<PAGE>
Templeton Variable
Annuity Fund
- --------------------------------------------------------------------------------
Your Fund's Objective:
The Templeton Variable Annuity Fund seeks long-term capital growth through a
flexible policy of investing primarily in stocks and debt obligations of
companies and governments of any nation.
- --------------------------------------------------------------------------------
February 15, 1996
Dear Contract Owner:
We are pleased to bring you the annual report of the Templeton Variable Annuity
Fund for the period ended December 31, 1995.
The past fiscal year was characterized by unexpected advances in developed
markets and volatility in emerging markets. Falling interest rates, relatively
low inflation, strong corporate earnings, and an increased flow of capital into
mutual funds benefited many stock and bond markets worldwide.
These conditions proved particularly bullish for U.S. stocks as the Dow Jones
Industrial Average/(R)/ reached record highs, with a gain for the year of more
than 36%.* The U.S. financial services, banking, insurance, and pharmaceutical
sectors performed extremely well during this time, which prompted us to sell
shares of holdings such as Amerifed Financial Corp., BankAmerica Corp., CCP
Insurance Inc., and Pfizer Inc. at significant gains. We also recognized gains
by selling shares of MCI
*Total return, calculated by Wilshire Associates, Inc., includes reinvested
dividends. One cannot invest directly in an index.
1
<PAGE>
Communications Corp. and Nike Inc. Over the course of the year, our overall U.S.
exposure decreased, from 34.1% of total net assets on December 31, 1994 to 31.1%
on December 31, 1995. Although we were net sellers of U.S. stocks during the
year, we did purchase additional shares of Federated Department Stores Inc., one
of the nation's largest department store operators, and initiated a position in
Summit Properties Inc., a real estate investment trust (REIT) with operations in
shopping centers, industrial buildings and apartments in the U.S. and Canada.
European equity markets turned in mixed performances during the fiscal year.
Markets in Switzerland, Sweden, and Spain posted impressive results, while
Germany's and Finland's were lackluster partly because their local currencies
appreciated versus the U.S. dollar. These stronger currencies lowered profits
from international trade and made some companies more vulnerable to foreign
competition. However, some companies thrived. For instance, many European
banking institutions were able to improve their balance sheets, which increased
earnings and benefited their stocks' prices. Pharmaceutical stocks also
rebounded due to strong earnings, and mergers and restructurings within the
industry. Believing that this sector was undervalued after a difficult 1994, we
pur-
- --------------------------------------------------------------------------------
Templeton Variable
Annuity Fund
Geographic Distribution on 12/31/95
Based on Total Net Assets
[PIE CHART APPEARS HERE]
Europe 41.7%
United States 31.1%
Latin America 9.1%
Asia 7.4%
Australia/New Zealand 6.5%
Canada 1.8%
Short-Term Obligations &
Other Net Assets 2.4%
chased shares of Pharmacia AB, a Swedish pharmaceutical manufacturer that
recently merged with Upjohn, and Ciba-Geigy AG, a Swiss chemical and
pharmaceutical company. During the reporting period, the Fund's European
exposure increased, from 32.3% to 41.7% of total net assets.
The performances of Asian equity markets also varied during the reporting
period. Japan's market experienced a small loss, while the Australian and New
Zealand markets posted gains in excess of 10%. Although uncertainty surrounding
Hong Kong's 1997 reversion to China, and
2
<PAGE>
threats of trade wars between China and the U.S., had a negative effect on the
Hong Kong stock market initially, it rebounded to end the year with a gain of
more than 20%. Responding to Hong Kong's strengthening market later in the year,
we sold a portion of our position in Hutchison Whampoa Ltd. for a sizable gain.
Emerging markets suffered considerably from a sharp selloff in 1995 as the
negative effects of Mexico's December 1994 currency devaluation, and subsequent
decline of its equity market, spread to other developing markets. As a result of
this crisis, many governments throughout Latin America were confronted with
mounting pressures to support their local currencies. Because we felt that 1994
valuations were rather high, we were in the process of trimming our Latin
American holdings as this situation unfolded, which mitigated the effects these
declines had on the Fund's holdings in this region. Although we had not foreseen
declines in these markets, we did take advantage of them by purchasing shares of
Madeco Manufacturera de Cobre SA, a Chilean manufacturer of telecommunication
cables and wires, and Telefonica de Argentina SA, an Argentine
telecommunications company. At the end of the year, we were cautious concerning
our exposure to Latin America, but were beginning to find additional bargains in
countries such as Brazil, Argentina and Chile.
