<PAGE>
A MUTUAL FUND SEEKING LONG TERM GROWTH
TEMPLETON VARIABLE ANNUITY FUND
PROSPECTUS
MAY 1, 1995
AS AMENDED OCTOBER 4, 1995
TEMPLETON VARIABLE ANNUITY FUND (the "Fund") has for its investment
objective long term capital growth. It pursues this objective through a
flexible policy of investing primarily in stocks and debt obligations of
companies and governments of any nation, including the United States.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing.
A STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED IN ITS
ENTIRETY BY REFERENCE IN AND MADE A PART OF THIS PROSPECTUS. THIS STATEMENT
IS AVAILABLE WITHOUT CHARGE UPON REQUEST TO THE FUND AT THE ADDRESS GIVEN
BELOW OR BY CALLING THE ANNUITY DEPARTMENT AT (800) 774-5001 OR (813)
823-8712.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
Investors are advised to read and retain this Prospectus for future
reference.
TEMPLETON VARIABLE ANNUITY FUND
P.O. Box 33030
St. Petersburg, Florida 33733-8030
Telephone: (800) 774-5001
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FINANCIAL HIGHLIGHTS .............. T-2
GENERAL DESCRIPTION ............... T-3
INVESTMENT OBJECTIVE AND POLICIES T-3
Stock Index Futures Contracts ... T-3
Loans of Portfolio Securities ... T-4
Repurchase Agreements ............ T-4
Commercial Paper ................. T-4
Debt Securities .................. T-4
Depositary Receipts .............. T-5
RISK FACTORS ...................... T-5
SALE AND REDEMPTION OF SHARES .... T-7
Net Asset Value .................. T-7
MANAGEMENT OF THE FUND ............ T-7
Trustees and Officers ............ T-7
Investment Manager ............... T-7
Business Manager ................. T-8
Expenses ......................... T-8
Brokerage Commissions ............ T-8
GENERAL INFORMATION ............... T-8
Capitalization ................... T-8
Voting Rights .................... T-8
Dividends and Distributions ..... T-9
Federal Tax Information .......... T-9
Inquiries ........................ T-9
Performance Information .......... T-9
Statements and Reports ........... T-10
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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FINANCIAL HIGHLIGHTS
The following statement of Financial Highlights has been audited by
McGladrey & Pullen, LLP, independent certified public accountants, whose
report thereon, which is incorporated by reference, appears in the Fund's
1994 Annual Report to Shareholders. This statement should be read in
conjunction with the other financial statements and notes thereto included in
the Fund's 1994 Annual Report to Shareholders, which contains further
information about the Fund's performance, and which is available to
Shareholders upon request and without charge.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of year $ 19.50 $ 14.99 $ 15.20 $ 11.76 $ 13.63 $ 10.26 $ 10.00
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
Income from investment operations:
Net investment income ............. .24 .24 .37 .31 .27 .22 .12
Net realized and unrealized gain
(loss) ........................... (.96) 5.31 1.16 3.58 (1.80) 3.42 .24
---------- ---------- --------- --------- ----------- --------- ----------
TOTAL FROM INVESTMENT
OPERATIONS ...................... (.75) 5.55 1.53 3.89 (1.53) 3.64 .36
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
Distributions:
Dividends from net investment
income ........................... -- (.24) (.39) (.29) (.26) (.23) (.10)
Distributions from net realized
gains ............................ (.79) (.80) (1.33) (.16) (.08) (.04) --
Distributions from other sources -- -- (.02) -- -- -- --
---------- ---------- --------- --------- ----------- --------- ----------
TOTAL DISTRIBUTIONS ............ (.79) (1.04) (1.74) (.45) (.34) (.27) (.10)
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
Change in net asset value for the
year .............................. (1.54) 4.51 (.21) 3.44 (1.87) 3.37 .26
---------- ---------- --------- --------- ----------- --------- ----------
NET ASSET VALUE, END OF YEAR ..... $ 17.96 $ 19.50 $ 14.99 $ 15.20 $ 11.76 $ 13.63 $ 10.26
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
TOTAL RETURN+ ..................... (4.06)% 37.24% 10.17% 33.29% (11.25)% 35.64% 3.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) .. $ 12,569 $ 12,698 $ 9,258 $ 9,147 $ 6,185 $ 6,317 $ 3,649
Ratio of expenses to average net
assets ............................ 1.49% 1.37% 1.52% 1.62% 2.00% 2.22% 3.01%**
Ratio of expenses, net of
reimbursement, to average net
assets ............................ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of net investment income to
average net assets ................ 1.09% 1.36% 2.06% 2.33% 2.24% 2.21% 2.24%**
Portfolio turnover rate ........... 19.85% 22.13% 27.86% 25.84% 24.12% 8.89% 8.85%
- ----------------------------------- ---------- ---------- --------- --------- ----------- --------- ----------
<FN>
*Period from February 16, 1988 (commencement of operations) to December 31,
1988.
