Registration No.33-11771
As filed with the Securities and Exchange Commission on April 29, 1996
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 9 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 12 X
(Check appropriate box or boxes)
TEMPLETON VARIABLE ANNUITY FUND
(Exact Name of Registrant as Specified in Charter)
700 CENTRAL AVENUE, P.O. BOX 33030, ST. PETERSBURG, FLORIDA 33733-8030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (813) 823-8712
Thomas M. Mistele
700 Central Avenue
P.O. Box 33030
ST. PETERSBURG, FLORIDA 33733-8030
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485
X on MAY 1, 1996 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on pursuant to paragraph (a)(2) of Rule 485
this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
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The Registrant has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940, and filed its Rule 24f-2 Notice for the fiscal
year ended December 31, 1995 on February 28, 1996.
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TEMPLETON VARIABLE ANNUITY FUND
CROSS REFERENCE SHEET
ITEM NO. CAPTION
PART A
1 Cover Page
2 N/A
3 Financial Highlights
4 General Description
5 Management of the Fund
5A See Annual Report to Shareholders
6 Description of Shares
7 Sale and Redemption of Shares; General Description
8 Sale and Redemption of Shares
9 N/A
PART B
10 Cover Page
11 Table of Contents
12 General Information and History
13 Investment Practices and Restrictions
14 Management of the Fund
15 General Description (Prospectus)
16 Investment Management and Other Services
17 Brokerage Allocation
18 Description of Shares (Prospectus)
19 Purchase, Redemption and Pricing of Shares
20 Tax Status
21 Sale and Redemption of Shares; General Description
(Prospectus)
22 Performance Information
23 Financial Statements
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,
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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
T-9
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
T-10
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.
T-11
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
T-12
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.
T-13
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.
- -----------------------------------------------------------------------------
T-14
TEMPLETON VARIABLE ANNUITY FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
MAY 1, 1996, IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON VARIABLE ANNUITY FUND DATED MAY 1, 1996,
WHICH CAN BE OBTAINED WITHOUT COST UPON REQUEST TO
TEMPLETON VARIABLE ANNUITY FUND,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 774-5001
TABLE OF CONTENTS
PAGE
<TABLE>
<CAPTION>
<S> <C>
GENERAL INFORMATION AND HISTORY............................................................. 1
INVESTMENT OBJECTIVE AND POLICIES........................................................... 2
-INVESTMENT POLICIES ..................................................................... 2
-DEBT SECURITIES.......................................................................... 2
-STRUCTURED INVESTMENTS .................................................................. 3
-STOCK INDEX FUTURES CONTRACTS ........................................................... 4
-INVESTMENT RESTRICTIONS.................................................................. 5
-RISK FACTORS............................................................................. 6
-TRADING POLICIES......................................................................... 10
-PERSONAL SECURITIES TRANSACTIONS......................................................... 10
MANAGEMENT OF THE FUND...................................................................... 11
TRUSTEE COMPENSATION........................................................................ 16
PRINCIPAL SHAREHOLDER....................................................................... 17
INVESTMENT MANAGEMENT AND OTHER SERVICES.................................................... 17
-INVESTMENT MANAGEMENT AGREEMENT.......................................................... 17
-MANAGEMENT FEES.......................................................................... 19
-EXPENSE LIMITATION ...................................................................... 19
-THE INVESTMENT MANAGER................................................................... 19
-BUSINESS MANAGER......................................................................... 19
-CUSTODIAN................................................................................ 20
-LEGAL COUNSEL............................................................................ 21
-INDEPENDENT ACCOUNTANTS.................................................................. 21
-REPORTS TO SHAREHOLDERS.................................................................. 21
BROKERAGE ALLOCATION........................................................................ 21
PURCHASE, REDEMPTION AND PRICING OF SHARES.................................................. 23
TAX STATUS.................................................................................. 24
DESCRIPTION OF SHARES....................................................................... 27
PERFORMANCE INFORMATION..................................................................... 28
FINANCIAL STATEMENTS........................................................................ 31
</TABLE>
GENERAL INFORMATION AND HISTORY
Templeton Variable Annuity Fund (the "Fund") was organized as a
Massachusetts business trust on February 5, 1987. The Fund is registered under
the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company. The Fund's Shares are currently sold only to
Templeton Funds Annuity Company ("TFAC") to be held by Templeton Funds
Retirement Annuity and Templeton Immediate Variable Annuity Separate Accounts
(the "Separate Accounts") for use as the sole investment vehicle for Templeton
Retirement Annuities and Templeton Immediate Variable Annuities (the
"Annuities"). The Fund's Shares may in the future be sold in connection with
other insurance products or as otherwise permitted by applicable regulations and
regulatory interpretations.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT POLICIES. The investment objective and policies of
the Fund are described in the Fund's Prospectus under the heading "Investment
Objective and Policies."
DEBT SECURITIES. The Fund may invest in debt securities which are rated
at least Ca by Moody's Investors Service, Inc. ("Moody's"), or CC by Standard &
Poor's Corporation ("S&P"), or deemed to be of comparable quality by the Fund's
investment manager, Templeton Investment Counsel, Inc. (the "Investment
Manager"). As an operating policy, the Fund will invest no more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB by S&P. 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. Bonds rated Ca by Moody's represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings. Bonds rated CC by S&P are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
bonds may have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
Although they may offer higher yields than do higher rated securities,
low rated and unrated debt securities generally involve greater volatility of
price and risk of principal and income, including the possibility of default by,
or bankruptcy of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish the Fund's ability to sell the
securities at fair value either to meet redemption requests or to respond to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the Fund to obtain accurate
market quotations for the purposes of valuing the Fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery.
The Fund may accrue and report interest on high yield bonds structured
as zero coupon bonds or pay-in-kind securities as income even though it receives
no cash interest until the security's maturity or payment date. In order to
qualify for beneficial tax treatment, the Fund must distribute substantially all
of its income to Shareholders (see "Tax Status"). Thus, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash so that it may satisfy the distribution requirement.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in
which the Fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Fund anticipates investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act. Structured Investments are typically sold in private
placement transactions, and there currently is not an active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to the Fund's restrictions on investments in illiquid securities.