- --------------------------------------------------------------------------------
Templeton Variable Annuity Fund
Top 10 Holdings on 12/31/95
Based on Total Net Assets
<TABLE>
<CAPTION>
<S> <C>
% of Total
Company, Industry, Country Net Assets
- --------------------------------------------------------------------------------
Telebras-Telecomunicacoes
Brasileiras SA, pfd.;
Telecommunications, Brazil 3.1%
- --------------------------------------------------------------------------------
News International PLC;
Broadcasting & Publishing, Australia 2.9%
- --------------------------------------------------------------------------------
Banque Nationale de Paris;
Banking, France 2.8%
- --------------------------------------------------------------------------------
Federal National Mortgage Assn.;
Financial Services, U.S. 2.6%
- --------------------------------------------------------------------------------
Chemical Banking Corp.; Banking, U.S. 2.5%
- --------------------------------------------------------------------------------
BBC Brown Boveri Ltd., br.;
- --------------------------------------------------------------------------------
Electrical & Electronics, Switzerland 2.5%
- --------------------------------------------------------------------------------
Federated Department Stores Inc.;
Merchandising, U.S. 2.3%
- --------------------------------------------------------------------------------
Bayer AG; Chemicals, Germany 2.3%
- --------------------------------------------------------------------------------
NationsBank Corp.; Banking, U.S. 2.1%
- --------------------------------------------------------------------------------
Ecco SA; Business & Public
Services, France 2.0%
- --------------------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, please see page 7 of this report.
This discussion reflects the strategies we employed for the Fund during the past
fiscal year, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings, may change
in light of new circumstances as they arise. Although past performance of a
specific investment or sector cannot guarantee future performance, such
information can be useful in analyzing securities we purchase or sell for the
Fund.
3
<PAGE>
Looking forward, we believe that global interest rates should continue to trend
downward, which would be beneficial to financial markets. In our opinion, the
U.S. Federal Reserve Board may ease monetary policy further if inflation remains
subdued, and European economic conditions should be characterized by a mix of
modest growth and low inflation, with the added benefit of ongoing fiscal
reforms in a broad range of markets. There are, of course, special risks
involved with global investing related to market, currency, economic,
political, and other factors; developing markets involve similar but heightened
risks. These risks are discussed in the prospectus.
As always, we will continue to build and improve our ability to serve investors
while maintaining the traditional values and principles that have served our
clients well for so long. We appreciate your participation in the Templeton
Variable Annuity Fund and welcome any comments or suggestions you may have.
Sincerely,
/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Variable Annuity Fund
4
<PAGE>
Performance Summary
The Templeton Variable Annuity Fund delivered a total return of 25.49% for the
one-year period ended December 31, 1995. Total return represents the change in
the Fund's share price, as measured by net asset value, and includes
reinvestment of dividends and capital gains. It does not include deductions at
the Fund or contract level for cost of insurance charges, premium load,
administrative charges, maintenance fees, premium tax charges, mortality and
expense risk charges or other charges that may be incurred under the variable
annuity contract for which the Fund serves as an underlying investment vehicle.
The graph to the right compares the Fund's performance since inception with the
performance of the unmanaged Morgan Stanley Capital International (MSCI) World
Index. It also shows how an investment in the Fund over the same period has kept
your purchasing power ahead of inflation, as measured by the Consumer Price
Index (CPI). As you can see, the Fund has significantly outpaced both indices
over the past four years. Please remember that the Fund's performance differs
from that of an index because an index does not contain cash (the Fund generally
carries a certain percentage of cash at any given time) and includes no
management fees or other expenses. Of course, one cannot invest directly in an
index.
- --------------------------------------------------------------------------------
TEMPLETON VARIABLE ANNUITY FUND
Total Return Index Comparison
$10,000 Investment (2/16/88-12/31/95)
[GRAPH APPEARS HERE SHOWING COMPARISON BETWWEEN TEMPLETON
VARIABLE ANNUITY FUND /1/, MSCI WORLD INDEX /2/
AND CONSUMER PRICE INDEX /3/]
<TABLE>
<CAPTION>
2/88 12/95
--------- ---------
<S> <C> <C>
Templeton Variable Annuity Fund $ 10,000 $ 30,243
MSCI World Index 10,000 20,927
Consumer Price Index 10,000 13,256
</TABLE>
1. Total return measures the change in the Fund's net asset value over the
period shown, assuming reinvestment of dividends and capital gains. It does not
include deductions at the Fund or contract level for cost of insurance charges,
premium load, administrative charges, maintenance fees, premium tax charges,
mortality and expense risk charges or other charges that may be incurred under
the variable annuity contract for which the Fund serves as an underlying
investment vehicle. Past performance is not predictive of future results.