**Annualized.
+Total return figures do not include charges applied under the Annuity
Contracts. Inclusion of such charges would reduce the total return figures
for all periods shown.
</FN>
</TABLE>
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GENERAL DESCRIPTION
THE FUND: Templeton Variable Annuity Fund (the "Fund") is a business trust
organized under the laws of Massachusetts on February 5, 1987. The Fund is
registered under the Investment Company Act of 1940 (the "1940 Act") as an
open-end diversified series investment company. Shares of the Fund 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 for use as the sole funding vehicle for Templeton
Retirement Annuities and Templeton Immediate Variable Annuities (the
"Annuities"). Shares of the Fund may in the future be sold in connection with
other insurance products or as otherwise permitted by applicable regulations
and regulatory interpretations.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long term capital growth. It pursues
this objective through a flexible policy of investing primarily in stocks and
debt obligations of companies and governments of any nation. Any income
realized will be incidental. The investment objective and investment policy
may not be changed without shareholder approval.
The Fund believes that in a world where investment opportunities change
rapidly, not only from company to company and from industry to industry, but
also from one national economy to another, its objective is more likely to be
achieved through an investment policy that is flexible and mobile.
Accordingly, the Fund will seek investment opportunities in all types of
securities issued by companies or governments of any nation. Although the
Fund will usually invest in common stocks, it also has the flexibility to
invest in preferred stocks and certain debt securities, rated or unrated,
such as convertible bonds and bonds selling at a discount (see "Debt
Securities"). Except for the restrictions dealing with concentration and
diversification of the Fund's investments described in the following
paragraph, there are no restrictions limiting the Fund's investments in
issuers of any nation. The Fund may, for hedging purposes, purchase and sell
stock index futures contracts (see "Stock Index Futures Contracts") and may
lend its portfolio securities (see "Loans of Portfolio Securities").
Notwithstanding its investment objective of capital growth, the Fund may on
occasion, for defensive purposes, without limitation as to amount, invest in
and earn income on debt obligations of the United States government or its
political subdivisions (see "Debt Securities"); hold cash and time deposits
with banks in United States currency or currency of any major nation;
purchase from banks or broker-dealers U.S. government obligations with a
simultaneous agreement by the seller to repurchase them within no more than
seven days at the original purchase price plus accrued interest (see
"Repurchase Agreements"); or invest in commercial paper (see "Commercial
Paper").
As to 75% of its total assets, the Fund's investments are diversified
among the securities issued by different companies and foreign governments to
the extent that no more than 5% of its total assets may be invested in
securities issued by any one company or by any one government, other than
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. The Investment Manager generally selects investments for
the Fund from among many different industries, choosing those investments
which (except defensive instruments) in its view have sound economic growth
potential and are in industries it believes to be productive and beneficial.
Although the Investment Manager may invest up to 25% of the Fund's assets in
a single industry, it has no present intention of doing so. The Fund's
investment restrictions (see "Investment Restrictions" in the Statement of
Additional Information ("SAI")) limit the Fund to investing no more than 10%
of its assets in securities with a limited trading market. The Fund may
borrow amounts equal to no more than 5% of the value of its assets. The
Fund's investment objective and investment policy described above, as well as
the fundamental investment restrictions described in the SAI, cannot be
changed without shareholder approval. The Fund invests for long term growth
of capital and does not intend to place emphasis upon short-term trading
profits. Accordingly, the Fund expects usually to have a portfolio turnover
rate of less than 50%.
