TEMPLETON VARIABLE ANNUITY FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 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
General Information and History. . . . . . . . . . . . . 1
Investment Practices and Restrictions. . . . . . . . . . 2
-Debt Securities . . . . . . . . . . . . . . . . . . . 2
-Investment Restrictions . . . . . . . . . . . . . . . 3
-Risk Factors. . . . . . . . . . . . . . . . . . . . . 5
-Trading Policies. . . . . . . . . . . . . . . . . . . 8
-Personal Securities Transactions. . . . . . . . . . . 8
Management of the Fund . . . . . . . . . . . . . . . . . 9
Trustee Compensation1. . . . . . . . . . . . . . . . . . 6
Principal Shareholder. . . . . . . . . . . . . . . . . . 16
Investment Management and Other Services . . . . . . . . 17
-Investment Management Agreement . . . . . . . . . . . 17
-Management Fees . . . . . . . . . . . . . . . . . . . 18
-The Investment Manager. . . . . . . . . . . . . . . . 18
-Business Manager. . . . . . . . . . . . . . . . . . . 18
-Custodian . . . . . . . . . . . . . . . . . . . . . . 20
-Legal Counsel . . . . . . . . . . . . . . . . . . . . 20
-Independent Accountants . . . . . . . . . . . . . . . 20
-Reports to Shareholders . . . . . . . . . . . . . . . 20
Brokerage Allocation . . . . . . . . . . . . . . . . . . 21
Purchase, Redemption and Pricing of Shares . . . . . . . 23
Tax Status . . . . . . . . . . . . . . . . . . . . . . . 24
Description of Shares. . . . . . . . . . . . . . . . . . 25
Performance Information. . . . . . . . . . . . . . . . . 26
Financial Statements . . . . . . . . . . . . . . . . . . 29
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.
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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.
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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
<PAGE>
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 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
<PAGE>
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.
Despite the recent dissolution of the Soviet Union, the communist party
may continue to exercise a significant or, in some countries, dominant role in
certain Eastern European countries. To the extent of the communist party's
influence, investments in such countries will 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.
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.
<PAGE>
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:
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<TABLE>
<CAPTION>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
<S> <C>
RUPERT H. JOHNSON, JR.* Executive vice president and director
777 Mariners Island Blvd. of Franklin Resources, Inc.; president
San Mateo, California and director, Franklin Advisers, Inc.;
Trustee executive vice president and director, Franklin
Templeton Distributors, Inc.; director, Franklin
Administrative Services, Inc.; director or trustee of
other Templeton Funds; and officer and/or director,
trustee or managing general partner, as the case may
be, of most other subsidiaries of Franklin, and of
most of the investment companies in the Franklin Group
of Funds.
HARRIS J. ASHTON Chairman of the board, president and
Metro Center, 1 Station Place chief executive officer of General Host
Stamford, Connecticut Corporation (nursery and craft centers);
Trustee director of RBC Holdings (U.S.A.) Inc. (a bank holding
company) and Bar-S Foods.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation.
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies.
Trustee
F. BRUCE CLARKE Retired; former credit adviser,
19 Vista View Blvd. National Bank of Canada, Toronto.
Thornhill, Ontario
Trustee
BETTY P. KRAHMER Director or trustee of various civic
2201 Kentmere Parkway associations; former economic analyst,
Wilmington, DE U.S. Government.
Trustee
FRED R. MILLSAPS Manager of personal investments (1978-
2665 NE 37th Drive present); chairman and chief executive
Fort Lauderdale, FL officer of Landmark Banking Corporation
Trustee (1969-1978); financial vice president of Florida Power
and Light (1965-1969); vice president of Federal
Reserve Bank of Atlanta (1958-1965); director of
various business and nonprofit organizations.
ANDREW H. HINES, JR. Consultant, Triangle Consulting Group;
150 2nd Avenue N. chairman of the board and chief
St. Petersburg, Florida executive officer of Florida Progress
Trustee Corporation (1982-1990) and director of various of its
subsidiaries; chairman and director of Precise Power
Corporation; Executive-in-Residence of Eckerd College
(1991-present); director of Checkers Drive-In
Restaurants, Inc.
<PAGE>
JOHN G. BENNETT, JR. Founder, chairman of the board and
3 Radnor Corporate Center president of New Era Philanthropy, Inc.;
Suite 150 chairman of Human Service Systems, Inc.;
100 Matsonford Rd. president of The Foundation for New Era
Radnor, PA Philanthropy; a director or trustee of
Trustee many national and international organizations,
including universities and grant-making foundations;
member of the Public Policy Committee of the
Advertising Counsel.
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland 20817 America Enterprise Holdings, Inc.;
Trustee Lockheed Martin Marietta Corporation, MCI
Communications Corporation and Medimmune, Inc.;
formerly: chairman, Hambrecht and Quist Group;
director, H&Q Healthcare Investors; and president,
National Association of Securities Dealers, Inc.
NICHOLAS F. BRADY* Chairman and president of Darby Overseas
102 East Dover Street Investments, Ltd. (an investment firm)
Easton, Maryland since 1994; director of the H. J. Heinz
Trustee Company, Amerada Hess Corporation, Capital Cities/ABC,
Inc. and the Christiana Companies; Secretary of the
United States Department of the Treasury from 1988 to
January, 1993; chairman of the board of Dillon, Read &
Co. Inc. (investment banking) prior thereto.
DANIEL L. JACOBS Executive vice president and director
500 East Broward Blvd. of Templeton Investment Counsel, Inc.;
Suite 1400 director of Templeton Global Investors, Inc.;
Fort Lauderdale, Florida president or vice president of certain of
President the Templeton Funds.