2. Index is unmanaged and includes reinvested dividends.
3. Source: U.S. Bureau of Labor Statistics.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Templeton Variable Annuity Fund
Periods ended 12/31/95
Since
Inception
One-Year Five-Year (2/16/88)
Average Annual
Total Return/1/ 25.49% 19.37% 15.10%
Cumulative
Total Return/2/ 25.49% 142.31% 202.43%
1. Average annual total return represents the average annual increase in the
value of an investment and assumes reinvestment of dividends and capital gains.
2. Cumulative total return represents the change in the Fund's net asset value
and assumes reinvestment of dividends and capital gains.
Note: Total return figures do not include deductions at the Fund or contract
level for cost of insurance charges, premium load, administrative charges,
maintenance fees, premium tax charges, mortality and expense risk charges or
other charges that may be incurred under the variable annuity contract for which
the Fund serves as an underlying investment vehicle. Investment return and
principal value will fluctuate with market conditions, currencies and the
economic and political climates of the countries where investments are made, and
shares, when redeemed, may be worth more or less than their initial cost. Past
performance is not indicative of future results.
5
<PAGE>
Templeton Variable Annuity Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 17.96 $ 19.50 $ 14.99 $15.20 $11.76
------- ------- ------- ------ ------
Income from investment operations:
Net investment income .32 .21 .24 .37 .31
Net realized and unrealized gain
(loss) 3.89 (.96) 5.31 1.16 3.58
------- ------- ------- ------ ------
Total from investment operations 4.21 (.75) 5.55 1.53 3.89
------- ------- ------- ------ ------
Distributions:
Dividends from net investment in-
come (.20) -- (.24) (.39) (.29)
Distributions from net realized
gains (1.35) (.79) (.80) (1.33) (.16)
Distributions from other sources -- -- -- (.02) --
------- ------- ------- ------ ------
Total distributions (1.55) (.79) (1.04) (1.74) (.45)
------- ------- ------- ------ ------
Change in net asset value 2.66 (1.54) 4.51 (.21) 3.44
------- ------- ------- ------ ------
Net asset value, end of year $ 20.62 $ 17.96 $ 19.50 $14.99 $15.20
======= ======= ======= ====== ======
TOTAL RETURN* 25.49% (4.06)% 37.24% 10.17% 33.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $14,120 $12,569 $12,698 $9,258 $9,147
Ratio of expenses to average net
assets 1.06% 1.49% 1.37% 1.52% 1.62%
Ratio of expenses, net of reim-
bursement, to average net assets 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%
Portfolio turnover rate 33.64% 19.85% 22.13% 27.86% 25.84%
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE FUND OR CONTRACT LEVEL FOR
COST OF INSURANCE CHARGES, PREMIUM LOAD, ADMINISTRATIVE CHARGES, MORTALITY AND
EXPENSE RISK CHARGES OR OTHER CHARGES THAT MAY BE INCURRED UNDER THE VARIABLE
ANNUITY CONTRACT FOR WHICH THE FUND SERVES AS AN UNDERLYING INVESTMENT VEHICLE.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS: 94.5%
- ----------------------------------------------------------------------------
Appliances & Household Durables: 1.7%
Sony Corp. Jpn. 4,000 $ 239,725
- ----------------------------------------------------------------------------
Automobiles: 2.7%
General Motors Corp. U.S. 4,000 208,500
Volvo AB, B Swe. 8,600 176,080
-----------
384,580
- ----------------------------------------------------------------------------