The Fund is authorized to use the various investment techniques described
below. Although these strategies are regularly used by some investment
companies and other institutional investors in various markets, some of these
strategies cannot at the present time be used to a significant extent by the
Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
STOCK INDEX FUTURES CONTRACTS: The Fund may purchase and sell stock index
futures contracts with respect to any stock index, provided such contracts
are traded on a recognized stock exchange or board of trade. Such purchases
and sales are for hedging purposes only and are limited to an aggregate
amount not
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exceeding 20% of the Fund's total assets as of the time the contracts are
entered into. A stock index futures contract is an agreement to buy or sell
units of a stock index under which two parties agree to take or make delivery
at a specified future date of an amount of cash based on the difference
between the value of the stock index units at the beginning and at the end of
the contract period.
During or in anticipation of a period of market appreciation, the Fund may
enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the common
stock which the Fund proposes to buy increases in value (in correlation with
the stock index contracted for), the purchase of futures contracts on the
index would result in gains to the Fund which could be offset against rising
prices of such common stock.
During or in anticipation of a period of market decline, the Fund may
"hedge" common stock in its portfolio by selling stock index futures for the
purposes of limiting the exposure of its portfolio to such decline. To the
extent that the Fund's portfolio of securities decreases in value (in
correlation with a given stock index), the net gain from the sale of futures
contracts on that index could substantially reduce the risk to the portfolio.
To the extent the price movements in the relevant markets are not as
anticipated, the costs of such futures transactions will not benefit the
Fund.
When the Fund enters into a stock index futures contract, it must make an
initial deposit, known as "initial margin", as a partial guarantee of its
performance under the contract. As the value of the stock index fluctuates,
either party to the contract may be required to make additional margin
deposits, known as "variation margin", to cover any additional obligation it
may have under the contract. The Fund may not at any time commit more than 5%
of its total assets to initial margin deposits on futures contracts.
LOANS OF PORTFOLIO SECURITIES: The Fund may lend to broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The Fund may terminate the
loans at any time and obtain the return of the securities loaned within one
business day. The Fund will continue to receive any interest or dividends
paid on the loaned securities and will continue to have voting rights with
respect to the securities.
REPURCHASE AGREEMENTS: When the Fund acquires a security from a bank or a
broker-dealer, it may simultaneously enter into a repurchase agreement,
wherein the seller agrees to repurchase the security at a specified time
(generally within seven days) and price. The repurchase price is in excess of
the purchase price by an amount which reflects an agreed-upon rate of return,
which is not tied to the coupon rate on the underlying security. Under the
1940 Act, repurchase agreements are considered to be loans collateralized by
the underlying security and therefore will be fully collateralized. However,
if the seller should default on its obligation to repurchase the underlying
security, the Fund may experience delay or difficulty in exercising its
rights to realize upon the security and might incur a loss if the value of
the security declines, as well as disposition costs in liquidating the
security.
COMMERCIAL PAPER: Commercial paper, in which the Fund may invest for
temporary defensive purposes, must at the date of investment be rated A-1 by
Standard & Poor's Corporation ("S&P") or Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, be issued by a company which at
the date of investment has an outstanding debt issue rated AAA or AA by S&P
or Aaa or Aa by Moody's.
DEBT SECURITIES: 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.
The Fund is authorized to invest in medium or lower quality debt
securities that are rated between BBB and as low as CC by S&P, and between
Baa and as low as Ca by Moody's or, if unrated, are of equivalent investment
quality as determined by the Investment Manager. As an operating policy,
which may be changed by the Board of Trustees without shareholder approval,
the Fund will not invest more than 5% of its total assets in debt securities
rated below BBB by S&P or Baa by Moody's. The Board may consider a change in
this operating policy if, in its judgment, economic conditions change such
that a higher level of investment in high risk, lower quality debt securities
would be consistent with the interests of the Fund and its shareholders. High
risk, lower quality debt securities, commonly referred to as "junk bonds,"
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 and may be in default. Unrated debt securities are
not necessarily
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<PAGE>
of lower quality than rated securities but they may not be attractive to as
many buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by the
Investment Manager to insure, to the extent possible, that the planned
investment is sound.
