<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.
August 15, 1996
Dear Contract Owner:
We are pleased to bring you this semi-annual report of the Templeton Variable
Annuity Fund for the period ended June 30, 1996. The Fund delivered a total
return of 14.46% for the six months under review, as discussed in the
Performance Summary on page 5. It significantly outperformed its benchmark, the
Morgan Stanley Capital International (MSCI) World Index, which posted a total
return of 7.33% for the same period.* The Fund's strong performance was
primarily the result of our bottom-up, value style of investing and relative
overweighting in markets that performed exceptionally well during the period.
Despite rising interest rates during the second quarter of 1996, stock markets
in the U.S. continued their upward climb throughout most of this reporting
period as record amounts of money poured into equity mutual funds. News of all-
time market highs appeared nearly every week, which further encouraged new
investments and
*Index is unmanaged and includes reinvested dividends.
1
<PAGE>
pushed stock prices and market multiples even higher. Many well-established
banks were able to increase their earnings while decreasing liabilities, and
rising stock prices of BankAmerica Corp., NationsBank Corp., Chemical Banking
Corp., and Barnett Banks Inc. provided significant gains for the Fund. We sold
our position in Barnett after its stock met our target price, and eliminated our
shares of Chemical for a significant gain following its merger with Chase
Manhattan Corp. The telecommunications industry rebounded in response to the
passage of the Telecommunications Bill, which enables companies to offer
customers services they were previously prohibited from offering. As a result of
this deregulation, the Fund's holdings of Worldcom Inc., a nationwide provider
of digital fiber-optic networks, and Lucent Technologies Inc., a recent spin-off
from AT&T Corp., appreciated significantly.
European equity markets turned in mixed performances during this period. The
stock markets of core countries such as the United Kingdom and Germany posted
relatively lackluster returns due primarily to their uncertain economic
prospects and low levels of consumer spending.
- --------------------------------------------------------------------------------
Templeton Variable
Annuity Fund
Geographic Distribution on 6/30/96
Based on Total Net Assets
-------------- Europe 40.6%
--- North America 31.5%
[PICTURE OF 3-D ----------- Australia & New Zealand 9.8%
PIE CHART
APPEARS HERE] ------ Asia 8.8%
--------- Latin America 7.3%
---------- Short-Term Obligations & Other
Net Assets 2.0%
However, the financial markets in Sweden, Norway, and the Netherlands performed
well, with large gains in the chemical, pharmaceutical, and banking sectors.
Since we were overweighted in all three countries, this helped the Fund's
performance. Although the Swiss stock market turned in a dull performance
compared with other European markets, the value of our holdings of Swiss
pharmaceutical company Ciba-Geigy AG and tourism giant Kuoni Reisen Holding AG
appreciated by 39% and 43%, respectively. This is a good example of how our
2
<PAGE>
bottom-up, value style of investing enables us to discover companies that often
perform well regardless of the direction of the overall markets.
Latin American equity markets rebounded during this period due to improved
economic fundamentals in the region and renewed interest by foreign investors.
The telecommunications and electric utility industries performed particularly
well as demand for their services continued to grow throughout many Latin
American countries. The share price of Telebras-Telecomunicacoes Brasileiras SA,
Brazil's largest telephone company, appreciated by more than 40% during the six-
month period, which prompted us to sell a portion of this holding for a
significant gain. We also sold our shares of Compania de Telecomunicaciones de
Chile SA for a gain following outstanding performance by the company's stock. In
our opinion, Latin American utilities markets should continue to grow rapidly
due to upcoming regulatory changes. For example, Brazil is expected to
deregulate its telephone industry over the next few years, which should provide
Telebras with significant growth potential.
Many Asian stock markets strengthened during the first four months of 1996, but
then declined in May and June as a result of profit-taking and growing concerns
about economic fundamentals. We took advantage of this weakness by initiating
positions in Consolidated Electric Power Asia Ltd., a Hong Kong-based electric
utility company, and Metro Pacific Corp., a Philippine conglomerate. We
continued to limit our exposure to Japan, whose stock market ended the period
with only a slight gain in U.S. dollar terms. This was beneficial to the Fund's
performance because as of June 30, 1996, our Japanese holdings represented just
2.6% of total net assets, compared
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Templeton Variable Annuity Fund
Top 10 Holdings on 6/30/96
Based on Total Net Assets
% of Total
Company, Industry, Country Net Assets
- -----------------------------------------------------------
<S> <C>
News International PLC
Broadcasting & Publishing, Australia 3.7%
- -----------------------------------------------------------
Federal National Mortgage Assn.