Banking: 14.6%
BankAmerica Corp. U.S. 3,000 194,250
Bankinter SA Sp. 1,400 136,191
Banque Nationale de Paris Fr. 8,000 360,874
Banque Nationale de Paris, ADR, 144A Fr. 700 31,576
Barnett Banks Inc. U.S. 1,500 88,500
Chemical Banking Corp. U.S. 6,000 352,500
HSBC Holdings PLC H.K. 12,327 186,519
National Australia Bank Ltd. Aus. 14,000 125,907
NationsBank Corp. U.S. 4,200 292,425
Sparbanken Sverige AB, A, 144A Swe. 7,900 100,498
Unidanmark AS, A Den. 3,700 183,109
-----------
2,052,349
- ----------------------------------------------------------------------------
Broadcasting & Publishing: 2.9%
News International PLC Aus. 87,200 415,741
- ----------------------------------------------------------------------------
Building Materials & Components: 0.7%
Pioneer International Ltd. Aus. 37,000 95,426
- ----------------------------------------------------------------------------
Business & Public Services: 5.6%
Columbia Healthcare Corp. U.S. 2,475 125,606
Ecco SA Fr. 1,875 283,720
*Healthcare Services Group Inc. U.S. 5,550 52,031
Wheelabrator Technologies Inc. U.S. 11,000 184,250
WMX Technologies Inc. U.S. 5,000 149,375
-----------
794,982
- ----------------------------------------------------------------------------
Chemicals: 6.3%
Akzo Nobel NV Neth. 2,000 231,696
Bayer AG Ger. 1,200 318,650
Rhone-Poulenc SA, A Fr. 8,200 175,654
Solvay SA Bel. 300 162,844
-----------
888,844
- ----------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- --------------------------------------------------------------------------------
Data Processing & Reproduction: 1.8%
*Cap Gemini Sogeti SA, wts. Fr. 187 $ 21
*Newbridge Networks Corp. Can. 6,000 248,250
-----------
248,271
- --------------------------------------------------------------------------------
Electrical & Electronics: 5.0%
Alcatel Alsthom SA Fr. 1,000 86,216
BBC Brown Boveri Ltd., br. Swtz. 300 348,505
*DSC Communications Corp. U.S. 3,400 125,375
Hitachi Ltd. Jpn. 15,000 151,038
-----------
711,134
- --------------------------------------------------------------------------------
Electronic Components & Instruments: 0.8%
Intel Corp. U.S. 2,000 113,500
- --------------------------------------------------------------------------------
Energy Sources: 4.0%
Societe Elf Aquitane SA Fr. 2,600 191,562
Total SA, B Fr. 2,800 188,973
Transportadora de Gas del Sur SA, ADR B Arg. 14,000 180,250
-----------
560,785
- --------------------------------------------------------------------------------
Financial Services: 4.6%
Dean Witter Discover & Co. U.S. 6,000 282,000
Federal National Mortgage Assn. U.S. 3,000 372,375
-----------
654,375
- --------------------------------------------------------------------------------
Food & Household Products: 3.2%
Burns Philp & Co. Ltd. Aus. 78,550 175,731
*Grupo Embotellador de Mexico SA, B Mex. 10,500 16,740
Nestle SA Swtz. 230 254,426
-----------
446,897
- --------------------------------------------------------------------------------
Forest Products & Paper: 3.2%
*Asia Pacific Resources International, A Indo. 20,000 95,000
Carter Holt Harvey Ltd. N.Z. 44,226 95,412
Enso Gutzeit OY, R Fin. 12,000 79,943
Stora Kopparbergs Bergslags AB, B Swe. 15,000 179,527
-----------
449,882
- --------------------------------------------------------------------------------
Health & Personal Care: 5.1%
Astra AB, B Swe. 4,200 166,294
Ciba-Geigy AG Swtz. 200 175,986
</TABLE>
8
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health & Personal Care (cont.)
