A MUTUAL FUND SEEKING LONG TERM GROWTH
TEMPLETON VARIABLE ANNUITY FUND
PROSPECTUS
MAY 1, 1996
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. Investors are advised to
read and retain this Prospectus for future reference.
A Statement of Additional Information ("SAI") dated May 1, 1996, 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. The SAI 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. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF CAPITAL.
TEMPLETON VARIABLE ANNUITY FUND
P.O. Box 33030
St. Petersburg, Florida 33733-8030
Telephone: (800) 774-5001
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS .... T-2
<S> <C>
GENERAL DESCRIPTION ..... T-3
INVESTMENT OBJECTIVE
AND POLICIES ............. T-3
INVESTMENT TECHNIQUES ... T-4
</TABLE>
<TABLE>
<CAPTION>
RISK FACTORS ...................... T-7
<S> <C>
SALE AND REDEMPTION OF SHARES .... T-10
NET ASSET VALUE ................... T-10
MANAGEMENT OF THE FUND ............ T-10
GENERAL INFORMATION ............... T-12
</TABLE>
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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.
T-1
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
1995 Annual Report to Shareholders. This statement should be read in
conjunction with the other financial statements and notes thereto included in
the Fund's 1995 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,
---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988*
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout
the period)
Net asset value,
beginning of year .......... $ 17.96 $ 19.50 $ 14.99 $15.20 $11.76 $ 13.63 $10.26 $10.00
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
Income from investment
operations:
Net investment income ....... .32 .21 .24 .37 .31 .27 .22 .12
Net realized and unrealized
gain (loss) ................. 3.89 (.96) 5.31 1.16 3.58 (1.80) 3.42 .24
---------- ---------- ---------- --------- --------- ----------- --------- ----------
TOTAL FROM INVESTMENT
OPERATIONS ................. 4.21 (.75) 5.55 1.53 3.89 (1.53) 3.64 .36
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
Distributions:
Dividends from net investment
income ...................... (.20) -- (.24) (.39) (.29) (.26) (.23) (.10)
Distributions from net
realized gains .............. (1.35) (.79) (.80) (1.33) (.16) (.08) (.04) --
Distributions from
other sources ............... -- -- -- (.02) -- -- -- --
---------- ---------- ---------- --------- --------- ----------- --------- ----------
TOTAL DISTRIBUTIONS .......... (1.55) (.79) (1.04) (1.74) (.45) (.34) (.27) (.10)
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
Change in net asset value
for the year ................. 2.66 (1.54) 4.51 (.21) 3.44 (1.87) 3.37 .26
---------- ---------- ---------- --------- --------- ----------- --------- ----------
NET ASSET VALUE, END OF YEAR .. $ 20.62 $ 17.96 $ 19.50 $14.99 $15.20 $ 11.76 $13.63 $10.26
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
TOTAL RETURN ................... 25.49% (4.06)% 37.24% 10.17% 33.29% (11.25)% 35.64% 3.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $14,120 $12,569 $12,698 $9,258 $9,147 $ 6,185 $6,317 $3,649
Ratio of expenses to average
net assets ................... 1.06% 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% 1.00%**
Ratio of net investment income
to average net assets ........ 1.62% 1.09% 1.36% 2.06% 2.33% 2.24% 2.21% 2.24%**
Portfolio turnover rate ........ 33.64% 19.85% 22.13% 27.86% 25.84% 24.12% 8.89% 8.85%
- -------------------------------- ---------- ---------- ---------- --------- --------- ----------- --------- ----------
</TABLE>
Footnotes on next page
T-2
*Period from February 16, 1988 (commencement of operations) to December
31, 1988.
**Annualized.
***The Fund's investment manager, Templeton Investment Counsel, Inc. (the
"Investment Manager" or "TICI"), has voluntarily agreed to reduce its
investment management fee to the extent necessary to limit total expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) to 1% of the Fund's average daily net assets until May 1, 1997. If
such fee reduction is insufficient to so limit the Fund's total expenses,
the Fund's business manager, Templeton Funds Annuity Company (the "Business
Manager" or "TFAC") has agreed to reduce its fee and, to the extent
necessary, assume other Fund expenses, so as to so limit the Fund's expenses.
[dagger] 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.
GENERAL DESCRIPTION
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, which it
seeks to achieve 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. There can be no assurance
that the Fund's investment objective will be achieved.