Financial Services, U.S. 2.6%
- -----------------------------------------------------------
Newbridge Networks Corp.
Data Processing & Reproduction, Canada 2.6%
- -----------------------------------------------------------
ABB AG, br.
Electrical & Electronics, Switzerland 2.4%
- -----------------------------------------------------------
Dean Witter Discover & Co.
Financial Services, U.S. 2.3%
- -----------------------------------------------------------
Aetna Life & Casualty Co.
Insurance, U.S. 1.9%
- -----------------------------------------------------------
VEBA AG
Utilities--Electrical & Gas, Germany 1.7%
- -----------------------------------------------------------
Evn Energie-Versorgung Niederoesterreich AG
Utilities--Electrical & Gas, Austria 1.7%
- -----------------------------------------------------------
Kuoni Reisen Holding AG, B
Leisure & Tourism, Switzerland 1.7%
- -----------------------------------------------------------
Sony Corp.
Appliances & Household Durables, Japan 1.7%
- -----------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, please see page 7 of this report.
3
<PAGE>
with a 22% weighting in the MSCI World Index. Although price/earnings ratios
have come down since 1994, we believe Japanese stocks remain very expensive by
global standards.
Looking forward, we believe the most important influences on global stock
markets are likely to be the sustainability of U.S. economic growth, the
direction of the dollar, and the prospects for a rebound in the core European
economies. Although we do not expect global economic growth to increase
substantially, we believe that the U.S. economy may be in the midst of renewed
growth that could last through the next few months. We shall monitor these and
other events as we continue to search the world for the best possible investment
opportunities.
This discussion reflects the strategies we employed for the Fund during the six-
month reporting period, 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 as new circumstances 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.
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.
We appreciate your participation in the Templeton Variable Annuity Fund and look
forward to serving your investment needs in the years to come.
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 provided a total return of 14.46% for the
six-month period ended June 30, 1996. Total return represents the percent change
in the Fund's share price, as measured by net asset value, and includes
reinvestment of dividends and capital gains. This figure and all performance
figures shown to the right reflect all Fund operating expenses, but do not
include deductions 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. If they
had been included, performance would have been lower. For a complete description
of expenses, including any applicable sales charges, please refer to the
contract prospectus.
We have always maintained a long-term perspective when managing the Fund, and we
encourage contract owners to view their investments in a similar manner. As you
can see from the table above, the Fund has delivered a cumulative total return
of more than 246% since its inception on February 16, 1988. It should be
remembered that performance data is historical and cannot predict or guarantee
future results. Principal value and investment return will fluctuate with market
conditions, currencies and the economic and political climates of the countries
where investments are made, and you may have a gain or loss when you withdraw
money.
<TABLE>
<CAPTION>
- --------------------------------------------------------
Templeton Variable Annuity Fund
Periods ended 6/30/96
Since
Inception
One-Year Five-Year (2/16/88)
<S> <C> <C> <C>
Average Annual
Total Return/1/ 25.01% 20.18% 15.99%
Cumulative
Total Return/2/ 25.01% 150.75% 246.15%
Value of $10,000
Investment/3/ $12,501 $25,075 $34,615
</TABLE>
1. Average annual total return represents the average annual increase in 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
over the periods indicated and assumes reinvestment of dividends and capital
gains.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the specified periods and assume reinvestment of dividends and
capital gains.