*Pharmacia & Upjohn U.S. 4,000 $ 155,000
SmithKline Beecham PLC, ADR U.K. 4,100 227,550
-----------
724,830
- ---------------------------------------------------------------------------------------------
Industrial Components: 1.4%
Madeco Manufacturera de Cobre SA, ADR Chil. 7,500 202,500
- ---------------------------------------------------------------------------------------------
Insurance: 5.1%
Aegon NV Neth. 3,750 166,188
Aetna Life & Casualty Co. U.S. 4,000 277,000
ING Group NV Neth. 2,000 133,824
Torchmark Corp. U.S. 3,000 135,750
-----------
712,762
- ---------------------------------------------------------------------------------------------
Leisure & Tourism: 1.3%
Kuoni Reisen Holding AG, B Swtz. 115 184,439
- ---------------------------------------------------------------------------------------------
Merchandising: 4.7%
*Federated Department Stores Inc. (Delaware) U.S. 12,000 330,000
Home Depot Inc. U.S. 4,000 191,500
Limited Inc. U.S. 8,200 142,475
-----------
663,975
- ---------------------------------------------------------------------------------------------
Multi-Industry: 2.6%
Hutchison Whampoa Ltd. H.K. 25,500 155,325
Jardine Matheson Holdings Ltd. (Singapore) H.K. 30,135 206,425
-----------
361,750
- ---------------------------------------------------------------------------------------------
Real Estate: 1.4%
Summit Properties Inc., REIT U.S. 9,700 192,788
- ---------------------------------------------------------------------------------------------
Telecommunications: 7.4%
Alcatel Cable SA Fr. 2,946 212,964
Compania de Telecomunicaciones de Chile SA, ADR Chil. 900 74,588
STET (Sta Finanziaria Telefonica Torino) SPA, di Risp Itl. 55,000 112,060
Telefonica de Argentina SA, B, ADR Arg. 3,000 81,750
Telefonica de Espana SA, ADR Sp. 4,200 175,875
Telmex-Telefonos de Mexico SA, L, ADR Mex. 7,300 232,688
*Worldcom Inc. U.S. 4,300 151,575
-----------
1,041,500
- ---------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, December 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS: 94.5%
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Textiles & Apparel: 1.3%
*Fruit of the Loom Inc., A U.S. 7,457 $ 181,764
PT Indorama Synthetics, fgn. Indo. 2,000 7,238
-----------
189,002
- ------------------------------------------------------------------------------------------------------------
Transportation: 0.6%
*Bremer Vulkan Verbund AG Ger. 3,100 86,468
- ------------------------------------------------------------------------------------------------------------
Utilities Electrical & Gas: 6.5%
*CEZ Csk. 3,600 130,143
Electricidad de Caracas Venz. 77,028 52,638
Endesa- Empresa Nacional de Electricidad SA, ADR Sp. 3,600 206,100
Evn Energie-Versorgung Niederoesterreich AG Aust. 1,600 219,547
Southern Co. U.S. 4,000 98,500
VEBA AG Ger. 5,000 214,079
-----------
921,007
-----------
TOTAL COMMON STOCKS (cost $9,659,816) 13,337,512
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS: 3.1%
- ------------------------------------------------------------------------------------------------------------
Telebras-Telecomunicacoes Brasileiras SA, pfd. Braz. 8,196,267 394,655
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR Braz. 1,000 47,375
-----------
TOTAL PREFERRED STOCKS (cost $228,727) 442,030
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM OBLIGATIONS: 2.5% (cost $353,627)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bills, 4.82% to 5.32% with maturities to 2/15/96 U.S. 355,000 353,869
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS: 100.1% (cost $10,242,170) 14,133,411
OTHER ASSETS, LESS LIABILITIES: (0.1)% (13,674)
-----------
TOTAL NET ASSETS: 100.0% $14,119,737
===========
</TABLE>
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Templeton Variable Annuity Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $10,242,170) $14,133,411
Cash 8,311
Receivables:
Investment securities sold 554,369
Expense reimbursement 5,478
Dividends 17,798
-----------
Total assets 14,719,367
-----------
Liabilities:
Payable for investment securities purchased 548,587
Accrued expenses 51,043
-----------
Total liabilities 599,630
-----------
Net assets, at value $14,119,737
===========
Net assets consist of:
Undistributed net investment income $ 215,429
Net unrealized appreciation 3,889,491
Accumulated net realized gain 1,939,097
Net capital paid in on shares of beneficial interest 8,075,720
-----------
Net assets, at value $14,119,737
===========
Shares outstanding 684,748
===========
Net asset value per share
($14,119,737 / 684,748) $ 20.62
===========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1995
<TABLE>
<S> <C> <C>
Investment income:
(net of $18,724
foreign taxes withheld)
Dividends $ 289,468
Interest 63,794
---------
Total income $ 353,262
Expenses:
Management fees (Note 3) 67,417
Administrative fees (Note 3) 20,222
Custodian fees 7,386
Reports to shareholders 16,000
Audit fees 21,100
Legal fees (Note 3) 10,250
Trustees' fees and expenses 100
Other 596
---------
Total expenses 143,071
Less expenses reimbursed
(Note 3) (8,584)
---------
Total expenses less reimbursement 134,487
----------
Net investment income 218,775
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 1,951,496
Foreign currency transactions (9,265)
---------
1,942,231
Net unrealized appreciation (depreciation) on:
Investments 888,829
Foreign currency translations of other assets and
liabilities (1,750)
---------
887,079
---------
Net realized and
unrealized gain 2,829,310
----------
Net increase in net assets resulting from operations $3,048,085
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Variable Annuity Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 218,775 $ 145,533
Net realized gain on investment and foreign cur-
rency transactions 1,942,231 918,388
Net unrealized appreciation (depreciation) 887,079 (1,595,023)
----------- -----------
Net increase (decrease) in net assets resulting
from operations 3,048,085 (531,102)
Distributions to shareholders:
From net investment income (137,838) (2,879)
From net realized gain (930,408) (514,109)
Capital share transactions (Note 2) (428,745) 919,033
----------- -----------
Net increase (decrease) in net assets 1,551,094 (129,057)
Net assets:
Beginning of year 12,568,643 12,697,700
----------- -----------
End of year $14,119,737 $12,568,643
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Variable Annuity Fund (the Fund) is a Massachusetts business trust
and an open-end, diversified management investment company registered under
the Investment Company Act of 1940. The following summarizes the Fund's sig-
nificant accounting policies.