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 generally invests in common stocks, it may also invest in preferred
stocks and certain debt securities (which may include structured
investments), 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
T-3
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 Objectives and Policies" in the SAI)
limit the Fund to investing no more than 10% of its assets in securities with
a limited trading market. As a temporary measure for the purpose of redeeming
its shares, 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%.
INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and 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.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government
securities, which are obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills and bonds, which are direct obligations of
the U.S. Treasury, and Government National Mortgage Association ("GNMA")
certificates, the principal and interest of which the Treasury guarantees,
are supported by the full faith and credit of the Treasury; others, such as
those of Federal Home Loan Banks, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates
represent part ownership of a pool of mortgage loans on which interest and
principal payments are guaranteed by the Treasury. Principal is repaid
monthly over the term of the loan. Expected payments may be delayed due to
the delays in registering newly traded certificates. The mortgage loans will
be subject to normal principal amortization and may be prepaid prior to
maturity. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates.
BANK OBLIGATIONS: The Fund may invest in certificates of deposit, which
are negotiable certificates issued against funds deposited in a commercial
bank for a definite period of time and earning a specified return. The Fund
may invest in bankers' acceptances, which are negotiable drafts or bills of
exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument on
maturity. The Fund may invest in dollar-denominated certificates of deposit
and bankers' acceptances of
T-4
foreign and domestic banks having total assets in excess of $1 billion. The
Fund may also invest in certificates of deposit of federally insured savings
and loan associations having total assets in excess of $1 billion.
RESTRICTED SECURITIES: The Fund may invest in restricted securities, which
are securities subject to legal or contractual restrictions on their resale,
such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when sale would otherwise be desirable. No
restricted securities and no securities for which there is not a readily
available market ("illiquid assets") will be acquired by the Fund if such
acquisition would cause the aggregate value of illiquid assets and restricted
securities to exceed 10% of the Fund's total assets. Restricted securities
may be sold only in privately negotiated transactions or in a public offering
with respect to which a registration statement is in effect under the
Securities Act of 1933. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair value as
determined by the management and approved in good faith by the Board of
Trustees.
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 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
T-5
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: Debt securities in which the Fund may invest consistent
with its investment objective and policies may include many types of debt
obligations of both domestic and foreign issuers such as bonds, debentures,
notes, commercial paper, structured investments and obligations issued or
guaranteed by governments or government agencies or instrumentalities. 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 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. Unrated debt securities are
not necessarily of lower quality than rated securities, but they may not be
as attractive to as many buyers.
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. As a result, lower rated securities involve greater
risk of loss of income and principal than higher rated securities. The Fund
may, from time to time, purchase defaulted debt securities if, in the opinion
of the Investment Manager, the issuer may resume
T-6
interest payments in the near future. As a fundamental policy, the Fund will
not invest more than 10% of its total assets (at the time of purchase) in
defaulted debt securities, which may be illiquid.
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 U.S. 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 in equity
securities may also be reflected in declines in the price of the Shares of
the Fund. Changes in the prevailing rates of interest in any of the countries
in which the Fund is invested in fixed income securities will likely affect
the value of such holdings and thus the value of Fund Shares. 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. In
addition, changes in currency valuations will also affect the price of the
Shares of the Fund. History reflects both decreases and increases in stock
markets, and interest rates in individual countries and throughout the world,
and in 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.
T-7
FOREIGN INVESTMENTS: The Fund is authorized 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.These risks are often heightened for investments in developing
markets, including certain Eastern European countries. See "Investment
Objective and Policies--Risk Factors" in the SAI. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including, for example, withholding taxes on
interest and dividends) 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), 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. The Fund may encounter difficulties or be unable to vote proxies,
exercise shareholder rights, pursue legal remedies, and obtain judgments in
foreign courts. These considerations generally are more of a concern in
developing countries, where the possibility of political instability
(including revolution) and dependence on foreign economic assistance may be
greater than in developed countries. Investments in companies domiciled in
developing countries therefore may be subject to potentially higher risks
than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to
investment in foreign countries are generally more expensive than in the
United States. 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. Russia's system of share registration
and custody creates certain risks of loss that are not normally associated
with investments in other securities markets. These risks are discussed more
fully in the SAI under the caption "Investment Objectives and Policies--Risk
Factors" and investors should read this section in detail. As a
non-fundamental policy, the Fund will limit its investment in Russian
companies to 5% of its total assets.