5
<PAGE>
Templeton Variable Annuity Fund
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31
JUNE 30, 1996 -----------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
------------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period $ 20.62 $ 17.96 $ 19.50 $ 14.99 $15.20 $11.76
------- ------- ------- ------- ------ ------
Income from investment
operations:
Net investment income .28 .32 .21 .24 .37 .31
Net realized and
unrealized gain (loss) 2.41 3.89 (.96) 5.31 1.16 3.58
------- ------- ------- ------- ------ ------
Total from investment
operations 2.69 4.21 (.75) 5.55 1.53 3.89
------- ------- ------- ------- ------ ------
Distributions:
Dividends from net in-
vestment income (.32) (.20) -- (.24) (.39) (.29)
Distributions from net
realized gains (2.88) (1.35) (.79) (.80) (1.33) (.16)
Distributions from
other sources -- -- -- -- (.02) --
------- ------- ------- ------- ------ ------
Total distributions (3.20) (1.55) (.79) (1.04) (1.74) (.45)
------- ------- ------- ------- ------ ------
Change in net asset
value (.51) 2.66 (1.54) 4.51 (.21) 3.44
------- ------- ------- ------- ------ ------
Net asset value, end of
period $ 20.11 $ 20.62 $ 17.96 $ 19.50 $14.99 $15.20
======= ======= ======= ======= ====== ======
TOTAL RETURN* 14.46% 25.49% (4.06)% 37.24% 10.17% 33.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000) $15,229 $14,120 $12,569 $12,698 $9,258 $9,147
Ratio of expenses to av-
erage net assets .96%** 1.06% 1.49% 1.37% 1.52% 1.62%
Ratio of expenses, net
of reimbursement, to
average net assets .96%** 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment
income to average net
assets 2.82%** 1.62% 1.09% 1.36% 2.06% 2.33%
Portfolio turnover rate 15.41% 33.64% 19.85% 22.13% 27.86% 25.84%
Average commission rate
paid (per share) $ .0019
</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.
**ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, June 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS: 96.4%
- -------------------------------------------------------------------------------
Appliances & Household Durables: 1.7%
Sony Corp. Jpn. 4,000 $ 263,535
- -------------------------------------------------------------------------------
Automobiles: 2.7%
General Motors Corp. U.S. 4,000 209,500
Volvo AB, B Swe. 8,600 196,134
-----------
405,634
- -------------------------------------------------------------------------------
Banking: 8.5%
BankAmerica Corp. U.S. 3,000 227,250
Bankinter SA Sp. 1,400 156,728
Banque Nationale de Paris Fr. 3,000 105,380
Banque Nationale de Paris, ADR, 144A Fr. 700 24,589
HSBC Holdings PLC H.K. 12,327 186,320
National Australia Bank Ltd. Aus. 14,000 129,288
NationsBank Corp. U.S. 2,300 190,038
Sparbanken Sverige AB, A, 144A Swe. 7,900 102,613
Unidanmark AS, A Den. 3,700 171,799
-----------
1,294,005
- -------------------------------------------------------------------------------
Broadcasting & Publishing: 3.7%
News International PLC Aus. 87,200 563,349
- -------------------------------------------------------------------------------
Building Materials & Components: 0.7%
Pioneer International Ltd. Aus. 37,000 107,596
- -------------------------------------------------------------------------------
Business & Public Services: 4.1%
Ecco SA Fr. 975 245,444
*Healthcare Services Group Inc. U.S. 5,550 49,950
Wheelabrator Technologies Inc. U.S. 11,000 167,750
WMX Technologies Inc. U.S. 5,000 163,750
-----------
626,894
- -------------------------------------------------------------------------------
Chemicals: 4.2%
Akzo Nobel NV Neth. 2,000 239,812
Rhone-Poulenc SA, A Fr. 8,200 215,670
Solvay SA Bel. 300 185,694
-----------
641,176
- -------------------------------------------------------------------------------
Data Processing & Reproduction: 3.6%
*Bay Networks Inc. U.S. 6,100 157,075
*Newbridge Networks Corp. Can. 6,000 393,000
-----------
550,075
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, June 30, 1996 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Electrical & Electronics: 6.2%