Debt securities with similar maturities may have different yields,
depending upon several factors, including the relative financial condition of
the issuers. For example, higher yields are generally available from
securities in the lower rating categories of S&P or Moody's. However, the
values of lower-rated securities generally fluctuate more than those of
higher-rated securities.
DEPOSITARY RECEIPTS: The Fund may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and Global Depositary Receipts ("GDRs") (collectively, "Depositary
Receipts"). ADRs are Depositary Receipts typically issued by a U.S. bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a United States corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements
to have its securities traded in the form of Depositary Receipts. In
unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored
and unsponsored programs are generally similar, in some cases it may be
easier to obtain financial information from an issuer that has participated
in the creation of a sponsored program. Accordingly, there may be less
information available regarding issuers of securities underlying unsponsored
programs and there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary Receipts also involve the
risks of other investments in foreign securities, as discussed below. For
purposes of the Fund's investment policies, the Fund's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities.
RISK FACTORS
Shareholders should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in the Fund,
nor can there be any assurance that the Fund's investment objective will be
attained. As with any investment in securities, the value of, and income
from, an investment in the Fund can decrease as well as increase, depending
on a variety of factors which may affect the values and income generated by
the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates. As with any investment in
securities, the value of, and income from, an investment in the Fund, can
decrease as well as increase, depending on a variety of factors which may
affect the values and income generated by the Fund's portfolio securities,
including general market conditions and market factors. In addition to the
factors which affect the value of individual securities, a Shareholder may
anticipate that the value of the Shares of the Fund will fluctuate with
movements in the broader equity and bond markets, as well. A decline in the
stock market of any country in which the Fund is invested may also be
reflected in declines in the price of the Shares of the Fund. Changes in
interest rates will affect the value of the Fund's portfolio and thus its
share price. Increased rates of interest which frequently accompany inflation
and/ or a growing economy are likely to have a negative effect on the value
of the Fund's Shares. Changes in currency valuations will also affect the
price of the Shares of the Fund. History reflects both decreases and
increases in worldwide stock markets, the prevailing rate of interest, and
currency valuations, and these may reoccur unpredictably in the future.
Additionally, investment decisions made by the Investment Manager will not
always be profitable or prove to have been correct.
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 investing in securities of
companies and governments of foreign nations, some of which are referred to
below, which are in addition to the usual risks inherent in domestic
investments.
There is the possibility of expropriation, nationalization or confiscatory
taxation, taxation of income earned in foreign nations or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls
(which may include suspension of the ability to transfer currency from a
given country),
T-5
<PAGE>
foreign investment controls on daily stock market movements, default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in
foreign nations. Some countries may withhold portions of interest and
dividends at the source. In addition, in many countries there is less
publicly available information about issuers than is available in reports
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. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights,
pursue legal remedies, and obtain judgments in foreign courts.
Prior governmental approval of foreign investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by
the charters of individual companies in developing countries to prevent,
among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by
foreign investors may require governmental registration and/or approval in
some developing countries. The Fund could be adversely affected by delays in
or a refusal to grant any required governmental regulation or approval for
such repatriation.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may
continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also have been and may continue to be adversely affected by
economic conditions in the countries with which they trade.
Commission rates in foreign countries, which are sometimes fixed rather
than subject to negotiation as in the United States, are likely to be higher.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements
have been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Delays in settlement could
result in temporary periods when assets of the Fund are uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible
liability to the purchaser. In many foreign countries, there is less
government supervision and regulation of business and industry practices,
stock exchanges, brokers and listed companies than in the United States.
There is an increased risk, therefore, of uninsured loss due to lost, stolen,
or counterfeit stock certificates. In addition, the foreign securities
markets of many of the countries in which the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in
the United States. The Fund may invest in Eastern European countries, which
involves special risks that are described under "Risk Factors" in the SAI.
The Fund usually effects currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the Fund converts assets from one currency to another.