a. Securities Valuations:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange
on which the securities are traded. Over-the-counter securities for which no
sale is reported are valued at the mean between the last current bid and asked
prices. Securities for which market quotations are not readily available are
valued at fair value as determined by management and approved in good faith by
the Board of Trustees.
b. Foreign Currency Transactions:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customar-
ily enters into a foreign exchange contract to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from invest-
ments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books, and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities other than investments in securities at
the end of the fiscal period, resulting from changes in the exchange rates.
c. Income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Reve-
nue Code applicable to regulated investment companies and to distribute all
its taxable income to its shareholders. Therefore, no provision has been made
for income taxes.
d. Security Transactions, Investment Income, Distributions and Expenses:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign secu-
rities is recorded as soon as information is available to the Fund. Interest
income and estimated expenses are accrued daily. Distributions to sharehold-
ers, which are determined in accordance with income tax regulations, are re-
corded on the ex-dividend date.
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At December 31, 1995, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 17,647 $ 325,840 103,790 $ 1,963,386
Shares issued on reinvestment
of distributions 64,121 1,068,246 27,282 516,988
Shares redeemed (96,898) (1,822,831) (82,327) (1,561,341)
------- ----------- ------- -----------
Net increase (decrease) (15,130) $ (428,745) 48,745 $ 919,033
======= =========== ======= ===========
</TABLE>
13
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements (cont.)
- -------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the fund are also directors of Templeton Investment Coun-
sel, Inc. (TICI), and Templeton Funds Annuity Company (TFAC), the Fund's in-
vestment manager, and administrative manager, respectively.
The Fund pays monthly an investment management fee to TICI equal, on an annual
basis, to 0.50% of the average daily net assets of the Fund, reduced to 0.45%
of such average daily net assets in excess of $200 million, and to 0.40% of
such net assets in excess of $1.3 billion.
The Fund pays to TFAC an administrative fee equivalent to 0.15% of the average
daily net assets of the Fund during the year, reduced to 0.135% of such net
assets in excess of $200 million, to 0.10% of such net assets in excess of
$700 million, and to 0.075% of such assets in excess of $1.2 billion. TFAC has
voluntarily agreed to limit the total expenses of the Fund to an annual rate
of 1.00% of the Fund's average net assets through the period ended May 1,
1996. The amount of the reimbursement is set forth in the Statement of Opera-
tions.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $10,250 for the year ended December
31, 1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1995 aggregated $4,200,467 and $4,789,938, respective-
ly. The cost of securities for federal income tax purposes is the same as that
shown in the investment portfolio. Realized gains and losses are reported on
an identified cost basis.
At December 31, 1995, the aggregate gross unrealized appreciation and depreci-
ation of portfolio securities, based on cost for federal income tax purposes,
was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $4,182,044
Unrealized depreciation (290,803)
----------
Net unrealized appreciation $3,891,241
==========
</TABLE>
14
<PAGE>
Templeton Variable Annuity Fund
Independent Auditor's Report
- -------------------------------------------------------------------------------
The Board of Trustees and Shareholders
Templeton Variable Annuity Fund
We have audited the accompanying statement of assets and liabilities, includ-
ing the investment portfolio, of Templeton Variable Annuity Fund as of Decem-
ber 31, 1995, and the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the pe-
riod then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of De-
cember 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant esti-
mates made by management, as well as evaluating the overall financial state-
ment presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Tem-
pleton Variable Annuity Fund as of December 31, 1995, the results of its oper-
ations, the changes in its net assets and the financial highlights for the pe-
riods indicated, in conformity with generally accepted accounting principles.
