Services Group Inc. U.S. 5,550 74,925
-----------
464,484
- -------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1994 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Chemicals: 4.0%
Akzo Nobel NV Neth. 2,000 $ 230,889
Bayer AG Ger. 1,200 278,007
-----------
508,896
- -------------------------------------------------------------------------------
Data Processing & Reproduction: 2.4%
*Cap Gemini Sogeti SA, wts. Fr. 187 196
*Newbridge Networks Corp. Can. 6,000 229,500
Sligos SA Fr. 1,000 67,590
-----------
297,286
- -------------------------------------------------------------------------------
Electrical & Electronics: 3.2%
BBC Brown Boveri Ltd., br. Swtz. 300 258,220
Hitachi Ltd. Jpn. 15,000 149,021
-----------
407,241
- -------------------------------------------------------------------------------
Electronic Components & Instruments: 2.0%
Intel Corp. U.S. 4,000 255,500
- -------------------------------------------------------------------------------
Energy Sources: 2.3%
Norsk Hydro AS, ADR Nor. 3,200 125,200
Total SA, B Fr. 2,800 162,621
-----------
287,821
- -------------------------------------------------------------------------------
Financial Services: 5.8%
Amerifed Financial Corp. U.S. 7,000 309,750
Dean Witter Discover & Co. U.S. 6,000 203,250
Federal National Mortgage Assn. U.S. 3,000 218,625
-----------
731,625
- -------------------------------------------------------------------------------
Food & Household Products: 2.4%
Cafe de Coral Group Ltd. H.K. 99,000 24,310
Grupo Embotellador de Mexico SA, B Mex. 3,500 26,950
Nestle SA Swtz. 230 219,048
Vitro SA Mex. 3,000 13,770
Vitro SA, ADR Mex. 1,500 21,000
-----------
305,078
- -------------------------------------------------------------------------------
Forest Products & Paper: 3.0%
Carter Holt Harvey Ltd. N.Z. 44,226 90,596
*Cartiere Burgo SPA Itl. 3,600 573
</TABLE>
7
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1994 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Forest Products & Paper (cont.)
Enso Gutzeit OY, R Fin. 12,000 $ 103,090
Stora Kopparbergs Bergslags AB, B Swe. 3,000 180,875
-----------
375,134
- -------------------------------------------------------------------------------
Health & Personal Care: 5.9%
Astra AB, B Swe. 10,000 255,028
Medeva PLC U.K. 34,430 87,801
Pfizer Inc. U.S. 2,680 207,030
SmithKline Beecham PLC, ADR U.K. 5,800 198,650
-----------
748,509
- -------------------------------------------------------------------------------
Industrial Components: 0.4%
*Hi-Lo Automotive Inc. U.S. 5,000 48,750
- -------------------------------------------------------------------------------
Insurance: 4.5%
Aegon NV Neth. 1,500 95,916
Aetna Life & Casualty Co. U.S. 4,000 188,500
CCP Insurance Inc. U.S. 4,000 81,500
International Nederlanden Group Neth. 2,000 94,475
Torchmark Corp. U.S. 3,000 104,625
-----------
565,016
- -------------------------------------------------------------------------------
Merchandising: 5.8%
*Federated Department Stores Inc. U.S. 7,000 134,750
Home Depot Inc. U.S. 4,000 184,000
K Mart Corp. U.S. 5,000 65,000
*Kroger Co. U.S. 8,000 193,000
Limited Inc. U.S. 8,200 148,625
-----------
725,375
- -------------------------------------------------------------------------------
Metals & Mining: 0.1%
Maanshan Iron & Steel Co. Ltd., H Chn. 32,000 6,741
- -------------------------------------------------------------------------------
Multi-Industry: 3.5%
Hutchison Whampoa Ltd. H.K. 55,000 222,488
Jardine Matheson Holdings Ltd. H.K. 29,800 212,788
-----------
435,276
- -------------------------------------------------------------------------------
Telecommunications: 11.7%
Alcatel Alsthom SA Fr. 1,754 149,752
Cable & Wireless PLC, ADR U.K. 9,000 157,500
Compania de Telefonos de Chile SA,
ADR Chil. 3,000 236,250
</TABLE>
8
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1994 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- ------------------------------------------------------------------------------
Telecommunications (cont.)