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 to which such assets may be exposed
from political acts of foreign governments and the higher costs of foreign
settlement and depositories (see "Investment Management and Other
Services--Custodian" in the SAI). 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.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may
not be available for a particular contract when the Fund seeks to offset
adverse market movements by reducing or eliminating a particular futures
position. In addition, there may be an imperfect correlation between
movements in the securities included in the index and movements in the
securities in the Fund's portfolio. Successful use of stock index futures
contracts is further dependent on the Investment Manager's ability to predict
correctly movements in the direction of both the stock markets and the
futures markets and no assurance can be given that its judgment in these
respects will be correct.
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<PAGE>
SALE AND REDEMPTION OF SHARES
Shares of the Fund are sold only to TFAC to be held by separate accounts
for use as the funding vehicle for the Annuities. Individuals may not
purchase shares directly from the Fund. Please read the prospectus for the
separate account for more information on the purchase of Fund Shares.
Shares of the Fund are sold and redeemed at their net asset value next
determined after receipt of a purchase or redemption order. No sales or
redemption charge is made. The value of Shares redeemed may be more or less
than their cost, depending upon the market value of the portfolio securities
at the time of redemption. Payment for Shares redeemed will be made as soon
as practicable after receipt, but in no event later than seven days after
tender, except that the Fund may suspend the right of redemption during any
period when trading on the New York Stock Exchange ("NYSE") is restricted or
the NYSE is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission as a result of
which disposal of portfolio securities or valuation of net assets is not
reasonably practicable, and whenever the Securities and Exchange Commission
has by order permitted such suspension or postponement for the protection of
shareholders. The Fund acts as its own underwriter and transfer agent.
NET ASSET VALUE: 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) on each day the NYSE is open for trading (except on days during which
no Shares are tendered for redemption and no order to purchase or sell Shares
is received by the Fund), by dividing the value of the Fund's securities plus
any cash and other assets (including accrued interest and dividends
receivable) less all liabilities (including accrued expenses) by the number
of Shares outstanding, the result being adjusted to the nearest whole cent. A
security listed or traded on a recognized stock exchange or NASDAQ is valued
at its last sale price on the principal exchange on which the security is
traded. The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange on which it is
traded, or as of the scheduled closing of the NYSE (generally 4:00 p.m., New
York time), if that is earlier, and that value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the current bid and asked
price is used. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of the NYSE, and will therefore not be reflected
in the computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Trustees. All other securities for
which over-the-counter market quotations are readily available are valued at
the mean between the current bid and asked price. Securities for which market
quotations are not readily available and other assets are valued at fair
value as determined by the management and approved in good faith by the Board
of Trustees. Futures contracts are valued using the last sale price on that
day or, in the absence of such a price, fair value as determined by the
management and approved in good faith by the Board of Trustees.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS: The Fund is managed by its Board of Trustees which
may exercise all powers not required by statute, the Declaration of Trust or
the By-laws to be exercised by its Shareholders. Information relating to the
Trustees and executive officers is set forth under the heading "Management of
the Fund" in the SAI.
INVESTMENT MANAGER: The Investment Manager of the Fund is Templeton
Investment Counsel, Inc., a Florida corporation with offices at Broward
Financial Center, Ft. Lauderdale, Florida 33394-3091. The Investment Manager
manages the investment and reinvestment of the Fund's assets. The Investment
Manager is an indirect wholly owned subsidiary of Franklin Resources, Inc.
("Franklin"). Through its subsidiaries, Franklin is engaged in various
aspects of the financial services industry. The Investment Manager and its
affiliates serve as advisers for a wide variety of public investment mutual
funds and private clients in many nations. The Templeton organization has
been investing globally over the past 52 years and, with its affiliates,
provides investment management and advisory services to a worldwide client
base, including over 4.3 million mutual fund shareholders, foundations,
endowments, employee benefit plans and individuals. The Investment Manager
and its affiliates have approximately 4,100 employees in ten different
countries, including the United States, Australia, Scotland, Germany, Hong
Kong, Luxembourg, Bahamas, Singapore, Canada and Russia.
