TEMPLETON VARIABLE ANNUITY FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1995, AS AMENDED SEPTEMBER 29, 1995,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON VARIABLE ANNUITY FUND DATED MAY 1, 1995,
AS AMENDED FROM TIME TO TIME,
WHICH CAN BE OBTAINED WITHOUT COST UPON REQUEST TO
TEMPLETON VARIABLE ANNUITY FUND,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 774-5001
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY........................................... 1
INVESTMENT PRACTICES AND RESTRICTIONS..................................... 2
- -DEBT SECURITIES.......................................................... 2
- -INVESTMENT RESTRICTIONS.................................................. 3
- -RISK FACTORS............................................................. 5
- -TRADING POLICIES......................................................... 9
- -PERSONAL SECURITIES TRANSACTIONS........................................ 10
MANAGEMENT OF THE FUND................................................... 10
TRUSTEE COMPENSATION..................................................... 16
PRINCIPAL SHAREHOLDER.................................................... 17
INVESTMENT MANAGEMENT AND OTHER SERVICES................................. 17
- -INVESTMENT MANAGEMENT AGREEMENT......................................... 17
- -MANAGEMENT FEES......................................................... 18
- -THE INVESTMENT MANAGER.................................................. 18
- -BUSINESS MANAGER........................................................ 19
- -CUSTODIAN............................................................... 20
- -LEGAL COUNSEL........................................................... 21
- -INDEPENDENT ACCOUNTANTS................................................. 21
- -REPORTS TO SHAREHOLDERS................................................. 21
BROKERAGE ALLOCATION..................................................... 21
PURCHASE, REDEMPTION AND PRICING OF SHARES............................... 24
TAX STATUS............................................................... 25
DESCRIPTION OF SHARES.................................................... 30
PERFORMANCE INFORMATION.................................................. 30
FINANCIAL STATEMENTS..................................................... 34
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
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Accounts (the "Separate Accounts") for use as the sole investment vehicle for
Templeton Retirement Annuities and Templeton Immediate Variable Annuities (the
"Annuities"). The Fund's Shares may in the future be sold in connection with
other insurance products or as otherwise permitted by applicable
regulations and regulatory interpretations.
INVESTMENT PRACTICES AND RESTRICTIONS
DEBT SECURITIES. The Fund may invest in debt securities which are rated
at least Ca by Moody's Investors Service, Inc. ("Moody's"), or CC by Standard &
Poor's Corporation ("S&P"), or deemed to be of comparable quality by the Fund's
investment manager, Templeton Investment Counsel, Inc. (the "Investment
Manager"). As an operating policy, the Fund will invest no more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB by S&P. Bonds
rated Ca by Moody's represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds rated CC by S&P are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such bonds may have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund's net asset value.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish the Fund's ability to sell the
securities at fair value either to meet redemption requests or to respond to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
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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 creditworthi-ness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery.
The Fund may accrue and report interest on high yield bonds structured
as zero coupon bonds or pay-in-kind securities as income even though it receives
no cash interest until the security's maturity or payment date. In order to
qualify for beneficial tax treatment, the Fund must distribute substantially all
of its income to Shareholders (see "Tax Status"). Thus, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash so that it may satisfy the distribution requirement.
INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain
fundamental investment restrictions which, together with its investment
objective and investment policy, are fundamental policies which may not be
changed without the approval of the Fund's Shareholders. For this purpose, the
provisions of the 1940 Act require the affirmative vote of the lesser of either
(A) 67% or more of the Shares of the Fund present at a Shareholders' meeting at
which more than 50% of the outstanding Shares of the Fund are present or
represented by proxy or (B) more than 50% of the outstanding Shares of the Fund.
A vote of the Shareholders satisfying these requirements will also satisfy the
requirements
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of the Fund's By-laws and the applicable provisions of
Massachusetts law.