STOCK INDEX FUTURES CONTRACTS. The Fund's investment policies also
permit it to buy and sell stock index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade, to an
aggregate amount not exceeding 20% of the Fund's total assets at the time when
such contracts are entered into. Successful use of stock index futures is
subject to the Investment Manager's ability to predict correctly movements in
the direction of the stock markets. No assurance can be given that the
Investment Manager's judgment in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the contract
is made. The value of a unit is the current value of the stock index. For
example, the Standard & Poor's 500 Stock Index (the "S&P 500 Index") is composed
of 500 selected common stocks, most of which are listed on the New York Stock
Exchange ("NYSE"). The S&P 500 Index assigns relative weightings to the value of
one share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one contract would be
worth $75,000 (500 units x $150). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if the Fund enters into a futures contract to BUY 500 units of the S&P 500 Index
at a specified future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will gain $2,000 (500 units x gain of $4).
If the Fund enters into a futures contract to SELL 500 units of the stock index
at a specified future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will lose $2,000 (500 units x loss of $4).
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 securities
which the Fund proposes to purchase change in value in correlation with the
stock index contracted for, the purchase of futures contracts on that 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
purpose of limiting the exposure of its portfolio to such decline. To the extent
that the Fund's portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index could
substantially reduce the risk to the portfolio of a market decline and, by so
doing, provide an alternative to the liquidation of securities positions in the
portfolio with resultant transaction costs.
Parties to an index futures contract must make initial margin deposits
to secure performance of the contract, which currently range from 1-1/2% to 5%
of the contract amount. Initial margin requirements are determined by the
respective exchanges on which the futures contracts are traded. There also are
requirements to make variation margin deposits as the value of the futures
contract fluctuates.
At the time the Fund purchases a stock index futures contract, an
amount of cash, U.S. Government securities, or other highly liquid debt
securities equal to the market value of the contract will be deposited in a
segregated account with the Fund's custodian. When selling a stock index futures
contract, the Fund will maintain with its custodian liquid assets that, when
added to the amounts deposited with a futures commission merchant or broker as
margin, are equal to the market value of the instruments underlying the
contract. Alternatively, the Fund may "cover" its position by owning a portfolio
with a volatility substantially similar to that of the index on which the
futures contract is based, or holding a call option permitting the Fund to
purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Fund's custodian).
INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain
fundamental investment restrictions which, together with its investment
objective and investment policy, are fundamental policies which may not be
changed without the approval of the Fund's Shareholders. For this purpose, the
provisions of the 1940 Act require the affirmative vote of the lesser of either
(A) 67% or more of the Shares of the Fund present at a Shareholders' meeting at
which more than 50% of the outstanding Shares of the Fund are present or
represented by proxy or (B) more than 50% of the outstanding Shares of the Fund.
A vote of the Shareholders satisfying these requirements will also satisfy the
requirements of the Fund's By-laws and the applicable provisions of
Massachusetts law.
A. FUNDAMENTAL INVESTMENT RESTRICTIONS. In accordance with
these restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate (although
the Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests
therein), or purchase or sell commodity contracts, except that
the Fund may purchase or sell stock index futures contracts.
2. With respect to 75% of its total assets, invest more than 5%
of the total value of its assets in the securities of any one
issuer, or purchase more than 10% of any class of securities
of any one company, including more than 10% of its outstanding
voting securities (except for investments in obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
3. Act as an underwriter or issue senior securities.
4. Lend money, except that the Fund may purchase
publicly-distributed bonds, debentures, notes and other
evidences of indebtedness and may buy from a bank or
broker-dealer U.S. government obligations with a simultaneous
agreement by the seller to repurchase them at the original
purchase price plus accrued interest.
5. Borrow money, for any purpose other than redeeming its Shares
or purchasing its Shares for cancellation, and then only as a
temporary measure up to an amount not exceeding 5% of the
value of its total assets.
6. Invest more than 25% of the Fund's total assets in a single
industry.
B. NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. As non-fundamental
policies, which may be changed by the Fund's Trustees without Shareholder
approval, the Fund will not invest more than 15% of its total assets in
securities of foreign issuers which are not listed on a recognized United States
or foreign securities exchange, or more than 10% of its total assets in (a)
securities with a limited trading market, (b) securities subject to legal or
contractual restrictions as to resale, and (c) repurchase agreements not
terminable within seven days. In addition, as a non-fundamental policy, the Fund
will not invest more than 5% of its assets in debt securities rated lower than
Baa by Moody's Investors Service, Inc. or BBB by Standard & Poor's Corporation.
When an investment restriction states a maximum percentage of the
Fund's assets which may be invested in any security or other property, it is
intended that such maximum percentage limitation be determined immediately after
and as a result of the Fund's acquisition of such security or property. Assets
are calculated as described in the Prospectus under the heading "How to Sell
Shares of the Fund." If the Fund receives from an issuer of securities held by
the Fund subscription rights to purchase securities of that issuer, and if the
Fund exercises such subscription rights at a time when the Fund's portfolio
holdings of securities of that issuer would otherwise exceed the limits set
forth in investment restrictions 2 or 6 above, it will not constitute a
violation if, prior to receipt of securities upon exercise of such rights, and
after announcement of such rights, the Fund has sold at least as many securities
of the same class and value as it would receive on exercise of such rights.
RISK FACTORS. The Fund has an unlimited right to purchase securities in
any foreign country, developed or developing, if they are listed on a stock
exchange, as well as a limited right to purchase such securities if they are
unlisted. Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. The Fund, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the New York Stock
Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies. Commission rates
in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the Fund's Shareholders.
Certain Eastern European countries, which do not have market economies,
are characterized by an absence of developed legal structures governing private
and foreign investments and private property. Certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment of foreign persons in a particular company, or limit the
investment of foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals.