The Investment Manager uses a disciplined, long-term approach to value
oriented global and international investing. It has an extensive global
network of investment research sources. Securities are
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selected for the Fund's portfolio on the basis of fundamental
company-by-company analysis. Many different selection methods are used for
different funds and clients and these methods are changed and improved by the
Investment Manager's research on superior selection methods.
The Investment Manager does not furnish any other services or facilities
for the Fund, although such expenses are paid by some investment advisers of
other investment companies. As compensation for its services, the Fund pays
the Investment Manager a fee, which during the most recent fiscal year,
represented 0.50% of its average daily net assets. The lead portfolio manager
for the Fund is Mark R. Beveridge. Mr. Beveridge, Vice President of the
Investment Manager, joined the Templeton organization in 1985. He has
responsibility for the industrial component and Latin American bank
industries and has market coverage of Thailand, Philippines and the Andean
Pact nations. Prior to joining the Templeton organization, Mr. Beveridge was
a principal with a financial accounting software firm based in Miami,
Florida. He has a Bachelors Degree in Business Administration with emphasis
in finance from the University of Miami. Lauretta A. Reeves, Vice President
of the Investment Manager, and Howard J. Leonard, Senior Vice President of
the Investment Manager, exercise secondary portfolio management
responsibilities. Ms. Reeves joined the Templeton organization in 1987 as an
equity trader and moved into the research group in 1989. She has research
responsibility for the chemical, medical supply and European and Asian
banking sectors, as well as the coverage of the Belgian market. Prior to
joining the Templeton organization, Ms. Reeves was manager of equity trading
for First Equity Corporation of Florida, a regional brokerage firm.
Previously, she worked in similar positions with two other brokerage houses.
She received her Masters in Business Administration from Nova University and
a B.A. in Business Administration with high honors from Florida International
University. Mr. Leonard has research responsibilities for the global forest
products, money management and airline industries, and coverage of Indonesia,
Switzerland, Brazil and India. Prior to joining the Templeton organization in
1989, Mr. Leonard was director of investment research at First Pennsylvania
Bank, where he was responsible for equity and fixed income research
activities and its proxy voting service for large pension plan sponsors. He
also previously worked at Provident National Bank as a security analyst. Mr.
Leonard holds a B.B.A. in Finance and Economics from Temple University.
Further information concerning the Investment Manager is included under the
heading "Investment Management and Other Services" in the SAI.
BUSINESS MANAGER: Templeton Funds Annuity Company, 700 Central Avenue,
P.O. Box 33030, St. Petersburg, Florida 33733-8030, telephone (813) 823-8712
(the "Business Manager"), provides certain administrative facilities and
services for the Fund, including payment of salaries of Fund officers,
preparation and maintenance of books and records, daily pricing of the Fund's
investment portfolio, filing of tax reports, preparation of financial reports
and monitoring compliance with regulatory requirements. For its services, the
Business Manager receives a monthly fee equivalent to 0.15% of the Fund's
average daily net assets during the year, reduced to 0.135% of such assets in
excess of $200,000,000, to 0.10% of such assets in excess of $700,000,000 and
0.075% of such assets in excess of $1,200,000,000.
EXPENSES: For the fiscal year ended December 31, 1994, expenses (net of
reimbursement by the Business Manager) amounted to 1.0% of the Fund's average
daily net assets.
BROKERAGE COMMISSIONS: The Fund's brokerage policies are described under
the heading "Brokerage Allocation" in the SAI. The Fund's brokerage policies
provide that the receipt of research services from a broker is a factor which
may be taken into account in allocating securities transactions as long as
the prices and execution provided by the broker equal the best available
within the scope of the Fund's brokerage policies.
GENERAL INFORMATION
CAPITALIZATION: The capitalization of the Fund consists of an unlimited
number of Shares of beneficial interest, par value $0.01 per Share. The Board
of Trustees may, in its discretion, authorize the division of Shares into two
or more series of the Fund without further action by the shareholders.