A. FUNDAMENTAL INVESTMENT RESTRICTIONS. In accordance
with these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate (although
the Fund may invest in marketable securities secured by real estate or interests
therein or issued by companies or investment trusts which invest in real estate
or interests therein), or purchase or sell commodity contracts, except that the
Fund may purchase or sell stock index futures contracts.
2. With respect to 75% of its total assets, invest more than
5% of the total value of its assets in the securities of any one issuer, or
purchase more than 10% of any class of securities of any one company, including
more than 10% of its outstanding voting securities (except for investments in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
3. Act as an underwriter or issue senior securities.
4. Lend money, except that the Fund may purchase
publicly-distributed bonds, debentures, notes and other evidences of
indebtedness and may buy from a bank or broker-dealer U.S. government
obligations with a simultaneous agreement by the seller to repurchase them at
the original purchase price plus accrued interest.
5. Borrow money, for any purpose other than redeeming its
Shares or purchasing its Shares for cancellation, and then only as a temporary
measure up to an amount not exceeding 5% of the value of its total assets.
6. Invest more than 25% of the Fund's total assets in
a single industry.
B. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. As non-fundamental
policies, which may be changed by the Fund's Trustees without Shareholder
approval, the Fund will not invest more than 15% of its total assets in
securities of foreign issuers which are not listed on a recognized United States
or foreign securities exchange, or more than 10% of its total assets in (a)
securities with a limited trading market, (b) securities subject to legal or
contractual restrictions as to resale, and (c) repurchase agreements not
terminable within seven days. In addition, as a non-fundamental policy, the Fund
will not invest more than 5% of its assets in debt securities rated lower than
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Baa by Moody's Investors Service, Inc. or BBB by Standard &
Poor's Corporation.
When an investment restriction states a maximum percentage of the
Fund's assets which may be invested in any security or other property, it is
intended that such maximum percentage limitation be determined immediately after
and as a result of the Fund's acquisition of such security or property. Assets
are calculated as described in the Prospectus under the heading "How to Sell
Shares of the Fund." If the Fund receives from an issuer of securities held by
the Fund subscription rights to purchase securities of that issuer, and if the
Fund exercises such subscription rights at a time when the Fund's portfolio
holdings of securities of that issuer would otherwise exceed the limits set
forth in investment restrictions 2 or 6 above, it will not constitute a
violation if, prior to receipt of securities upon exercise of such rights, and
after announcement of such rights, the Fund has sold at least as many securities
of the same class and value as it would receive on exercise of such rights.
RISK FACTORS. The Fund has an unlimited right to purchase securities in
any foreign country, if they are listed on a stock exchange, as well as a
limited right to purchase such securities if they are unlisted. Investors should
consider carefully the substantial risks involved in securities of companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments. There may be less publicly available
information about foreign companies comparable to the reports and ratings
published about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. The Fund, therefore, may encounter
difficulty in obtaining market quotations for purposes of valuing its portfolio
and calculating its net asset value. Foreign markets have substantially less
volume than the New York Stock Exchange ("NYSE") and securities of some foreign
companies are less liquid and more volatile than securities of comparable United
States companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the United States, are likely to
be higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers and listed companies than in the United
States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
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nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Funds could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Fund Shareholders.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
Russian economic system; (4) currency exchange rate volatility and the lack of
available
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currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars; (7) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for the Fund to lose
its registration through fraud, negligence or even mere oversight. While the
Fund will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting
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from their errors, it may be difficult for the Fund to enforce any rights it may
have against the registrar or issuer of the securities in the event of loss of
share registration. Furthermore, although a Russian public enterprise with more
than 1,000 shareholders is required by law to contract out the maintenance of
its shareholder register to an independent entity that meets certain criteria,
in practice this regulation has not always been strictly enforced. Because of
this lack of independence, management of a company may be able to exert
considerable influence over who can purchase and sell the company's shares by
illegally instructing the registrar to refuse to record transactions in the
share register. This practice may prevent the Fund from investing in the
securities of certain Russian companies deemed suitable by the Investment
Manager. Further, this also could cause a delay in the sale of Russian company
securities by the Fund if a potential purchaser is deemed unsuitable, which may
expose the Fund to potential loss on the investment.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from transferring cash
out of the country, withhold portions of interest and dividends at the source,
or impose other taxes, with respect to the Fund's investments in securities of
issuers of that country. There is the possibility of expropriation, cessation of
trading on national exchanges, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could affect investments in securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which the Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally traded. Certain
of these currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid
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unfavorable consequences and to take advantage of favorable developments in
particular nations where from time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services--Custodian"). However, in the absence of willful misfeasance, bad faith
or gross negligence on the part of the Investment Manager, any losses resulting
from the holding of the Fund's portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the Shareholders. No
assurance can be given that the Trustees' appraisal of the risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated 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.