ABB AG, br. Swtz. 300 $ 371,446
Alcatel Alsthom SA Fr. 1,000 87,282
*DSC Communications Corp. U.S. 3,400 102,425
Hitachi Ltd. Jpn. 15,000 139,809
Motorola Inc. U.S. 3,800 238,925
-----------
939,887
- -------------------------------------------------------------------------------
Electronic Components & Instruments: 2.2%
BICC U.K. 38,000 182,942
Intel Corp. U.S. 2,000 146,875
-----------
329,817
- -------------------------------------------------------------------------------
Energy Equipment & Services: 1.3%
Helikopter Services Group AS Nor. 16,600 191,832
- -------------------------------------------------------------------------------
Energy Sources: 3.7%
Societe Elf Aquitane SA Fr. 2,600 191,352
Total SA, B Fr. 2,800 207,813
Transportadora de Gas del Sur SA, B,
ADR Arg. 14,000 171,500
-----------
570,665
- -------------------------------------------------------------------------------
Financial Services: 6.0%
AXA SA Fr. 3,061 167,561
Dean Witter Discover & Co. U.S. 6,000 343,500
Federal National Mortgage Assn. U.S. 12,000 402,000
-----------
913,061
- -------------------------------------------------------------------------------
Food & Household Products: 1.8%
Burns Philp & Co. Ltd. Aus. 78,550 148,167
Nestle SA Swtz. 115 131,442
-----------
279,609
- -------------------------------------------------------------------------------
Forest Products & Paper: 4.5%
*Asia Pacific Resources
International, A Indo. 20,000 150,000
Carter Holt Harvey Ltd. N.Z. 44,226 101,323
*Enso OY, R Fin. 12,000 93,532
Fletcher Challenge Ltd., Forestry
Division N.Z. 114,500 142,584
Stora Kopparbergs Bergslags AB, B Swe. 15,000 198,233
-----------
685,672
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, June 30, 1996 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ----------------------------------------------------------------------------
Health & Personal Care: 3.6%
Astra AB, B Swe. 3,600 $ 157,136
Ciba-Geigy AG Swtz. 200 243,951
Smithkline Beecham PLC, A, ADR U.K. 2,600 141,050
-----------
542,137
- ----------------------------------------------------------------------------
Industrial Components: 1.4%
Madeco Manufacturera de Cobre SA,
ADR Chil. 7,500 210,938
- ----------------------------------------------------------------------------
Insurance: 7.9%
Aetna Life & Casualty Co. U.S. 4,000 286,000
GIO Austrailia Holdings Ltd. Aus. 82,180 202,164
HIH Winterthur International
Holdings Ltd. Aus. 52,600 99,218
ING Groep NV Neth. 5,000 149,223
Partnerre Ltd. Bmu. 6,000 179,250
Reliastar Financial Corp. U.S. 3,500 150,938
Torchmark Corp. U.S. 3,000 131,250
-----------
1,198,043
- ----------------------------------------------------------------------------
Leisure & Tourism: 1.7%
Kuoni Reisen Holding AG, B Swtz. 115 263,987
- ----------------------------------------------------------------------------
Merchandising: 2.8%
*Federated Department Stores Inc. U.S. 6,000 204,750
Home Depot Inc. U.S. 4,000 216,000
-----------
420,750
- ----------------------------------------------------------------------------
Multi-Industry: 3.5%
Hutchison Whampoa Ltd. H.K. 25,500 160,430
Jardine Matheson Holdings Ltd. H.K. 30,135 221,492
La Cemento Nacional CA, GDR Ecu. 400 72,400
Metro Pacific Corp. Phil. 272,000 80,977
-----------
535,299
- ----------------------------------------------------------------------------
Real Estate: 2.4%
*Fastighets AB Tornet, A Swe. 790 6,443
National Health Investors Inc. U.S. 5,000 163,750
Summit Properties Inc., REIT U.S. 9,700 190,363
-----------
360,556
- ----------------------------------------------------------------------------
Telecommunications: 9.7%
Alcatel Cable SA Fr. 3,000 255,431
Lucent Technologies Inc. U.S. 1,300 49,238
*SPT Telecom AS Csk. 1,900 232,036
</TABLE>
9
<PAGE>
Templeton Variable Annuity Fund
Investment Portfolio, June 30, 1996 (unaudited) (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ------------------------------------------------------------------------------
Telecommunications (cont.)