JOHN R. KAY Vice President of the Templeton Funds;
500 East Broward Blvd. vice president and treasurer of Templeton
Suite 1400 Global Investors, Inc. and Templeton
Fort Lauderdale, Florida Worldwide, Inc.; formerly, vice president
Vice President and controller of the Keystone Group, Inc.
CHARLES B. JOHNSON President, chief executive officer,
777 Mariners Island Blvd. and director, Franklin Resources, Inc.;
San Mateo, California chairman of the board and director,
Vice President Franklin Templeton Distributors, Inc. and Franklin
Advisers, Inc.; director, Franklin Administrative
Services, Inc., and General Host Corporation; director
of Templeton Global Investors, Inc.; and director or
trustee of other Templeton Funds; and officer and
director, trustee or managing partner, as the case may
be, of most other subsidiaries of Franklin and of most
of the investment companies in the Franklin Group of
Funds.
<PAGE>
MARK G. HOLOWESKO President, chief executive officer and
Lyford Cay director of Templeton, Galbraith &
Nassau, Bahamas Hansberger Ltd. ("TGH"); director of global
Vice President equity research for TGH; president or vice president
of the Templeton Funds; investment administrator with
Roy West Trust Corporation (Bahamas) Limited (1984-
1985).
MARTIN L. FLANAGAN Senior vice president, treasurer and
777 Mariners Island Blvd. chief financial officer of Franklin
San Mateo, CA Resources, Inc.; director, chief executive
Vice President officer and executive vice president of Templeton
Investment Counsel, Inc. and director, president and
chief executive officer of Templeton Global Investors,
Inc.; director or trustee, president or vice
president of the Templeton Funds; accountant, Arthur
Andersen & Company (1982-1983); member of the
International Society of Financial Analysts and the
American Institute of Certified Public Accountants.
THOMAS M. MISTELE Senior vice president of Templeton Global
700 Central Avenue Investors, Inc.; vice president of
St. Petersburg, FL Franklin Templeton Distributors, Inc.;
Secretary secretary of the Templeton Funds; attorney, Dechert
Price & Rhoads (1985-1988) and Freehill, Hollingdale &
Page (1988); judicial clerk, U.S. District Court
(Eastern District of Virginia) (1984-1985).
JAMES R. BAIO Certified public accountant; treasurer of
500 East Broward Blvd. the Templeton Funds; senior vice president
Suite 1400 of Templeton Worldwide, Inc., Templeton
Fort Lauderdale, FL Global Investors, Inc., and Templeton Funds
Treasurer Trust Company; formerly, senior tax manager of Ernst &
Young (certified public accountants) (1977-1989).
JACK L. COLLINS Assistant treasurer, Templeton Funds;
700 Central Avenue assistant vice president of Franklin Templeton
St. Petersburg, FL Investor Services, Inc.; former partner of
Assistant Treasurer Grant Thornton, independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
</TABLE>
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* Messrs. Johnson and Brady are Directors 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.
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TRUSTEE COMPENSATION
All of the Trust's officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid
by the Trust 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, based upon the assets
of the Trust as of December 31, 1994, the Trust will pay 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 Trust expenses.
The following table shows the total compensation paid to the Trustees by
the Trust and by all investment companies in the Franklin Templeton Group for
the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
NUMBER OF TOTAL COMPENSATION
NAME AGGREGATE FRANKLIN TEMPLETON FROM ALL FUNDS IN
OF COMPENSATION FUND BOARDS ON WHICH FRANKLIN
TRUSTEE FROM THE TRUST WHICH TRUSTEE SERVES TEMPLETON GROUP
<S> <C> <C> <C>
Harris J. Ashton 1,525 54 $319,925
John G. Bennett 2,025 23 105,625
Nicholas F. Brady 1,525 23 86,125
F. Bruce Clarke 2,025 19 95,275
S. Joseph Fortunato 1,525 56 336,065
Andrew H. Hines, Jr. 2,025 23 106,125
Betty P. Krahmer 1,525 19 75,275
Gordon S. Macklin 1,525 51 303,695
Fred R. Millsaps 2,025 23 106,125
Hasso-G von
Diergardt-Naglo 1,525 19 75,275
</TABLE>
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
<PAGE>
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.
<PAGE>
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 New York Stock Exchange. Charles B.
Johnson (an 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:
o providing office space, telephone, office equipment and supplies
for the Fund;
o paying compensation of the Fund's officers for services rendered
as such;
o authorizing expenditures and approving bills for payment on
behalf of the Fund;
o preparation of annual and semi-annual reports, notices of
dividends, capital gains distributions and tax credits;
o 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;
o monitoring relationships with organizations serving the Fund,
including its custodian and printers;
o providing trading desk facilities for the Fund;
o supervising compliance by the Fund with recordkeeping require-
ments under the 1940 Act and regulations promulgated there
under, 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
o 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
<PAGE>
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 and the Internal Revenue Service.
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.
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
<PAGE>
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.
PAGE>
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 on the New York Stock Exchange (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 Securities and Exchange
<PAGE>
Commission, 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 Securities and Exchange Commission 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 (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.
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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 Corp., 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, 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.
<PAGE>
(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 <F1>, advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. Superior performance is possible
only if you invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality
stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is
safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even understand
all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative
too often."
<F1> Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October, 1992 and resigned from the Trust's Board on April
16, 1995. He is no longer involved with the investment management process.
<PAGE>
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 Group of 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.