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PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Executive Officers of
the Fund are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of Franklin Administrative Services,
Inc., General Host Corporation, and Templeton Global Investors, Inc.; and
officer and director, trustee or managing general partner, as the case may be,
of most other subsidiaries of Franklin and of 55 of the investment companies in
the Franklin Templeton Group. Age 62.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
HARRIS J. ASHTON
Metro Center
1 Station Place
Stamford, Connecticut
Trustee
Chairman of the Board,
president and chief executive
officer of General Host
Corporation (nursery and craft
centers); and a director of
RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-
S Foods. Age 63.
NICHOLAS F. BRADY*
102 East Dover Street
Easton, Maryland
Trustee
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm), (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Trustee Retired; formerly, credit adviser of the National Bank of Canada,
Toronto. Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Trustee
Farmer; and president of
Clairhaven Investments, Ltd.
and other private investment
companies. Age 79.
S. JOSEPH FORTUNATO
12 Brannick Drive
Madison, New Jersey
Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director
of General Host Corporation. Age 63.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Trustee
President of Galbraith
Properties, Inc. (personal
investment company); director
of Gulfwest Banks, Inc. (bank
holding company) (1995-
present) and Mercantile Bank
(1991-present); vice chairman
of Templeton, Galbraith &
Hansberger Ltd. (1986-1992);
and chairman of Templeton
Funds Management, Inc. (1974-
1991). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Trustee
Consultant, Triangle
Consulting Group; chairman of the board and chief executive officer of Florida
Progress Corporation (1982-February 1990) and director of various of its
subsidiaries; chairman and director of Precise Power Corporation;
executive-in-residence of Eckerd College (1991-present); and a director of
Checkers Drive-In Restaurants, Inc. Age 72.
RUPERT H. JOHNSON, JR.*
777 Mariners Island Blvd.
San Mateo, California
Trustee Executive vice president and director of Franklin Resources, Inc.;
president and director of Franklin Advisers, Inc.; executive vice president and
director of Franklin Templeton Distributors, Inc.; director of Franklin
Administrative Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin, and
of 42 of the investment companies in the Franklin Group of Funds. Age 55.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, DE
Trustee
Director or trustee of various civic associations; formerly, economic analyst,
U.S.
Government. Age 66.
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland 20817
Trustee
Chairman of White River
Corporation (information
services); director of Fund
America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; and formerly held the following
positions: chairman of Hambrecht and Quist Group; director of H&Q Healthcare
Investors; and president of the National Association of Securities Dealers, Inc.
Age 67.
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, FL
Trustee
Manager of personal
investments (1978-present); chairman and chief executive officer of Landmark
Banking Corporation (1969-1978); financial vice president of Florida Power and
Light (1965- 1969); vice president of The Federal Reserve Bank of Atlanta
(1958-1965); and a director of various other business and nonprofit
organizations. Age 66.