*LDDS Communications Inc. U.S. 7,100 $ 138,006
MCI Communications Corp. U.S. 9,200 169,050
STET (Sta Finanziaria
Telefonica Torino) SPA, di
Risp Itl. 55,000 130,379
Telefonica de Argentina SA, B,
ADR Arg. 1,500 79,500
Telefonica de Espana SA, ADR Sp. 4,200 147,525
Telefonos de Mexico SA, L, ADR Mex. 6,300 258,300
-----------
1,466,262
- ------------------------------------------------------------------------------
Textiles & Apparel: 2.5%
*Fruit of the Loom Inc., A U.S. 3,500 94,500
Nike Inc., B U.S. 3,000 223,875
-----------
318,375
- ------------------------------------------------------------------------------
Transportation: 1.0%
Atlantic Southeast Airlines
Inc. U.S. 8,000 124,000
- ------------------------------------------------------------------------------
Utilities-Electrical & Gas: 3.9%
Electricidad de Caracas Venz. 44,511 53,993
Endesa-Empresa Nacional de
Electricidad SA, ADR Sp. 4,600 186,300
Hong Kong & China Gas Co. Ltd. H.K. 800 1,292
Southern Co. U.S. 4,000 80,000
VEBA AG Ger. 500 173,206
-----------
494,791
-----------
TOTAL COMMON STOCKS (cost $8,295,979) 11,114,754
- ------------------------------------------------------------------------------
PREFERRED STOCKS: 3.3%
- ------------------------------------------------------------------------------
Telebras-Telecomunicacoes
Brasileiras SA, ADR Braz. 1,000 45,000
Telebras-Telecomunicacoes
Brasileiras SA, pfd Braz. 8,196,267 366,751
-----------
TOTAL PREFERRED STOCKS (cost $228,704) 411,751
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1994 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
INDUSTRY ISSUE COUNTRY LOCAL CURRENCY VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT TERM OBLIGATIONS: 8.1% (cost $1,020,823)
- -------------------------------------------------------------------------------
U.S. Treasury Bills, 4.75%
to 5.45% with
maturities to 2/23/95 U.S. $1,025,000 $ 1,021,413
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 99.8% (cost $9,545,506) 12,547,918
OTHER ASSETS, LESS LIABILITIES: 0.2% 20,725
-----------
TOTAL NET ASSETS: 100.0% $12,568,643
===========
</TABLE>
*NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Templeton Variable Annuity Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
Assets:
Investment in securities, at value (identified cost $9,545,506) $12,547,918
Cash 3,274
Receivables:
Investment securities sold 147,944
Dividends and interest 25,818
Administrative fee reimbursement 6,900
-----------
Total assets 12,731,854
-----------
Liabilities:
Payables for investment
securities purchased 86,678
Accrued expenses 76,533
-----------
Total liabilities 163,211
-----------
Net assets, at value $12,568,643
===========
Net assets consist of:
Undistributed net investment income $ 145,533
Net unrealized appreciation 3,002,412
Accumulated net realized gain 916,233
Net capital paid in on shares of beneficial interest 8,504,465
-----------
Net assets, at value $12,568,643
===========
Shares outstanding 699,878
===========
Net asset value per share
($12,568,643 / 699,878) $ 17.96
===========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income:
(net of $12,835
foreign taxes withheld)
Dividends $ 228,015
Interest 50,544
-----------
Total income $ 278,559
Expenses:
Management fees (Note 3) 66,500
Administrative fees (Note 3) 19,950
Custodian fees 18,200
Reports to shareholders 19,500
Audit fees 24,500
Legal fees 12,600
Trustees' fees and expenses 33,500
Other 3,240
-----------
Total expenses 197,990
Less expenses
reimbursed (Note 3) (64,964)
-----------
Total expenses
less reimbursement 133,026
---------
Net investment income 145,533
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 929,429
Foreign currency transactions (11,041)
-----------
918,388
-----------
Net unrealized appreciation (depreciation) on:
Investments (1,599,700)
Foreign currency
translation of other
assets and liabilities 4,677
-----------
(1,595,023)
-----------
Net realized and
unrealized loss (676,635)
---------
Net decrease in net assets resulting from operations $(531,102)
=========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Variable Annuity Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 145,533 $ 147,990
Net realized gain from security and foreign
currency transactions 918,388 1,075,304
Net unrealized appreciation (depreciation) (1,595,023) 2,287,277
----------- -----------
Net increase (decrease) in net assets resulting
from operations (531,102) 3,510,571
Distributions to shareholders:
From net investment income (2,879) (145,111)
From net realized gain (514,109) (493,997)
Fund share transactions (Note 2) 919,033 568,646
----------- -----------
Net increase (decrease) in net assets (129,057) 3,440,109
Net assets:
Beginning of year 12,697,700 9,257,591
----------- -----------
End of year $12,568,643 $12,697,700
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Variable Annuity Fund (the Fund) is a Massachusetts business trust
and an open-end, diversified management investment company registered under the
Investment Company Act of 1940. The following summarizes the Fund's significant
accounting policies.