Authoritarian governments in certain Eastern European countries may
require that a governmental or quasi-governmental authority act as custodian of
the Fund's assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (1) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (2) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (3) pervasiveness of corruption and crime in the Russian
economic system; (4) currency exchange rate volatility and the lack of available
currency hedging instruments; (5) higher rates of inflation (including the risk
of social unrest associated with periods of hyper-inflation); (6) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the Fund's ability to exchange local currencies for U.S. dollars; (7) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for the Fund to lose
its registration through fraud, negligence or even mere oversight. While the
Fund will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian companies deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by the Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from transferring cash
out of the country, withhold portions of interest and dividends at the source,
or impose other taxes, with respect to the Fund's investments in securities of
issuers of that country. There is the possibility of expropriation, cessation of
trading on national exchanges, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability or diplomatic developments that
could affect investments in securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which the Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally traded. Certain
of these currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Fund's portfolio
securities are denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where from time to time it places the Fund's investments. The exercise
of this flexible policy may include decisions to purchase securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed losses.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services--Custodian"). However, in the absence of willful misfeasance, bad faith
or gross negligence on the part of the Investment Manager, any losses resulting
from the holding of the Fund's portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the Shareholders. No
assurance can be given that the Trustees' appraisal of the risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions may be negotiated
below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted by the Fund's Board of
Trustees pursuant to Rule 17a-7 under the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT OF THE FUND
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Executive Officers of
the Fund are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
HARRIS J. ASHTON Chairman of the Board, president, and chief
Metro Center executive officer of General Host
1 Station Place Corporation (nursery and craft centers);
Stamford, Connecticut and a director of RBC Holdings (U.S.A.)
Trustee Inc. (a bank holding company) and Bar-S
Foods. Age 63.
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets
102 East Dover Street Investment Trust PLC; chairman of Templeton
Easton, Maryland Latin America Investment Trust PLC;
Trustee Chairman of Darby Overseas Investments,
Ltd. (an investment firm) (1994-present)
investment firm) (1994-present); director
of the Amerada Hess Corporation, Capital
Cities/ABC, Inc., Christiana Companies, and
the H.J. Heinz Company; Secretary of the
United States Department of the Treasury
(1988-January 1993); and chairman of the
board of Dillon, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
F. BRUCE CLARKE Retired; formerly, credit adviser for the
19 Vista View Blvd. Bank of Canada, Toronto. Age 86.
Thornhill, Ontario
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; and president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies. Age 79.
Trustee
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
S. JOSEPH FORTUNATO Member of the law firm of Pitney, Hardin,
200 Campus Drive Kipp & Szuch; and a director of General Host
Florham Park, New Jersey Corporation. Age 63.
Trustee
JOHN Wm. GALBRAITH President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of
Suite 1300 Gulfwest Banks, Inc.(bank holding company)
St. Petersburg, Florida (1995-present) and Mercantile Bank (1991-
Trustee present); vice chairman of Templeton,
Galbraith & Hansberger Ltd. (1986-1992); and
chairman of Templeton Funds Management, Inc.
(1974-1991). Age 74.
ANDREW H. HINES, JR. Consultant for the Triangle Consulting Group;
150 2nd Avenue N. chairman of the board and chief executive
St. Petersburg, Florida officer of Florida Progress Corporation (1982-
Trustee February 1990) and director of various
of its subsidiaries; chairman and director
of Precise Power Corporation; executive-in-
residence of Eckerd College (1991-present);
and a director of Checkers Drive-In
Restaurants, Inc. Age 72.
CHARLES B. JOHNSON* President and director of Franklin Resources,
777 Mariners Island Blvd. Inc., chairman of the board and director of
San Mateo, California Franklin Advisers, Inc. and Franklin
Chairman Templeton Distributors, Inc.; director of
the Board and Vice President of General
Host Corporation (nursery and craft
centers), and Templeton Global Investors,
Inc.; and officer and director, trustee or
managing general partner, as the case may
be, of most other subsidiaries
of Franklin Resources, Inc. Age 63.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
RUPERT H. JOHNSON, JR. Executive vice president, secretary and
777 Mariners Island Blvd. director, Franklin Resources, Inc.; executive
San Mateo, California vice president and director, Franklin
Trustee Templeton Distributors, Inc.; and Vice
President executive vice president, Franklin
Advisers, Inc.; director, Franklin Templeton
Investor Services, Inc.; officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc. Age
55.
BETTY P. KRAHMER Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst,
Wilmington, Delaware U.S. Government. Age 66
Trustee
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., Lockheed
Trustee Martin Corporation, MCI Communications
Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.;
formerly chairman of Hambrecht and Quist
Group; director, H&Q Healthcare Investors;
and president of the National Association
of Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS Manager of personal investments (1978-pre-
2665 NE 37th Drive sent)-chairman and chief executive officer of
Fort Lauderdale, Florida Landmark Banking Corporation (1969-1978);
Trustee financial vice president of Florida Power and
Light(1965-1969); vice president of The
Federal Reserve Bank of Atlanta (1958-1965);
director of various other business and
nonprofit organizations. Age 66.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
CHARLES E. JOHNSON Senior vice president and director of Franklin
777 Mariners Island Blvd. Resources, Inc.; senior vice president of
San Mateo, California Franklin Templeton Distributors, Inc.;
President president and director of Franklin
Institutional Service Corporation and
Templeton Worldwide, Inc.; chairman of the
board of Templeton Investment Counsel, Inc.;
vice president and/or director, as the case
may be, for some of the subsidiaries of
Franklin Resources, Inc. Age 39.
HARMON E. BURNS Executive vice president, secretary and
777 Mariners Island Blvd. director, Franklin Resources, Inc.; executive
San Mateo, California vice president and director, Franklin
Vice President Templeton Distributors, Inc.; executive vice
president, Franklin Advisers, Inc; director,
Franklin Templeton Investor Services, Inc.;
officer and/or director, as the case may be,
of other subsidiaries of Franklin Resources,
Inc. Age 51.
MARTIN L. FLANAGAN Senior vice president, treasurer, and chief
777 Mariners Island Blvd. financial officer of Franklin Resources, Inc.;
San Mateo, California executive vice president and director of
Vice President Templeton Investment Counsel, Inc.; director,
president and chief executive officer of
Templeton Global Investors, Inc.; director or
trustee and president or vice president of
various Templeton Funds; accountant with
Arthur Andersen & Company (1982-1983); and a
member of the International Society of
Financial Analysts and the American Institute
of Certified Public Accountants. Age 35.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
DEBORAH R. GATZEK Senior Vice President, Legal, Franklin Resources,
777 Mariners Island Blvd. Inc. and Franklin Templeton Distributors, Inc.;
San Mateo, California vice president, Franklin Advisers, Inc. Age 47.
Vice President
MARK G. HOLOWESKO President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer of the
Nassau, Bahamas global equity group for Templeton Worldwide,
Vice President Inc.; president or vice president of the Templeton
Funds; formerly, investment administrator with
Roy West Trust Corporation (Bahamas) Limited
(1984-1985). Age 36.