DANIEL L. JACOBS
500 East Broward Blvd.
Suite 1400
Fort Lauderdale, Florida
President
Executive vice president and
director of Templeton
Investment Counsel, Inc.;
director of Templeton Global
Investors, Inc.; and president
or vice president of certain
of the Templeton Funds. Age
43.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
JOHN R. KAY
500 East Broward Blvd.
Suite 1400
Fort Lauderdale, Florida
Vice President Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors,
Inc. and Templeton Worldwide,
Inc.; assistant vice president
of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller
of the Keystone Group, Inc.
Age 55.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President President and director of Templeton, Galbraith & Hansberger
Ltd.; director of global equity research for Templeton Worldwide, Inc.;
president or vice president of the Templeton Funds; formerly, investment
administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985).
Age 35.
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, CA
Vice President
Senior vice president, treasurer and chief financial officer of Franklin
Resources, Inc.; director and executive vice president of Templeton Investment
Counsel, Inc.; director, president and chief executive officer of Templeton
Global Investors, Inc.; director or trustee, president or vice president of
various Templeton Funds; accountant, Arthur Andersen & Company (1982-1983); and
a member of the International Society of Financial Analysts and the American
Institute of Certified Public Accountants.
Age 35.
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THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, FL
Secretary Senior vice president of Templeton Global Investors, Inc.; vice
president of Franklin Templeton Distributors, Inc.; secretary of the Templeton
Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill,
Hollingdale & Page (1988); and judicial clerk, U.S. District Court (Eastern
District of Virginia) (1984- 1985). Age 42.
JAMES R. BAIO
500 East Broward Blvd.
Suite 1400
Fort Lauderdale, FL
Treasurer Certified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager, Ernst &
Young (certified public accountants) (1977-1989). Age 41.
JACK L. COLLINS
700 Central Avenue
St. Petersburg, FL
Assistant Treasurer Assistant treasurer, Templeton Funds; assistant vice
president of Franklin Templeton Investor Services, Inc.; formerly, partner,
Grant Thornton, independent public accountants. Age 66.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price &
Rhoads. Age 50.
* These are Trustees who are "interested persons" of the Fund
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
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<PAGE>
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees, except
that Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
TRUSTEE COMPENSATION
All of the Fund's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or trustee who is an officer, trustee or employee of the
Investment Manager or its affiliates. Each Templeton Fund pays its independent
directors and trustees and Mr. Brady an annual retainer and/or fees for
attendance at Board and Committee meetings, the amount of which is based on the
level of assets in each fund. Accordingly, the Fund currently pays the
independent Trustees and Mr. Brady an annual retainer of $100.00. The
independent Trustees and Mr. Brady are reimbursed for any expenses incurred in
attending meetings, paid pro rata by each Franklin Templeton Fund in which they
serve. No pension or retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the
Trustees by the Fund and by all investment companies in the
Franklin Templeton Group:
<TABLE>
<CAPTION>
Number of Total Compensation
Name Aggregate Franklin Templeton from all Funds in
of Compensation Fund Boards on which Franklin Templeton
TRUSTEE FROM THE FUND* TRUSTEE SERVES GROUP*
<S> <C> <C> <C>
Harris J. Ashton $1,525 54 $319,925
Nicholas F. Brady 1,525 23 86,125
F. Bruce Clarke 2,025 19 95,275
Hasso-G von Diergardt-Naglo 1,525 19 75,275
S. Joseph Fortunato 1,525 56 336,065
John Wm. Galbraith 0 22 0
Andrew H. Hines, Jr. 2,025 23 106,125
Betty P. Krahmer 1,525 23 75,275
Gordon S. Macklin 1,525 51 303,695
Fred R. Millsaps 2,025 23 106,125
</TABLE>
- 16 -
<PAGE>
- --------------
* For the fiscal year ended December 31, 1994.