a. Securities Valuations:
Securities listed or traded on a recognized national or foreign stock exchange
or NASDAQ are valued at the last reported sales prices on the principal ex-
change on which the securities are traded. Over-the-counter securities and
listed securities for which no sale is reported are valued at the mean between
the last current bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
and approved in good faith by the Board of Trustees.
b. Foreign Currency Translations:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customar-
ily enters into foreign exchange contracts to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement dates on security transactions, the differences between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at the end
of the period, resulting from changes in the exchange rates.
c. Income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
federal income taxes.
d. Security Transactions, Investment Income, Distributions, and Expenses:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign securi-
ties is recorded as soon as information is available to the Fund. Interest in-
come and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At December 31, 1994, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares for
the years ended December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 103,790 $ 1,963,386 67,021 $ 1,093,138
Shares issued on reinvestment
of distributions 27,282 516,988 33,637 639,108
Shares redeemed (82,327) (1,561,341) (67,195) (1,163,600)
------- ----------- ------- -----------
Net increase 48,745 $ 919,033 33,463 $ 568,646
======= =========== ======= ===========
</TABLE>
13
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund pays monthly an investment management fee to Templeton Investment
Counsel, Inc. equal, on an annual basis, to 0.50% of the average daily net as-
sets of the Fund, reduced to 0.45% of such net assets in excess of $200 million
up to $1.3 billion and further reduced to 0.40% of such net assets in excess of
$1.3 billion. The Fund pays to Templeton Funds Annuity Company (TFAC) an admin-
istrative fee equivalent to 0.15% of the average daily net assets of the Fund
during the year, reduced to 0.135% of such net assets in excess of $200 mil-
lion, to 0.10% of such net assets in excess of $700 million, and to 0.075% of
such assets in excess of $1.2 billion. TFAC voluntarily limited total expenses
of the Fund to an annual rate of 1.00% of the Fund's average net assets for the
year ended December 31, 1994. The amount of reimbursement for the year ended
December 31, 1994, is set forth in the Statement of Operations.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1994 aggregated $2,400,886 and $2,671,452, respective-
ly. The cost of securities for federal income tax purposes is the same as that
shown in the investment portfolio. Realized gains and losses are reported on an
identified cost basis.
At December 31, 1994, the aggregate gross unrealized appreciation and deprecia-
tion of portfolio securities, based on cost for federal income tax purposes,
was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $3,378,350
Unrealized depreciation (375,938)
----------
Net unrealized appreciation $3,002,412
==========
</TABLE>
14
<PAGE>
Templeton Variable Annuity Fund
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders Templeton Variable Annuity Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Variable Annuity Fund as of December 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the respon-
sibility of the Fund's management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of De-
cember 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Tem-
pleton Variable Annuity Fund as of December 31, 1994, the results of its opera-
tions, the changes in its net assets and the financial highlights for the peri-
ods indicated, in conformity with generally accepted accounting principles.
[SIGNATURE OF MCGLADREY & PULLEN, LLP APPEARS HERE]
New York, New York
February 3, 1995
15
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
Assets
Investment in Templeton Variable Annuity Fund, at value
(cost $8,397,034) $10,047,637
Liabilities
Payable to Templeton Funds
Annuity Company 15,919
-----------
Net assets $10,031,718
===========
Net assets attributable to annuitants--Annuity reserves (Note 1) $10,031,718
===========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1994
<TABLE>
<S> <C>
Investment Income:
Income:
Capital gains distributions $ 463,004
-----------
Total income 463,004
Expenses:
Periodic charge (Note 2) 122,341
-----------
Net investment income 340,663
-----------
Realized and unrealized gain (loss)
on investments:
Net realized gain on investments 469,901
Unrealized depreciation of investments for the year (1,356,713)
-----------
Net loss on investments (886,812)
-----------
Net decrease in net assets from operations $ (546,149)
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income $ 340,663 $ 469,989
Net realized gain on investments 469,901 470,378
Unrealized appreciation (depreciation) of
investments for the year (1,356,713) 2,186,007
----------- -----------
Net increase (decrease) in net assets from
operations (546,149) 3,126,374
----------- -----------
Annuity unit transactions:
Proceeds from units sold 350,411 738,647
Annuity payments (1,274,550) (1,157,971)
Increase in annuity reserves for mortality experience
(Note 1) 9,728 4,588
----------- -----------
Net decrease in net assets derived from annuity unit
transactions (914,411) (414,736)
----------- -----------
Total decrease in net assets (1,460,560) 2,711,638
Net Assets:
Beginning of year 11,492,278 8,780,640
----------- -----------
End of year $10,031,718 $11,492,278
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
The Templeton Funds Retirement Annuity Separate Account (the Separate Account)
was established on February 4, 1987 by resolution of the Board of Directors of
Templeton Funds Annuity Company (the Company) and is registered under the In-
vestment Company Act of 1940 as a unit investment trust. The Separate Account
is sold exclusively for use with the Templeton Retirement Annuity, an immediate
variable annuity designed for distributing the benefits of tax deferred retire-
ment plans. The Separate Account invests all its assets in the Templeton Vari-
able Annuity Fund (the Fund). The following is a summary of significant ac-
counting policies followed by the Separate Account in the preparation of its
financial statements.