JOHN R. KAY Vice president of the Templeton Funds; vice
500 East Broward Blvd. president and treasurer of Templeton Global
Fort Lauderdale, Florida Investors, Inc. and Templeton Worldwide, Inc.;
Vice President assistant vice president of Franklin Templeton
Distributors, Inc.; formerly, vice president and
controller, the Keystone Group, Inc. Age 55.
JAMES R. BAIO Certified public accountant; treasurer of the
500 East Broward Blvd. Templeton Funds; senior vice president of
Fort Lauderdale, Florida Templeton Worldwide Inc., Templeton Global
Treasurer Investors, Inc., and Templeton Funds Trust
Company; formerly, senior tax manager, Ernst
& Young (certified public accountants) (1977-
1989). Age 41.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
THOMAS M. MISTELE Senior vice president of Templeton Global
700 Central Avenue Investors, Inc.; vice president of Franklin
St. Petersburg, Florida Templeton Distributors, Inc.; secretary of the
Secretary Templeton Funds; formerly, attorney, Dechert Price
& Rhoads (1985-1988) and Freehill, Hollingdale &
Page (1988); and judicial clerk, U.S. District
Court (Eastern District of Virginia)(1984-1985).
Age 42.
-----------------------------------------------
* These are Trustees who are "interested persons" of the Trust as
that term is defined in the 1940 Act. Mr. Brady and Franklin
Resources, Inc. are limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in
February, 1994, and is Chairman and a shareholder of the corporate
general partner of Darby Overseas. In addition, Darby Overseas and
Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees, except that
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
TRUSTEE COMPENSATION
All of the Trust's officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or trustee who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, based upon the assets of the
Trust as of December 31, 1995, the Trust will pay the independent Trustees and
Mr. Brady an annual retainer of $100.00. The independent Trustees and Mr. Brady
are reimbursed for any expenses incurred in attending meetings, paid pro rata by
each Franklin Templeton Fund in which they serve. No pension or retirement
benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the Trustees
by the Trust and by all investment companies in the Franklin Templeton Group for
the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF FRANKLIN TOTAL COMPENSATION FROM
AGGREGATE TEMPLETON FUND BOARDS ALL FUNDS IN FRANKLIN
COMPENSATION FROM ON WHICH TRUSTEE TEMPLETON GROUP*
NAME OF TRUSTEE THE TRUST* SERVES
<S> <C> <C> <C>
Harris J. Ashton $ 100 56 $327,925
Nicholas F. Brady 100 24 98,225
F. Bruce Clarke 128 20 83,350
Hasso-G von Diergardt-Naglo 100 20 77,350
S. Joseph Fortunato 100 58 344,745
John Wm. Galbraith 75 23 70,100
Andrew H. Hines, Jr. 195 24 106,325
Betty P. Krahmer 100 24 93,475
Gordon S. Macklin 167 53 321,525
Fred R. Millsaps 105 24 104,325
</TABLE>
PRINCIPAL SHAREHOLDER
As of March 29, 1996, TFAC, on behalf of the Separate Accounts, owned
of record 785,430 Shares (100%) of the Fund. However, TFAC will exercise voting
rights attributable to these Shares in accordance with voting instructions
received by holders of the Annuities or any other policies for which the Fund
serves as the underlying investment vehicle. To this extent, TFAC does not
exercise control over the Fund by virtue of the voting rights from its ownership
of Fund Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is
Templeton Investment Counsel, Inc., a Florida corporation with offices in Fort
Lauderdale, Florida. The Investment Management Agreement, dated October 30,
1992, was approved by shareholders of the Fund on October 30, 1992, and was
amended and restated on February 25, 1994. It was last approved by the Board of
Trustees, including a majority of the Trustees who were not parties to the
Agreement or interested persons of any such party, at a meeting on February 23,
1996, and will continue through April 30, 1997. The Management Agreement will
continue from year to year thereafter, subject to approval annually by the Board
of Trustees or by vote of the holders of a majority of the outstanding shares of
the Fund (as defined in the 1940 Act) and also, in either event, with the
approval of a majority of those Trustees who are not parties to the Management
Agreement or interested persons of any such party in person at a meeting called
for the purpose of voting on such approval.
The Management Agreement requires the Investment Manager to manage the
investment and reinvestment of the Fund's assets. The Investment Manager is not
required to furnish any overhead items or facilities for the Fund, including
daily pricing or trading desk facilities, although such expenses are paid by
some investment advisers of some other investment companies.
The Management Agreement provides that the Investment Manager will
select brokers and dealers for execution of the Fund's portfolio transactions
consistently with the Fund's brokerage policy. (See "Brokerage Allocation.")
Although services provided by broker-dealers in accordance with the Fund's
brokerage policy may incidentally help reduce the expenses of or otherwise
benefit the Investment Manager and other investment advisory clients of the
Investment Manager and of its affiliates, as well as the Fund, the value of any
such services is indeterminable and is not used to offset the Investment
Manager's fee.
When the Investment Manager determines to buy or sell the same
securities for the Fund that the Investment Manager or certain of its affiliates
has selected for one or more of the Investment Manager's other clients or for
clients of its affiliates, the orders for all such securities trades may be
placed for execution by methods determined by the Investment Manager, with
approval by the Fund's Board of Trustees, to be impartial and fair, in order to
seek good results for all parties (see "Investment Practices and
Restrictions--Trading Policies"). Records of securities transactions of persons
who know when orders are placed by the Fund are available for inspection at
least four times annually by the compliance officer of the Fund so that the
non-interested Trustees (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Investment Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from the action taken by the Investment
Manager on behalf of the Fund. Similarly, with respect to the Fund, the
Investment Manager is not obligated to recommend, purchase or sell, or to
refrain from recommending, purchasing or selling any security that the
Investment Manager and access persons, as defined by the 1940 Act, may purchase
or sell for its or their own account or for the accounts of any other fund or
accounts. Furthermore, the Investment Manager is not obligated to refrain from
investing in securities held by the Fund or other funds which it manages or
administers. Any transactions for the accounts of the Investment Manager and
other access persons will be made in compliance with the Fund's Code of Ethics
as described in the section "Investment Objective and Policies - Personal
Securities Transactions."