/s/ McGladrey + Pullen, LLP
New York, New York
January 31, 1996
15
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C>
Assets
Investment in Templeton Variable Annuity Fund, at value (cost
$8,458,143) $11,264,697
Receivable from Templeton Funds Annuity Company 17,503
-----------
Net assets $11,282,200
===========
Net assets attributable to annuitants--
Annuity reserves (Note 1) $11,282,200
===========
</TABLE>
STATEMENT OF OPERATIONS
for the year ended December 31, 1995
<TABLE>
<S> <C>
Investment Income:
Income:
Dividend distributions $ 110,058
Capital gains distributions 742,890
----------
Total income 852,948
Expenses:
Periodic charge (Note 2) 119,140
----------
Net investment income 733,808
----------
Realized and unrealized gain on investments:
Net realized gain on investments 436,311
Unrealized appreciation 1,155,950
----------
Net gain on investments 1,592,261
----------
Net increase in net assets from operations $2,326,069
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 1995 and
1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income $ 733,808 $ 340,663
Net realized gain on investments 436,311 469,901
Unrealized appreciation (depreciation) 1,155,950 (1,356,713)
----------- -----------
Net increase (decrease) in net assets from
operations 2,326,069 (546,149)
----------- -----------
Annuity unit transactions:
Proceeds from units sold 228,833 350,411
Annuity payments (1,368,267) (1,274,550)
Increase in annuity reserves for mortality experience
(Note 1) 63,847 9,728
----------- -----------
Net decrease in net assets derived from annuity unit
transactions (1,075,587) (914,411)
----------- -----------
Total increase (decrease) in net assets 1,250,482 (1,460,560)
Net Assets:
Beginning of year 10,031,718 11,492,278
----------- -----------
End of year $11,282,200 $10,031,718
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
The Templeton Funds Retirement Annuity Separate Account (the Separate Account)
was established on February 4, 1987 by resolution of the Board of Directors of
Templeton Funds Annuity Company (the Company) and is registered under the In-
vestment Company Act of 1940 as a unit investment trust. The Separate Account
is sold exclusively for use with the Templeton Retirement Annuity, an immediate
variable annuity designed for distributing the benefits of tax deferred retire-
ment plans. The Separate Account invests all its assets in the Templeton Vari-
able Annuity Fund (the Fund). The following is a summary of significant ac-
counting policies followed by the Separate Account in the preparation of its
financial statements.
a. Valuation of Securities:
Investment in shares of the Fund are carried in the Statement of Assets and Li-
abilities at net asset value (market value).
b. Dividends:
Dividend income and capital gain distributions are recorded as income on the
ex-dividend date and reinvested in additional shares of the Fund.
c. Income Taxes:
Operations of the Separate Account form a part of the Company, which is taxed
as a life insurance company under the Internal Revenue Code (the Code). Under
current law, no federal income taxes are payable with respect to the Separate
Account. Under the principles set forth in Internal Revenue Service Ruling 81-
225 and Section 817(h) of the Code and regulations thereunder, the Company un-
derstands that it will be treated as owner of the assets invested in the Sepa-
rate Account for federal income tax purposes, with the result that earnings and
gains, if any, derived from those assets will not be included in an Annuitant's
gross income until amounts are received pursuant to an Annuity.
d. Annuity Reserves:
Annuity reserves are computed according to the 1983a Blended Unisex Mortality
Table, with a 50% male/female content. The assumed interest rates are 9%, 7%
and 3%. Charges to annuity reserves for mortality experience are reimbursed to
the Company if the reserves required are less than originally estimated. If ad-
ditional reserves are required, the Company reimburses the Separate Account.
2. PERIODIC CHARGE
The Company assesses a Periodic Charge against the Separate Account, equal on
an annual basis to 1.1% of Separate Account assets. The Periodic Charge, in the
following amounts, compensates the Company for expenses of administering the
Separate Account and for assuming the risks that mortality experience will be
lower than the rate assumed and that expenses will be greater than what is as-
sumed: 0.3% of average annual net assets to cover expenses, 0.3% to cover ex-
pense risk and 0.5% to cover the mortality risk. The Periodic Charge is guaran-
teed as to Annuities issued prior to the effective date of any change in the
Periodic Charge.
3. INVESTMENT TRANSACTIONS
During the year ended December 31, 1995, purchases and sales of Templeton Vari-
able Annuity Fund shares aggregated $1,081,781 and $1,020,671 respectively. Re-
alized gains and losses are reported on an identified cost basis.
4. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Separate Account to concen-
trations of credit risk consist of investments in the Templeton Variable Annu-
ity Fund. The Fund's investment securities are managed by professional invest-
ment managers within established guidelines. As of December 31, 1995, in man-
agement's opinion, the Separate Account had no significant concentrations of
credit risk.
17
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Report of Independent Accountants
- --------------------------------------------------------------------------------
The Participants of Templeton Funds Retirement Annuity Separate Account
We have audited the accompanying statement of assets and liabilities of Temple-
ton Funds Retirement Annuity Separate Account as of December 31, 1995, and the
related statement of operations for the year then ended and the statements of
changes in net assets for the years ended December 31, 1995 and 1994. These fi-
nancial statements are the responsibility of the Separate Account's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned at December 31, 1995, by correspon-
dence with the Templeton Variable Annuity Fund. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Templeton Funds Retirement An-
nuity Separate Account as of December 31, 1995, and the results of its opera-
tions for the year then ended and the changes in its net assets for the years
ended December 31, 1995 and 1994 in conformity with generally accepted account-
ing principles.
Coopers & Lybrand L.L.P.
Tampa, Florida
February 9, 1996
18
<PAGE>
The Franklin Templeton Group
Literature Request - Call today for a free descriptive brochure and prospectus
on any of the funds listed below. The prospectus contains more complete
information, including fees, charges and expenses, and should be read carefully
before investing or sending money.
Templeton Funds
Americas Government
Securities Fund
Developing Markets Trust
Foreign Fund
Global Infrastructure Fund
Global Opportunities Trust
Greater European Fund
Growth Fund
Growth and Income Fund
Income Fund
Latin American Fund
Real Estate
Securities Fund
Smaller Companies
Growth Fund
World Fund
Franklin Funds Seeking
Tax-Free Income
Federal Tax-Free
Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
High Yield Tax-Free
Income Fund
Insured Tax-Free
Income Fund***
Puerto Rico Tax-Free
Income Fund
Franklin State-Specific
Funds Seeking Tax-Free Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan***
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee
Texas
Virginia
Washington**
Franklin Funds
Seeking Capital Growth
California Growth Fund
DynaTech Fund
Equity Fund
Global Health
Care Fund
Gold Fund
Growth Fund
International
Equity Fund
Japan Fund
Pacific Growth Fund
Small Cap Growth Fund
Franklin Funds Seeking Growth and Income
Balance Sheet
Investment Fund
Convertible Securities Fund
Equity Income Fund
Global Utilities Fund
Income Fund
Natural Resources Fund
Premier Return Fund
Real Estate Securities Fund
Rising Dividends Fund
Strategic Income Fund
Utilities Fund
Franklin Funds Seeking
High Current Income
AGE High Income Fund
Global Government
Income Fund
Investment Grade
Income Fund
U.S. Government
Securities Fund
Franklin Funds Seeking
High Current Income and Stability of Principal
Adjustable Rate
Securities Fund
Adjustable U.S. Government Securities Fund
Short-Intermediate U.S. Government
Securities Fund
Franklin Funds for
Non-U.S. Investors
Tax-Advantaged High Yield Securities Fund
Tax-Advantaged International Bond Fund
Tax-Advantaged U.S. Government Securities Fund
Franklin Templeton Global Currency Funds
German Government
Bond Fund
Global Currency Fund
High Income Currency Fund
Hard Currency Fund
Franklin Money
Market Funds
Money Fund
Federal Money Fund
Tax-Exempt Money
Fund
California Tax-Exempt
Money Fund
New York Tax-Exempt
Money Fund
IFT U.S. Treasury Money
Market Portfolio
Franklin Fund for Corporations
Corporate Qualified
Dividend Fund
Franklin Tax-Deferred
Annuity
Franklin Valuemark
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
Fund Information: 1-800/292-9293
Account Services: 1-800/393-3001
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and a high yield
portfolio (CA).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
<PAGE>
- --------------------------
TEMPLETON VARIABLE
ANNUITY FUND
700 Central Avenue
St. Petersburg,
Florida 33701
This report must be preceded or accompanied by the prospectus of Templeton
Variable Annuity Fund. Like any investment in securities, the value of the
Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
investment manager which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the investment manager.
Therefore, investors who cannot accept this risk should not invest in shares
of the Fund.
- --------------------------
[RECYCLED PAPER LOGO APPEARS HERE]
TRA A95 2/96
TEMPLETON
VARIABLE
ANNUITY
FUND
Annual Report
December 31, 1995
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