a. Valuation of Securities:
Investment in shares of the Fund are carried in the Statement of Assets and Li-
abilities at net asset value (market value).
b. Dividends:
Dividend income and capital gain distributions are recorded as income on the
ex-dividend date and reinvested in additional shares of the Fund.
c. Income Taxes:
Operations of the Separate Account form a part of the Company, which is taxed
as a life insurance company under the Internal Revenue Code (the Code). Under
current law, no federal income taxes are payable with respect to the Separate
Account. Under the principles set forth in Internal Revenue Service Ruling 81-
225 and Section 817(h) of the Code and regulations thereunder, the Company un-
derstands that it will be treated as owner of the assets invested in the Sepa-
rate Account for federal income tax purposes, with the result that earnings and
gains, if any, derived from those assets will not be included in an Annuitant's
gross income until amounts are received pursuant to an Annuity.
d. Annuity Reserves:
Annuity reserves are computed according to the 1983a Blended Unisex Mortality
Table, with a 50% male/female content. The assumed interest rates are 9%, 7%
and 3%. Charges to annuity reserves for mortality experience are reimbursed to
the Company if the reserves required are less than originally estimated. If ad-
ditional reserves are required, the Company reimburses the Separate Account.
2. PERIODIC CHARGE
The Company assesses a Periodic Charge against the Separate Account, equal on
an annual basis to 1.1% of Separate Account assets. The Periodic Charge, in the
following amounts, compensates the Company for expenses of administering the
Separate Account and for assuming the risks that mortality experience will be
lower than the rate assumed and that expenses will be greater than what is as-
sumed: 0.3% of average annual net assets to cover expenses, 0.3% to cover ex-
pense risk and 0.5% to cover the mortality risk. The Periodic Charge is guaran-
teed as to Annuities issued prior to the effective date of any change in the
Periodic Charge.
3. INVESTMENT TRANSACTIONS
During the year ended December 31, 1994, purchases and sales of Templeton Vari-
able Annuity Fund shares aggregated $813,414 and $923,309, respectively. Real-
ized gains and losses are reported on an identified cost basis.
17
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Report of Independent Accountants
- --------------------------------------------------------------------------------
The Participants of Templeton Funds Retirement Annuity Separate Account
We have audited the accompanying statement of assets and liabilities of Temple-
ton Funds Retirement Annuity Separate Account as of December 31, 1994, and the
related statement of operations for the year then ended and the statement of
changes in net assets for the years ended December 31, 1994 and 1993. These fi-
nancial statements are the responsibility of the Separate Account's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned at December 31, 1994, by correspon-
dence with the Templeton Variable Annuity Fund. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Templeton Funds Retirement An-
nuity Separate Account as of December 31, 1994, and the results of its opera-
tions for the year then ended and the changes in its net assets for the years
ended December 31, 1994 and 1993, in conformity with generally accepted ac-
counting principles.
Coopers & Lybrand L.L.P.
Tampa, Florida February 10, 1995
18
<PAGE>
The Franklin Templeton Group
- --------------------------------------------------------------------------------
To receive a free brochure and prospectus, which contain more complete informa-
tion, including charges and expenses on each of the funds listed below, call
Franklin Fund Information, toll free, at 1-800-DIAL-BEN (1-800-342-5236) or
Templeton Fund Information at 1-800-292-9293. Please read the prospectus care-
fully before you invest or send money.