The Management Agreement provides that the Investment Manager shall
have no liability to the Fund or any Shareholder of the Fund for any error of
judgment, mistake of law, or any loss arising out of any investment or other act
or omission in the performance by the Investment Manager of its duties under the
Management Agreement, or for any loss or damage resulting from the imposition by
any government of exchange control restrictions which might affect the liquidity
of the Fund's assets, or from acts or omissions of custodians or securities
depositories, or from any wars or political acts of any foreign governments to
which such assets might be exposed, except for any liability, loss or damage
resulting from willful misfeasance, bad faith or gross negligence in the
performance of the Investment Manager's duties or by reason of reckless
disregard of its obligations and duties under the Management Agreement. The
Management Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Fund at any time without payment of any
penalty on 60 days' written notice, with the approval of a majority of the
Fund's Trustees in office at the time or by vote of a majority of the
outstanding Shares of the Fund (as defined in the 1940 Act).
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager
a monthly fee equal on an annual basis to 0.50% of its average daily net assets,
reduced to 0.45% of such net assets in excess of $200,000,000 and further
reduced to 0.40% of such net assets in excess of $1,300,000,000. During the
fiscal years ended December 31, 1995, 1994, and 1993, the Investment Manager
received fees of $67,417, $66,500, and $54,283, respectively.
EXPENSE LIMITATION. The Investment Manager has agreed in advance to
reduce its fee to the extent necessary to limit the total expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) of the Fund
to an annual rate of 1.00% of the Fund's average net assets through May 1, 1997.
If such fee reduction is insufficient to so limit the Fund's total expenses, the
Fund's Business Manager has agreed to reduce its fee and to the extent
necessary, assume other Fund expenses, so as to so limit the Fund's total
expenses. As long as this expense limitation continues, it may lower the Fund's
expenses and increase its total return. After May 1, 1997, the expense
limitation may be terminated or revised at any time, at which time the Fund's
expenses may increase and its total return may be reduced depending on the total
assets of the Fund.
THE INVESTMENT MANAGER. The Investment Manager is an indirect
wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"), a publicly
traded company whose shares are listed on the New York Stock Exchange. Charles
B. Johnson (a Trustee and Officer of the Fund) and Rupert H. Johnson, Jr.
(a Trustee and Officer of the Fund) are principal shareholders of Franklin and
own, respectively, approximately 20% and 16% of its outstanding
shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Funds Annuity Company (the "Business
Manager"), 700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida
33733-8030, telephone (813) 823-8712, performs certain administrative
functions as Business Manager for the Fund pursuant to a Business Management
Agreement dated October 30, 1992
The Business Management Agreement requires the Business Manager to be
responsible for various activities on behalf of the Fund, including:
o providing office space, telephone, office equipment and
supplies for the Fund;
o paying compensation of the Fund's officers for services
rendered as such;
o authorizing expenditures and approving bills for payment on
behalf of the Fund;
o preparation of annual and semi-annual reports, notices of
dividends, capital gains distributions and tax credits;
o daily pricing of the Fund's investment portfolio and preparing
and supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other
financial data;
o monitoring relationships with organizations serving the
fund, including its custodian and printers;
o providing trading desk facilities for the Fund;
o supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and regulations promulgated
thereunder, with state regulatory requirements, maintaining
books and records for the Fund (other than those maintained by
the custodian), and filing tax reports, other than the Fund's
income tax returns; and
o providing executive, clerical and secretarial help needed to
carry out its responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of such net assets in excess of
$200,000,000, further reduced to 0.10% annually of such net assets in excess of
$700,000,000, and further reduced to 0.075% annually of such net assets in
excess of $1,200,000,000. Since the Business Manager's fee covers services often
provided by investment advisers to other funds, the Fund's combined expenses for
advisory and administrative services together may be higher than those of some
other investment companies. During the fiscal years ended December 31, 1995,
1994, and 1993, TFAC received business management fees of $20,222, $19,950, and
$16,285, respectively.
The Business Manager is relieved of liability to the Fund for any act
or omission in the course of its performance under the Business Management
Agreement in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties and obligations under the Agreement. The
Business Management Agreement may be terminated by the Fund at any time on 60
days' written notice without payment of penalty, provided that such termination
by the Fund shall be directed or approved by vote of a majority of the Trustees
(as defined in the 1940 Act), and shall terminate automatically and immediately
in the event of its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned subsidiary
of Franklin.
CUSTODIAN. The Chase Manhattan Bank, N.A., pursuant to an Agreement
dated as of January 27, 1988, serves as custodian of the Fund's securities and
cash, which are kept at the custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and agencies
throughout the world. Compensation for the services of the custodian is based on
a schedule of charges agreed on from time to time. The custodian generally
domestically, and frequently abroad, does not actually hold certificates for the
securities in its custody, but instead has book records with domestic and
foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C, 20005 is legal counsel for the Fund.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, serves as independent accountants for the
Fund. Its audit services comprise examination of the Fund's financial statements
and review of the Fund's filings with the Securities and Exchange Commission and
the Internal Revenue Service.
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on December 31.
Shareholders will be provided at least semiannually with reports showing the
portfolio of the Fund and other information, including an annual report with
financial statements audited by independent accountants.
BROKERAGE ALLOCATION
The Management Agreement provides that the Investment Manager is
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of the portfolio transactions of the Fund and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with brokers
who are selected by the Investment Manager as able to
achieve "best execution" of such orders. "Best execution"
means prompt and reliable execution at the most favorable
security price, taking into account the other provisions
hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including, without limitation, the overall
direct net economic result to the Fund (involving both price
paid or received and any commissions and other costs paid),
the efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large block
is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future,
and the financial strength and stability of the broker.
Such considerations are judgmental and are weighed by the
Investment Manager in determining the overall reasonableness
of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by the
Fund.
3. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e)of the
Securities Exchange Act of 1934 (the "1934 Act"), for the
Fund and/or other accounts, if any, for which the
Investment Manager exercises investment discretion (as
defined in Section 3(a)(35) of the 1934 Act) and, for
transactions as to which fixed minimum commission rates are
not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount
another broker would have charged for effecting that
transaction, if the Investment Manager in making the
selection in question determines in good faith that such
amount of commission is reasonable in relation to the
value of the brokerage and research services provided by
such broker, viewed in terms of either that particular
transaction or the Investment Manager's overall
responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment
discretion. In reaching such determination, the Investment
Manager is not required to place or to attempt to place a
specific dollar value on the research or execution
services of a broker or on the portion of any commission
reflecting either of those services. In demonstrating
that such determinations were made in good faith,
the Investment Manager shall be prepared to show that all
commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy, that the
research services provide lawful and appropriate
assistance to the Investment Manager in the performance
of its investment decision-making responsibilities and that
the commissions paid were within a reasonable range.