- 17 -
<PAGE>
PRINCIPAL SHAREHOLDER
As of March 31, 1995, TFAC, on behalf of the Separate Accounts, owned
of record 594,635 Shares (100%) of the Fund. However, TFAC will exercise voting
rights attributable to these Shares in accordance with voting instructions
received by holders of the Annuities or any other policies for which the Fund
serves as the underlying investment vehicle. To this extent, TFAC does not
exercise control over the Fund by virtue of the voting rights from its ownership
of Fund Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is
Templeton Investment Counsel, Inc., a Florida corporation with offices in Fort
Lauderdale, Florida. The Investment Management Agreement, dated October 30,
1992, was approved by shareholders of the Fund on October 30, 1992, and was
amended and restated on February 25, 1994. It was last approved by the Board of
Trustees, including a majority of the Trustees who were not parties to the
Agreement or interested persons of any such party, at a meeting on February 24,
1995, and will continue through April 30, 1996. The Management Agreement will
continue from year to year thereafter, subject to approval annually by the Board
of Trustees or by vote of the holders of a majority of the outstanding shares of
the Fund (as defined in the 1940 Act) and also, in either event, with the
approval of a majority of those Trustees who are not parties to the Management
Agreement or interested persons of any such party in person at a meeting called
for the purpose of voting on such approval.
The Management Agreement requires the Investment Manager to manage the
investment and reinvestment of the Fund's assets. The Investment Manager is not
required to furnish any overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses are paid by
some investment advisers of some other investment companies.
The Management Agreement provides that the Investment Manager will
select brokers and dealers for execution of the Fund's portfolio transactions
consistently with the Fund's brokerage policy. (See "Brokerage Allocation.")
Although services provided by broker-dealers in accordance with the Fund's
brokerage policy may incidentally help reduce the expenses of or otherwise
benefit the Investment Manager and other investment advisory clients of the
Investment Manager and of its affiliates, as well as the Fund, the value of any
such services is indeterminable and is not used to offset the Investment
Manager's fee.
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<PAGE>
When the Investment Manager determines to buy or sell the same
securities for the Fund that the Investment Manager or certain of its affiliates
have selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
placed for execution by methods determined by the Investment Manager, with
approval by the Fund's Board of Trustees, to be impartial and fair, in order to
seek good results for all parties (see "Investment Practices and
Restrictions--Trading Policies"). Records of securities transactions of persons
who know when orders are placed by the Fund are available for inspection at
least four times annually by the compliance officer of the Fund so that the
non-interested Trustees (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Management Agreement provides that the Investment Manager shall
have no liability to the Fund or any Shareholder of the Fund for any error of
judgment, mistake of law, or any loss arising out of any investment or other act
or omission in the performance by the Investment Manager of its duties under the
Management Agreement, or for any loss or damage resulting from the imposition by
any government of exchange control restrictions which might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments to
which such assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence in the
performance of the Investment Manager's duties or by reason of reckless
disregard of its obligations and duties under the Management Agreement. The
Management Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Fund at any time without payment of any
penalty on 60 days' written notice, with the approval of a majority of the
Fund's Trustees in office at the time or by vote of a majority of the
outstanding Shares of the Fund (as defined in the 1940 Act).
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager
a monthly fee equal on an annual basis to 0.50% of its average daily net assets,
reduced to 0.45% of such net assets in excess of $200,000,000 and further
reduced to 0.40% of such net assets in excess of $1,300,000,000. During the
fiscal years ended December 31, 1994, 1993, and 1992, the Investment Manager
received fees of $66,500, $54,283 and $50,260, respectively.
THE INVESTMENT MANAGER. The Investment Manager is an
indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"), a publicly traded company whose shares are listed
- 19 -
<PAGE>
on the NYSE. Charles B. Johnson (a Trustee and officer of the
Fund), Rupert H. Johnson, Jr. (a Trustee of the Fund), and R.
Martin Wiskemann are principal shareholders of Franklin and own,
respectively, approximately 20%, 16% and 9.2% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr.
are brothers.