TEMPLETON
FAMILY OF FUNDS
Franklin Templeton Japan Fund
Templeton American Trust
Templeton Americas
Government Securities Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Rising
Dividends Fund
Templeton Growth Fund
Templeton Income Fund
Templeton Money Fund
Templeton Real Estate
Securities Fund
Templeton Smaller
Companies Growth Fund
Templeton World Fund
FRANKLIN GROUP OF FUNDS(R)
FRANKLIN GLOBAL/
INTERNATIONAL FUNDS
Franklin Global Health Care
Fund
Franklin Global Government
Income Fund
Franklin Global Utilities Fund
Franklin International Equity
Fund
Franklin Pacific Growth Fund
FUNDS SEEKING CAPITAL GROWTH
Franklin California Growth
Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin Small Cap Growth
Fund
FUNDS SEEKING GROWTH AND
INCOME
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Income Fund
Franklin Equity Income Fund
Franklin Utilities Fund
FUNDS SEEKING HIGH CURRENT
INCOME
Franklin's AGE High Income
Fund
Franklin Investment Grade
Income Fund
Franklin Premier Return Fund
Franklin U.S. Government
Securities Fund
FUNDS SEEKING TAX-FREE
INCOME
Franklin Federal Tax-Free
Income Fund
Franklin High Yield Tax-Free
Income Fund
Franklin California High Yield
Municipal Fund
Franklin Alabama Tax-Free
Income Fund
Franklin Arizona Tax-Free
Income Fund
Franklin California Tax-Free
Income Fund
Franklin Colorado Tax-Free
Income Fund
Franklin Connecticut Tax-Free
Income Fund
Franklin Florida Tax-Free
Income Fund
Franklin Georgia Tax-Free
Income Fund
Franklin Hawaii Municipal
Bond Fund
Franklin Indiana Tax-Free
Income Fund
Franklin Kentucky Tax-Free
Income Fund
Franklin Louisiana Tax-Free
Income Fund
Franklin Maryland Tax-Free
Income Fund
Franklin Missouri Tax-Free
Income Fund
Franklin New Jersey Tax-Free
Income Fund
Franklin New York Tax-Free
Income Fund
Franklin North Carolina Tax-Free
Income Fund
Franklin Oregon Tax-Free
Income Fund
Franklin Pennsylvania Tax-Free
Income Fund
Franklin Puerto Rico Tax-Free
Income Fund
Franklin Texas Tax-Free
Income Fund
Franklin Virginia Tax-Free
Income Fund
Franklin Washington Municipal
Bond Fund
FUNDS SEEKING TAX-FREE
INCOME THROUGH INSURED
PORTFOLIOS
Franklin Insured Tax-Free
Income Fund
Franklin Arizona Insured
Tax-Free Income Fund
Franklin California Insured
Tax-Free Income Fund
Franklin Florida Insured
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 New York Insured
Tax-Free Income Fund
Franklin Ohio Insured
Tax-Free Income Fund
FUNDS SEEKING HIGH CURRENT
INCOME AND STABILITY OF
PRINCIPAL
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable
U.S. Government
Securities Fund
Franklin Short-Intermediate
U.S. Government Securities
Fund
FUND SEEKING HIGH AFTER-TAX
INCOME FOR CORPORATIONS
Franklin Corporate
Qualified Dividend Fund
MONEY MARKET FUNDS SEEKING
SAFETY OF PRINCIPAL AND
INCOME
Franklin Money Fund
Franklin Federal Money
Fund
Franklin Tax-Exempt
Money Fund
Franklin California
Tax-Exempt Money Fund
Franklin New York
Tax-Exempt Money Fund
IFT Franklin U.S. Treasury
Money Market Portfolio
FUNDS FOR
NON-U.S. INVESTORS
FRANKLIN PARTNERS FUNDS(R)
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged
U.S. Government
Securities Fund
To ensure the highest quality of service, telephone calls to or from our serv-
ice departments may be monitored, recorded and accessed. These calls can be de-
termined by the presence of a regular beeping tone.
<PAGE>
- --------------------------
TEMPLETON VARIABLE
ANNUITY FUND
700 Central Avenue
St. Petersburg,
Florida 33701
This report must be preceded or accompanied by the prospectus of Templeton
Variable Annuity Fund. Like any investment in securities, the value of the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
investment manager which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the investment manager.
Therefore, investors who cannot accept this risk should not invest in shares of
the Fund.
- --------------------------
[RECYLED PAPER LOGO APPEARS HERE]
TRA A94 12/94
TEMPLETON
VARIABLE
ANNUITY
FUND
Annual Report
December 31, 1994
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