The determination that commissions were within a
reasonable range shall be based on any available information
as to the level of commissions known to be charged by other
brokers on comparable transactions, but there shall be
taken into account the Fund's policies that: (i) obtaining
a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that
usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission and (ii)
the quality, comprehensiveness and frequency of research
studies which are provided for the Investment Manager are
useful to the Investment Manager in performing its advisory
services under its Management Agreement with the Fund.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in lieu
of, services required to be performed by the Investment
Manager under its Management Agreement with the Fund.
Research furnished by brokers through whom the Fund effects
securities transactions may be used by the Investment
Manager for any of its accounts, and not all such research
may be used by the Investment Manager for the Fund. When
execution of portfolio transactions is allocated to
brokers trading on exchanges with fixed brokerage
commission rates, account may be taken of various services
provided by the broker, including quotations outside the
United States for daily pricing of foreign securities held in
the Fund's portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange shall be executed
with primary market makers acting as principal except where,
in the judgment of the Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
5. Sales of shares of investment companies registered under
the 1940 Act which have either the same investment adviser,
or an investment adviser affiliated with the Investment
Manager, made by a broker is one factor among others to
be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal
transactions, purchases in underwritings or tenders in
response to tender offers) for the account of the Fund to
that broker; provided that the broker shall furnish "best
execution" as defined in paragraph 1 above, and that such
allocation shall be within the scope of the Fund's other
policies as stated above; and provided further, that in
every allocation made to a broker in which such sale of
shares is taken into account there shall be no increase
in the amount of the commissions or other compensation
paid to such broker beyond a reasonable commission or other
compensation determined, as set forth in paragraph 3 above,
on the basis of best execution alone or best execution
plus research services, without taking account of or
placing any value upon such sale of shares.
Insofar as known to the Fund's management, no Trustee or officer of the
Fund, nor the Investment Manager or any person affiliated with any of them, has
any material direct or indirect interest in any broker employed by or on behalf
of the Fund. The total brokerage commissions on portfolio transactions for the
Fund during the fiscal years ended December 31, 1995, 1994, and 1993 were
$21,000, $19,000, and $12,220, respectively. All portfolio transactions are
allocated to broker-dealers only when their prices and execution, in the
judgment of the Investment Manager, are equal to the best available within the
scope of the Fund's policies. There is no fixed method used in determining which
broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's Shares may
be purchased and redeemed. See "Sale and Redemption of Shares".
The net asset value of the Fund's Shares is determined as of the
scheduled closing time on the New York Stock Exchange (NYSE), (generally 4:00
p.m., New York time) every Monday through Friday (exclusive of national business
holidays), except on days during which no Shares are tendered for redemption and
no order to purchase or sell Shares is received by the Fund. The Fund's offices
will be closed and net asset value will not be calculated on those days on which
the NYSE is closed, which currently are: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the NYSE is open. Trading of European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every New York business day. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. The Fund calculates net
asset value per Share, and therefore effects sales, redemptions and repurchases
of its Shares, as of the close of the NYSE once on each day on which that
Exchange is open. Such calculation does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Trustees.
The Board of Trustees may establish procedures under which the Fund may
suspend the right of redemption for the whole or any part of any period during
which (1) the NYSE is closed other than for customary weekend and holiday
closings, (2) trading on the NYSE is restricted, (3) an emergency exists, as
determined under rules and regulations of the Securities and Exchange
Commission, as a result of which disposal of securities owned by the Fund is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (4) for such other period as the
Securities and Exchange Commission may by order permit for the protection of the
holders of the Fund's Shares. Any subscription may be rejected by the Fund.
TAX STATUS
The Fund intends to qualify and elect to be taxed as a "regulated
investment company" under Subchapter M of the Internal Revenue Code (the
"Code"). In any fiscal year in which the Fund so qualifies and distributes at
least 90% of its investment company taxable income, the Fund will be relieved of
federal income tax on the investment company taxable income and net capital
gains distributed to its Shareholders, the Separate Accounts. However, because
the Separate Accounts are not separate entities and their operations form a part
of TFAC, TFAC will be liable for any federal income taxes which become payable
with respect to the income of the Separate Accounts. The Separate Accounts will
bear their allocable share of such liabilities. Under current law, no item of
dividend income, interest income or realized capital gain of the Separate
Accounts attributable, at a minimum, to appreciation after January 1, 1985, will
be taxed to TFAC to the extent it is applied to increase the reserves under the
Contracts.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, the Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, the Fund intends to make its distributions
in accordance with the calendar year distribution requirement. A distribution
will be treated as paid on December 31 of the calendar if it is declared by the
Fund during October, November, or December of that year to Shareholders of
record on a date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to Shareholders (a
Separate Account) in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. The
excise tax provisions described above will not apply in a given calendar year to
the Fund if all of its Shareholders at all times during the calendar year are
segregated asset accounts of life insurance companies where the shares are held
in connection with variable contracts. (For this purpose, any shares of a
regulated investment company attributable to an investment not exceeding
$250,000 made in connection with the organization of the company is not taken
into account.) Accordingly, if this condition regarding the ownership of Shares
of the Fund is met, the excise tax will be inapplicable to the Fund even if the
calendar year distribution requirement is not met.
The Fund may invest in shares of foreign corporation which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Income received by the Fund from sources within a foreign country may
be subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain types of financial contracts, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains or losses, referred to under the
Code as "Section 988" gains or losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its Shareholders as
ordinary income.
Debt securities purchased by the Fund may be treated for federal income
tax purposes as having original issue discount. Original issue discount
essentially represents interest for federal income tax purposes and can be
defined generally as the excess of the stated redemption price at maturity over
the issue price. Original issue discount, whether or not any income is actually
received by the Fund, is treated for U.S. federal income tax purposes as
ordinary income earned by the Fund, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount
included in the income of the Fund each year is determined on the basis of a
constant yield to maturity which takes into account the compounding of accrued
but unpaid interest.
Some of the debt securities may be purchase by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semi-annual compounding of interest.