BUSINESS MANAGER. Templeton Funds Annuity Company (the "Business
Manager"), 700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida
33733-8030, telephone (813) 823-8712, performs certain administrative functions
as Business Manager for the Fund pursuant to a Business Management Agreement
dated October 30, 1992. Prior to January 1, 1992, these administrative functions
were performed by Templeton Funds Management, Inc.
The Business Management Agreement requires the Business Manager to be
responsible for various activities on behalf of the Fund, including:
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
requirements under the 1940 Act and regulations promulgated
thereunder, with state regulatory requirements, maintaining
books and records for the Fund (other than those maintained by
the custodian), and filing tax reports, other than the Fund's
income tax returns; and
- 20 -
<PAGE>
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 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
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<PAGE>
generally domestically, and frequently abroad, does not actually hold
certificates for the securities in its custody, but instead has book records
with domestic and foreign securities depositories, which in turn have book
records with the transfer agents of the issuers of the securities.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C, 20005 is legal counsel for the Fund.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Fund. Its audit services comprise examination of the Fund's financial statements
and review of the Fund's filings with the Securities and Exchange Commission
("SEC") and the Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on December 31.
Shareholders will be provided at least semiannually with reports showing the
portfolio of the Fund and other information, including an annual report with
financial statements audited by independent accountants. Shareholders who would
like to receive an interim quarterly report may phone Fund Information
Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Management Agreement provides that the Investment Manager is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of the portfolio transactions of the Fund and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable security price, taking into account the
other provisions hereinafter set forth. The
determination of what may constitute best execution and
price in the execution of a securities transaction by a
broker involves a number of considerations, including,
without limitation, the overall direct net economic
result to the Fund (involving both price paid or
received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
- 22 -
<PAGE>
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
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<PAGE>
account the Fund's policies that: (i) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is
more beneficial to the Fund to obtain a favorable price than
to pay the lowest commission and (ii) the quality,
comprehensiveness and frequency of research studies which are
provided for the Investment Manager are useful to the
Investment Manager in performing its advisory services under
its Management Agreement with the Fund. Research services
provided by brokers to the Investment Manager are considered
to be in addition to, and not in lieu of, services required to
be performed by the Investment Manager under its Management
Agreement with the Fund. Research furnished by brokers through
whom the Fund effects securities transactions may be used by
the Investment Manager for any of its accounts, and not all
such research may be used by the Investment Manager for the
Fund. When execution of portfolio transactions is allocated to
brokers trading on exchanges with fixed brokerage commission
rates, account may be taken of various services provided by
the broker, including quotations outside the United States for
daily pricing of foreign securities held in the Fund's
portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange shall be executed
with primary market makers acting as principal except where,
in the judgment of the Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
5. Sales of shares of investment companies registered
under the 1940 Act which have either the same
investment adviser, or an investment adviser affiliated
with the Investment Manager, made by a broker is one
factor among others to be taken into account in
deciding to allocate portfolio transactions (including
agency transactions, principal transactions, purchases
in underwritings or tenders in response to tender
offers) for the account of the Fund to that broker;
provided that the broker shall furnish "best execution"
as defined in paragraph 1 above, and that such
allocation shall be within the scope of the Fund's
other policies as stated above; and provided further,
that in every allocation made to a broker in which such
sale of shares is taken into account there shall be no
increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set
- 24 -
<PAGE>
forth in paragraph 3 above, on the basis of best execution
alone or best execution plus research services, without taking
account of or placing any value upon such sale of shares.
Insofar as known to the Fund's management, no Trustee or officer of the
Fund, nor the Investment Manager or any person affiliated with any of them, has
any material direct or indirect interest in any broker employed by or on behalf
of the Fund. The total brokerage commissions on portfolio transactions for the
Fund during the fiscal years ended December 31, 1994, 1993, and 1992 were
$19,000, $12,220 and $13,000, respectively. All portfolio transactions are
allocated to broker-dealers only when their prices and execution, in the
judgment of the Investment Manager, are equal to the best available within the
scope of the Fund's policies. There is no fixed method used in determining which
broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's
Shares may be purchased and redeemed. See "Sale and Redemption
of Shares".