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. As an
open-end investment company, the Fund is limited to the extent to which it
may invest in illiquid securities.The Fund may invest in Eastern European
countries, which involves special risks that are described under "Investment
Objective and Policies--Risk Factors" in the SAI.
T-8
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 registration 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.
FOREIGN CURRENCY EXCHANGE: The Fund will usually effect currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange market. However, some price spread on currency exchange (to
cover service charges) will be incurred when the Fund converts assets from
one currency to another.
FUTURES CONTRACTS: Successful use of stock index futures contracts is
subject to special risk considerations and transaction costs. A liquid
secondary market for futures contracts may not be available when a position
is sought to be closed. Successful use of futures contracts is further
dependent on the ability of the Fund's Investment Manager to correctly
predict movements in the securities markets and no assurance can be given
that its judgment will be correct.
There are further risk factors, including possible losses through the
holding of securities in domestic and foreign custodian banks and
depositories, described elsewhere in the Prospectus and in the SAI.
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 ("SEC") as a result
of which disposal of portfolio securities or valuation of net assets is not
reasonably practicable, and whenever the SEC 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 by dividing the value of the
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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, 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 56 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 the United States,
Australia, Scotland, Germany, Hong Kong, Luxembourg, Bahamas, Singapore,
Canada, Russia, France, Poland, Italy, India, Vietnam, South America and
South Africa.
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 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 performs similar services for other funds and
accounts and there may be times when the actions taken with respect to the
Fund's portfolio will differ from those taken by the Investment Manager on
behalf of other funds and accounts. Neither the Investment Manager and its
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affiliates, its officers, directors or employees, nor the officers and
Trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds and accounts which are managed or administered by the
Investment Manager to the extent such transactions comply with the Fund's
Code of Ethics. Please see "Investment Management and Other
Services--Investment Management Agreement," in the SAI for further
information on securities transactions and a summary of the Fund's Code of
Ethics.
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 since 1995 is Mark R. Beveridge.
Mr. Beveridge, Vice President of TICI, joined the Templeton organization in
1985. He has responsibility for the industrial component appliances/household
durables industries, and has market coverage of Argentina, Denmark and
Thailand. 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 TICI, and
Howard J. Leonard, Senior Vice President of TICI, 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 banking sectors, as well as the coverage of the Phillipines 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 (800) 774-5001
(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, 1995, expenses (net of
fee reduction) 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.
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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 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. 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 each year as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). If the Fund so qualifies, it generally will not be subject to
federal income taxes on amounts distributed to shareholders. In order to
qualify as a regulated investment company, the Fund must, among other things,
meet certain source of income requirements. In addition, the Fund must
diversify its holdings so that, at the end of each quarter of the taxable
year, (a) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to
an amount not greater than 5% of the value of the Fund's total assets and 10%
of the outstanding voting securities of such issuer, and (b) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax. See the SAI for more information about this tax and its
applicability to the Fund.
Distributions of any net investment income and of any net realized
short-term capital gains in excess of net realized long-term capital losses
are treated as ordinary income for tax purposes in the hands of the
shareholder (the Separate Account). 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 a capital gain dividend, be treated as long-term
capital gains in the hands of the Separate Account regardless of the length
of time the Separate Account may have held the Shares. Any distributions that
are not from the Fund's investment
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company taxable income or net capital gain may be characterized as a return
of capital to shareholders or, in some cases, as capital gain. Reference is
made to the prospectus for the applicable annuity for information regarding
the federal income tax treatment of distributions to an owner of an annuity.
To comply with regulations under Section 817(h) of the Code the Fund is
required to 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 the same issuer are treated as a single investment. 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 securities
issued, guaranteed, or insured (to the extent so guaranteed or insured) by
the U.S. Government or an instrumentality of the U.S. Government are treated
as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract
owner's control of the investments of a separate account may cause the
contract owner, rather than the insurance company, to be treated as the owner
of the assets held by the separate account. If the contract owner is
considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in
the contract owner's gross income. It is not known what standards will be set
forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Fund will be able to operate as currently described in the
Prospectus, or that the Fund will not have to change its investment objective
or investment policies. While the Fund's investment objective is fundamental
and may be changed only by a vote of a majority of its outstanding Shares,
the Trustees have reserved the right to modify the investment policies of the
Fund as necessary to prevent any such prospective rules and regulations from
causing the contract owners to be considered the owners of the Shares of the
Fund underlying the Separate Account.
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 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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