Certain futures contracts in which the Fund may invest are "section
1256 contacts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses ("60-40"),
except for certain foreign currency gains and losses which will be treated as
ordinary in character. Also, section 1256 contracts held by the Fund at the end
of each taxable year (and, in some cases, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized.
The hedging transactions undertaken by the Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The requirements under the Code relating to the qualification of the
Fund as a regulated investment company may limit the extent to which the Fund
may engage in futures contracts.
Distributions of any investment company taxable income are treated as
ordinary income for tax purposes in the hands of the Separate Accounts, even
though distributed as additional Shares of the Fund rather than in cash.
Similarly, net capital gains (the excess of any net long-term capital gains over
net short-term capital losses) will be, to the extent distributed by the Fund
and designated by the Fund as capital gain dividends, treated as long-term
capital gains in the hands of the Separate Accounts, even though distributed as
additional Shares of the Fund, regardless of the length of time the Separate
Accounts may have held the Shares.
To comply with regulations under Section 817(h) of the Code, the Fund
must diversify its investments so that on the last day of each quarter of a
calendar year no more than 55% of the value of its assets is represented by any
one investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, securities of a single issuer
are treated as one investment. However, for this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any security issued, guaranteed or insured (to the extent
so guaranteed or insured) by the United States or an instrumentality of the
United States is treated as a U.S. Government security.
Reference is made to the prospectus for the Separate Account for
information regarding the federal income tax treatment of distributions to the
Separate Account.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights, so that the holders of a
plurality of the Shares voting for the election of Trustees at a meeting at
which 50% of the outstanding Shares are present can elect all the Trustees and,
in such event, the holders of the remaining Shares voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees.
The Declaration of Trust provides that the holders of not less than
two-thirds of the outstanding Shares of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares of the
Fund.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Fund for acts or obligations of the Fund, which are
binding only on the assets and property of the Fund. The Declaration of Trust
provides for indemnification out of Fund property for all loss and expense of
any Shareholder held personally liable for the obligations of the Fund. The risk
of a Shareholder incurring financial loss on account of Shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations and, thus, should be considered remote.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Fund will not be advertised unless accompanied by comparable
performance information for a separate account to which the Fund offers its
Shares.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return for periods
in excess of one year or the total return for periods less than one year of a
hypothetical investment in the Fund over a period of one year (or, if less, up
to the life of the Fund) calculated pursuant to the following formula: P(1 + T)n
= ERV (where P = a hypothetical initial payment of $1,000, T = the average
annual total return for periods of one year or more or the total return for
periods of less than one year, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional share
of Fund expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid. The Fund's average annual total return
for the one- and five-year periods ended December 31, 1995 and for the period
from February 16, 1988 (commencement of operations) through December 31, 1995
were 25.49, 19.37% and 15.10%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Fund's results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Quotations of total return for the Fund will not take into account
charges and deductions against any separate accounts to which the Fund's Shares
are sold or charges and deductions against Templeton Retirement Annuities,
Templeton Immediate Variable Annuities, or any other participations or policies
for which the Fund may serve as the underlying investment vehicle, although
comparable performance information for a separate account will take such charges
into account. Performance information for the Fund reflects only the performance
of a hypothetical investment in the Fund during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.
From time to time, the Fund and the Investment Manager may also refer
to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets relative
to foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets
as prepared or published by the International Finance Corp.,
Morgan Stanley Capital International or a similar financial
organization.
(4) The geographic distribution of the Fund's portfolio and the
Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, of various countries as published by various
statistical organizations.
(6) To assist investors in understanding the different returns and
risk characteristics of various investments, the Fund may show
historical returns of various investments and published
indices (E.G., Ibbotson Associates, Inc. Charts and Morgan
Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) The number of shareholders in the Fund or the aggregate
number of shareholders in the Franklin Templeton Group of
Funds or the dollar amount of fund and private account assets
under management.
(13) Comparison of the characteristics of various emerging
markets, including population and financial and economic
conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton*, advocating the virtues of diversification and
long-term investing, including the following:
o "Never follow the crowd. Superior performance
is possible only if you invest differently
from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
FINANCIAL STATEMENTS
The financial statements contained in the Fund's December 31, 1995 Annual
Report to Shareholders are incorporated herein by reference.
PARTC
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Part A:
Financial Highlights
Part B:
Incorporated by reference to Registrant's 1995 Annual Report:
(1) Report of Independent Certified Public Accountants
(2) Statement of Assets and Liabilities as of December
31, 1995
(3) Statement of Operations for fiscal period ended
December 31, 1995
(4) Statement of Changes in Net Assets
(5) Investment Portfolio as of December 31, 1995
(6) Notes to Financial Statements
(b) Exhibits
1. Declaration of Trust*
2. By-Laws**
3. N/A
4. N/A
5. Amended and Restated Investment Management Contract**
6. N/A
7. N/A
8. Custody Agreement*
9. Business Management Agreement***
10. Opinion and Consent of Counsel - filed with Rule
24f-2 Notice on February 28, 1996.
11. Consent of Independent Certified Public Accountants
12. N/A
13. Letter concerning initial capital****
14. Reference is made to Exhibits (4)(a) and (4)(b)
filed on February 12, 1988 in connection with
Pre-Effective Amendment No. 3 to the Registration
Statement on Form N-4 for Templeton Funds
Retirement Annuity Separate Account
(Registration No. 33-11780).
15. N/A
16. Schedule showing computation of performance
quotations provided in response to Item 22
(unaudited).**
27. Financial Data Schedule.
- ------------------
* Filed with Pre-Effective Amendment No. 1 on October 7, 1987.
** Filed with Post-Effective Amendment No. 8 on May 1, 1995.
*** Filed with Post-Effective Amendment No. 6 on March 2, 1993.
**** Filed with Pre-Effective Amendment No. 3 on February 16, 1988.
ITEM 25. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of March 29, 1996, Templeton Funds Annuity
Company, on behalf of Templeton Funds Retirement
Annuity Separate Account and Templeton Immediate
Variable Annuity Separate Account, owned 785,429.645
shares (100%) of the Trust. Templeton Funds Annuity
Company will vote shares in accordance with the
voting instructions of holders of the Annuities or
any other policies for which Registrant serves as the
underlying investment vehicle.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF
TITLE OF CLASS RECORDHOLDERS
Shares of Beneficial Interest, 1 as of
par value $0.01 per Share: March 29, 1996
ITEM 27. INDEMNIFICATION
Reference is made to Section 4.3 of Registrant's
Declaration of Trust, filed on October 7, 1987 with
Pre-Effective Amendment No. 1 to Registrant's
Registration
Statement.
Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to
trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission
such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
In the event that a claim for indemnification against
such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in
the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities
being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and the Registrant will be
governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to information contained under the
heading "Management of the Fund The Investment
Manager" in Part B of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITER
N/A
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts and records of Registrant are maintained
by Templeton Funds Annuity Company,
700 Central Avenue, St. Petersburg, Florida 33733-8030.
ITEM 31. MANAGEMENT SERVICES
N/A
ITEM 32. UNDERTAKINGS
(a) N/A
(b) N/A
(c) Registrant undertakes to furnish to each
person to whom a prospectus is provided a
copy of its latest Annual Report, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it has met
the requirements for effectiveness of the Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and that it has duly caused this
Post-Effective Amendment No. 9 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of St.
Petersburg, Florida on the 29th day of April, 1996.
TEMPLETON VARIABLE ANNUITY FUND
(Registrant)
By:
Charles E. Johnson*
President
*By:/s/THOMAS M. MISTELE
Thomas M. Mistele
as attorney-in-fact**
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CATION>
SIGNATURE TITLE DATE
<S> <C> <C>
_______________________________ President (Chief Executive Officer) April 29, 1996
Charles E. Johnson*
________________________________ Chairman of the Board and April 29, 1996
Charles B. Johnson* Trustee
_______________________________ Trustee April 29, 1996
Harris J. Ashton*
________________________________ Trustee April 29, 1996
Nicholas F. Brady*
_______________________________ Trustee April 29, 1996
F. Bruce Clarke*
_______________________________ Trustee April 29, 1996
Hasso-G von Diergardt-Naglo*
________________________________ Trustee April 29, 1996
S. Joseph Fortunato*
SIGNATURE TITLE DATE
_______________________________ Trustee April 29, 1996
John Wm. Galbraith*
_______________________________ Trustee April 29, 1996
Andrew H. Hines, Jr.*
________________________________ Trustee April 29, 1996
Rupert H. Johnson, Jr.*
_______________________________ Trustee April 29, 1996
Betty P. Krahmer*
________________________________ Trustee April 29, 1996
Gordon S. Macklin*
_______________________________ Trustee April 29, 1996
Fred R. Millsaps*
________________________________ Treasurer (Chief Financial and April 29, 1996
James R. Baio* Accounting Officer)
</TABLE>
*By:/s/THOMAS M. MISTELE
Thomas M. Mistele
as attorney-in-fact**
** Powers of Attorney were previously filed with Registration
Statement No. 33-11771 and are incorporated by reference, or are contained
herewith.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a duly elected
Trustee of Templeton Variable Annuity Fund (the "Fund"), constitutes and
appoints Allan S. Mostoff, Jeffrey L. Steele, William J. Kotapish and Thomas M.
Mistele, and each of them, his true and lawful attorney-in-fact and agents
with full power of substitution and resubstitution for him in his name, place
and stead, in any and all capacities, to sign the Fund's registration statement
and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in fact and act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
attorney-in fact and agents, or any of the, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Dated: August 31, 1995
/s/JOHN WM. GALBRAITH
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a duly elected
Trustee of Templeton Variable Annuity Fund (the "Fund"), constitutes and
appoints Allan S. Mostoff, Jeffrey L. Steele, William J. Kotapish and Thomas M.
Mistele, and each of them, his true and lawful attorney-in-fact and agents with
full power of substitution and resubstitution for him in his name, place and
stead, in any and all capacities, to sign the Fund's registratin statement and
any and all amendments thereto, and to file the same, with all exhibits
thereto, and to file the same, with all exhibits thereto, and other documents
inconnection therwith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and act and thing requisite and necessary to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and conforming all that said attorneys-in fact and agents, or
anyof the, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: March 1, 1996
/s/CHARLES B. JOHNSON
POWER OF ATTORENY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a duly elected
President of Templeton Variable Annuity Fund (the "Fund"), constitutes and
appoints Allan S. Mostoff, Jeffrey L. Steele, William J. Kotapish and Thomas
M. Mistele, and each of them, his true and lawfully attorneys-in-fact and
agents with fullpoer of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the Fund's registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents, or any of them, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Date: Novmeber 28, 1995 /s/CHARLES E. JOHNSON
* Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October, 1992 and resigned from the Trust's Board on
April 16, 1995. He is no longer involved with the investment management
process.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Variable Annuity Fund December 31, 1995 annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000810355
<NAME> TEMPLETON VARIABLE ANNUITY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 10242170
<INVESTMENTS-AT-VALUE> 14133411
<RECEIVABLES> 577645
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 8311
<TOTAL-ASSETS> 14719367
<PAYABLE-FOR-SECURITIES> 548587
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51043
<TOTAL-LIABILITIES> 599630
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8075720
<SHARES-COMMON-STOCK> 684748
<SHARES-COMMON-PRIOR> 699878
<ACCUMULATED-NII-CURRENT> 215429
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1939097
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3889491
<NET-ASSETS> 14119737
<DIVIDEND-INCOME> 289468
<INTEREST-INCOME> 63794
<OTHER-INCOME> 0
<EXPENSES-NET> 134487
<NET-INVESTMENT-INCOME> 218775
<REALIZED-GAINS-CURRENT> 1942231
<APPREC-INCREASE-CURRENT> 887079
<NET-CHANGE-FROM-OPS> 3048085
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (137838)
<DISTRIBUTIONS-OF-GAINS> (930408)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17647
<NUMBER-OF-SHARES-REDEEMED> (96898)
<SHARES-REINVESTED> 64121
<NET-CHANGE-IN-ASSETS> 1551094
<ACCUMULATED-NII-PRIOR> 145533
<ACCUMULATED-GAINS-PRIOR> 916233
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67417
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 143071
<AVERAGE-NET-ASSETS> 13483668
<PER-SHARE-NAV-BEGIN> 17.96
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> 3.89
<PER-SHARE-DIVIDEND> (.20)
<PER-SHARE-DISTRIBUTIONS> (1.35)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.62
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Without reimbursement the expense ratio equaled 1.06%
</FN>
</TABLE>