VOTING RIGHTS: Shareholders of the Fund are given certain rights. Each
Share outstanding entitles the holder to one vote. Massachusetts business
trust law does not require the Fund to hold annual shareholder meetings,
although special meetings of the Fund may be called for purposes such as
electing or removing Trustees, changing fundamental policies or approving the
Investment Management Contract. TFAC is currently and likely will continue to
be the Fund's sole shareholder. However, it will vote its Fund Shares in
accordance with the voting instructions of holders of Templeton Retirement
Annuities, Templeton Immediate Variable Annuities and of any other insurance
participations or policies for which the Fund may serve as the
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underlying investment vehicle. Shares of the Fund, when issued, are fully
paid and non-assessable, fully transferable and redeemable. Shareholders have
no preemptive rights but are entitled to all dividends declared by the Fund's
Trustees. The Shares have non-cumulative voting rights so that 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends normally to pay an annual
dividend representing substantially all of its net investment income and to
distribute any net realized capital gains. In accordance with the direction
of TFAC all income dividends and capital gains distributions paid by the Fund
on its Shares will automatically be reinvested on the payment date in whole
or fractional Shares of the Fund at net asset value as of the record date
unless otherwise requested by TFAC to be paid in cash. The processing for the
reinvestment of dividends may vary from month to month, and does not affect
the amount or value of the Shares acquired. While the payment of dividends
and distributions will decrease the value of each Share, the automatic
reinvestment of such amounts in additional Shares means that the value of
accounts invested in the Fund will not be diminished.
FEDERAL TAX INFORMATION: The Fund intends to qualify and elect to be taxed
as a "regulated investment company" under Subchapter M of the Internal
Revenue Code ("Code"). In any fiscal year in which the Fund so qualifies and
distributes at least 90% of its investment company taxable income, the Fund
generally will be relieved of federal income tax on the investment company
taxable income and net capital gains distributed to shareholders.
Distributions of any investment company taxable income, even when
reinvested in additional Shares, are treated as ordinary income for tax
purposes in the hands of the recipient (Templeton Funds Retirement Annuity
Separate Account and Templeton Immediate Variable Annuity Separate Account
(the "Separate Accounts")). Net capital gains (the excess of any net
long-term capital gains over net short-term capital losses) will, to the
extent distributed and designated by the Fund as "capital gain dividends", be
treated as long term capital gains in the hands of the Separate Accounts,
even when reinvested in additional Shares, regardless of the length of time
the Separate Accounts may have held the Shares. Any distributions that are
not from a Fund's investment company taxable income or net capital gain may
be characterized as a return of capital to shareholders or, in some cases, as
capital gain.
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, all securities of a
given issuer are treated as a single investment. However, 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
for this purpose.
Reference is made to the prospectuses for the Annuities for information
regarding the federal income tax treatment of distributions to Annuitants.
INQUIRIES: Shareholders' inquiries should be addressed to Templeton
Variable Annuity Fund, P.O. Box 33030, St. Petersburg, Florida 33733-8030;
telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION: The Fund may include its total return in
advertisements or reports to Shareholders or prospective investors.
Performance information for the Fund will not be advertised or included in
sales literature unless accompanied by comparable performance information for
a separate account to which the Fund offers its Shares.
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return on a hypothetical investment in
the Fund over a period of 1, 5 and 10 years (or up to the life of the Fund),
will reflect the deduction of the maximum initial sales charge and deduction
of a proportional share of Fund expenses (on an annual basis), and will
assume that all dividends and distributions are reinvested when paid. Total
return may be expressed in terms of the cumulative value of an investment in
the Fund at the end of a defined period of time. Quotations of total return
for the Fund will not take into account charges or deductions against any
separate account to which the Fund's Shares are sold, or charges or
deductions against Templeton Retirement Annuities, Templeton Immediate
Variable Annuities, or any other insurance 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. For a description of the methods used to determine
total return for the Fund, see "Performance Information" in the SAI.
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STATEMENTS AND REPORTS: The Fund's fiscal year ends on December 31. Annual
reports (containing financial statements audited by independent auditors and
additional information regarding the Fund's performance) and semi-annual
reports (containing unaudited financial statements) are sent to Shareholders
each year. Additional copies may be obtained, without charge, upon request to
the Business Manager.
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