The net asset value of the Fund's Shares is determined as of the
scheduled closing time of the NYSE (generally 4:00 p.m., New York time), every
Monday through Friday (exclusive of national business holidays), except on days
during which no Shares are tendered for redemption and no order to purchase or
sell Shares is received by the Fund. The Fund's offices will be closed and net
asset value will not be calculated on those days on which the NYSE is closed,
which currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Trading in securities on European and Far Eastern exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the NYSE is open. Trading of European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every New York business day. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. The Fund calculates net
asset value per Share, and therefore effects sales, redemptions and repurchases
of its Shares, as of the close of the NYSE once on each day on which that
Exchange is open. Such calculation does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of those
foreign
- 25 -
<PAGE>
securities, they will be valued at fair market value as determined by the
management and approved in good faith by the Board of Trustees.
The Board of Trustees may establish procedures under which the Fund may
suspend the right of redemption for the whole or any part of any period during
which (1) the NYSE is closed other than for customary weekend and holiday
closings, (2) trading on the NYSE is restricted, (3) an emergency exists, as
determined under rules and regulations of the SEC, as a result of which disposal
of securities owned by the Fund is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (4) for such other period as the SEC may by order permit for the
protection of the holders of the Fund's Shares. Any subscription may be rejected
by the Fund.
TAX STATUS
The Fund intends to qualify and elect to be taxed as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In any fiscal year in which the Fund so qualifies and
distributes at least 90% of its investment company taxable income, the Fund will
be relieved of federal income tax on the investment company taxable income and
net capital gains distributed to its Shareholders, the Separate Accounts.
However, because the Separate Accounts are not separate entities and their
operations form a part of TFAC, TFAC will be liable for any federal income taxes
which become payable with respect to the income of the Separate Accounts. The
Separate Accounts will bear their allocable share of such liabilities. Under
current law, no item of dividend income, interest income or realized capital
gain of the Separate Accounts attributable, at a minimum, to appreciation after
January 1, 1985, will be taxed to TFAC to the extent it is applied to increase
the reserves under the Contracts.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, the Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, the Fund intends to make its distributions
in accordance with the calendar year distribution requirement. A distribution
will be treated as paid
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<PAGE>
on December 31 of the calendar if it is declared by the Fund during October,
November, or December of that year to Shareholders of record on a date in such a
month and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (a Separate Account) in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. The excise tax provisions
described above will not apply in a given calendar year to the Fund if all of
its Shareholders at all times during the calendar year are segregated asset
accounts of life insurance companies where the shares are held in connection
with variable contracts. (For this purpose, any shares of a regulated investment
company attributable to an investment not exceeding $250,000 made in connection
with the organization of the company is not taken into account.) Accordingly, if
this condition regarding the ownership of Shares of the Fund is met, the excise
tax will be inapplicable to the Fund even if the calendar year distribution
requirement is not met.
The Fund may invest in shares of foreign corporation which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition,
- 27 -
<PAGE>
another election may be available that would involve marking to market the
Fund's PFIC shares at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund could, in
limited circumstances, incur nondeductible interest charges. The Fund's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Income received by the Fund from sources within a foreign country may
be subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain types of financial contracts, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains or losses, referred to under the
Code as "Section 988" gains or losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its Shareholders as
ordinary income.
Debt securities purchased by the Fund may be treated for federal income
tax purposes as having original issue discount. Original issue discount
essentially represents interest for federal income tax purposes and can be
defined generally as the excess of the stated redemption price at maturity over
the issue price. Original issue discount, whether or not any income is actually
received by the Fund, is treated for U.S. federal income tax purposes as
ordinary income earned by the Fund, and therefore
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<PAGE>
is subject to the distribution requirements of the Code. Generally, the amount
of original issue discount included in the income of the Fund each year is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued but unpaid interest.
Some of the debt securities may be purchase by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Certain futures contracts in which the Fund may invest are "section
1256 contacts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses ("60-40"),
except for certain foreign currency gains and losses which will be treated as
ordinary in character. Also, section 1256 contracts held by the Fund at the end
of each taxable year (and, in some cases, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized.
The hedging transactions undertaken by the Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the
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<PAGE>
elections may operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The requirements under the Code relating to the qualification of the
Fund as a regulated investment company may limit the extent to which the Fund
may engage in futures contracts.
Distributions of any investment company taxable income are treated as
ordinary income for tax purposes in the hands of the Separate Accounts, even
though distributed as additional Shares of the Fund rather than in cash.
Similarly, net capital gains (the excess of any net long-term capital gains over
net short-term capital losses) will be, to the extent distributed by the Fund
and designated by the Fund as capital gain dividends, treated as long-term
capital gains in the hands of the Separate Accounts, even though distributed as
additional Shares of the Fund, regardless of the length of time the Separate
Accounts may have held the Shares.
To comply with regulations under Section 817(h) of the Code, the Fund
must diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, securities of a single issuer
are treated as one investment. However, for this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any security issued, guaranteed or insured (to the extent
so guaranteed or insured) by the United States or an instrumentality of the
United States is treated as a U.S.
Government security.
Reference is made to the prospectus for the Separate Account for
information regarding the federal income tax treatment of distributions to the
Separate Account.
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DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights, so that the holders of a
plurality of the Shares voting for the election of Trustees at a meeting at
which 50% of the outstanding Shares are present can elect all the Trustees and,
in such event, the holders of the remaining Shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees.
The Declaration of Trust provides that the holders of not less than
two-thirds of the outstanding Shares of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares of the
Fund.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Fund for acts or obligations of the Fund, which are
binding only on the assets and property of the Fund. The Declaration of Trust
provides for indemnification out of Fund property for all loss and expense of
any Shareholder held personally liable for the obligations of the Fund. The risk
of a Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations and, thus, should be considered remote.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Fund will not be advertised unless accompanied by comparable
performance information for a separate account to which the Fund offers its
Shares.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return for periods
in excess of one year or the total return for periods less than one year of a
hypothetical investment in the Fund over a period of one year (or, if less, up
to the life of the Fund) calculated pursuant to the following formula: P(1 + T)n
= ERV (where P = a hypothetical initial payment of $1,000, T = the average
annual total return for periods of one year or more or the total return for
periods of less than one year, n = the
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number of years, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). All total return figures reflect
the deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. The Fund's
average annual total return for the one- and five-year periods ended December
31, 1994 and for the period from February 16, 1988 (commencement of operations)
through December 31, 1994 were - 4.06%, 11.39% and 13.65%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Fund's results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Quotations of total return for the Fund will not take into account
charges and deductions against any separate accounts to which the Fund's Shares
are sold or charges and deductions against Templeton Retirement Annuities,
Templeton Immediate Variable Annuities, or any other participations or policies
for which the Fund may serve as the underlying investment vehicle, although
comparable performance information for a separate account will take such charges
into account. Performance information for the Fund reflects only the performance
of a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.
From time to time, the Fund and the Investment Manager may also refer
to the following information:
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<PAGE>
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's
investment management philosophy and approach,
including its worldwide search for undervalued or
"bargain" securities and its diversification by
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<PAGE>
industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and
long-term investing, including the following:
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."
- --------
* Sir John Templeton sold the Templeton organization to Franklin
Franklin Resources, Inc. in October, 1992 and resigned from the Fund's
Board on April 16, 1995. He is no longer involved with the
investment management process.
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<PAGE>
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."
In addition, the Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders in
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated December 31, 1994 are incorporated herein by reference.
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