STET (Sta Finanziaria
Telefonica Torino) SPA, di
Risp Itl. 55,000 $ 144,704
Telefonica de Argentina SA, B,
ADR Arg. 3,000 88,875
Telefonica de Espana SA, ADR Sp. 4,200 231,525
Telefonos de Mexico SA, L, ADR Mex. 7,300 244,550
*Worldcom Inc. U.S. 4,300 238,113
-----------
1,484,472
- ------------------------------------------------------------------------------
Textiles & Apparel: 1.2%
*Fruit of the Loom Inc., A U.S. 7,457 190,154
- ------------------------------------------------------------------------------
Utilities--Electrical & Gas: 7.3%
*CEZ Csk. 3,600 143,278
Consolidated Electric Power
Asia Ltd. H.K. 90,900 150,311
Electricidad de Caracas Venz. 83,447 69,372
Endesa-Empresa Nacional de
Electricidad SA, ADR Sp. 3,600 225,450
Evn Energie-Versorgung
Niederoesterreich AG Aust. 1,920 265,483
VEBA AG Ger. 5,000 266,057
-----------
1,119,951
-----------
TOTAL COMMON STOCKS (cost $10,481,918) 14,689,094
- ------------------------------------------------------------------------------
PREFERRED STOCKS: 1.6%
- ------------------------------------------------------------------------------
Telebras-Telecomunicacoes
Brasileiras SA, pfd. Braz. 2,496,267 174,265
Telebras-Telecomunicacoes
Brasileiras SA, pfd., ADR Braz. 1,000 69,625
-----------
TOTAL PREFERRED STOCKS (cost $85,692) 243,890
- ------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY
- ------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT TERM OBLIGATIONS: 1.8% (cost
$271,385)
- ------------------------------------------------------------------------------
U.S. Treasury Bills, 4.83% to
5.08% with
maturities to 9/05/96 U.S. 273,000 271,456
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS: 99.8% (cost
$10,838,995) 15,204,440
OTHER ASSETS, LESS LIABILITIES: 0.2% 25,020
-----------
TOTAL NET ASSETS: 100.0% $15,229,460
===========
</TABLE>
*NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Templeton Variable Annuity Fund
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (unaudited)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (identified cost $10,838,995) $15,204,440
Cash 3,434
Dividends receivable 73,006
-----------
Total assets 15,280,880
-----------
Liabilities:
Payable for investment
securities purchased 7,073
Accrued expenses 44,347
-----------
Total liabilities 51,420
-----------
Net assets, at value $15,229,460
===========
Net assets consist of:
Undistributed net investment income $ 207,005
Net unrealized appreciation 4,365,445
Accumulated net realized gain 1,301,709
Net capital paid in on shares of beneficial interest 9,355,301
-----------
Net assets, at value $15,229,460
===========
Shares outstanding 757,413
===========
Net asset value per share ($15,229,460 / 757,413) $ 20.11
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
for the six months ended June 30, 1996 (unaudited)
<TABLE>
<S> <C> <C>
Investment income:
(net of $25,878 foreign taxes withheld)
Dividends $ 263,180
Interest 14,577
---------
Total income $ 277,757
Expenses:
Management fees (Note 3) 36,770
Administrative fees (Note 3) 11,035
Custodian fees 3,750
Reports to shareholders 5,400
Audit fees 8,000
Legal fees (Note 3) 4,600
Registration and filing fees 700
Other 93
---------
Total expenses 70,348
----------
Net investment income 207,409
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 1,305,178
Foreign currency transactions (71)
---------
1,305,107
---------
Net unrealized appreciation on:
Investments 474,204
Foreign currency translations of other assets and
liabilities 1,750
---------
475,954
---------
Net realized and unrealized gain 1,781,061
----------
Net increase in net assets resulting from operations $1,988,470
==========
</TABLE>
11
<PAGE>
Templeton Variable Annuity Fund
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 207,409 $ 218,775
Net realized gain on investment and foreign
currency transactions 1,305,107 1,942,231
Net unrealized appreciation 475,954 887,079
----------- -----------
Net increase in net assets resulting from
operations 1,988,470 3,048,085
Distributions to shareholders:
From net investment income (215,833) (137,838)
From net realized gain (1,942,495) (930,408)
Fund share transactions (Note 2) 1,279,581 (428,745)
----------- -----------
Net increase in net assets 1,109,723 1,551,094
Net assets:
Beginning of period 14,119,737 12,568,643
----------- -----------
End of period $15,229,460 $14,119,737
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 Fund seeks long-term capital growth through
a flexible policy of investing primarily in stocks and debt obligations of com-
panies and governments of any nation. 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 investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement 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 Revenue
Code applicable to regulated investment companies and to distribute all of 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 securi-
ties is recorded as soon as information is available to the Fund. Interest in-
come and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
e. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
13
<PAGE>
Templeton Variable Annuity Fund
Notes to Financial Statements (unaudited) (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
At June 30, 1996, there were an unlimited number of shares of beneficial inter-
est authorized ($0.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Shares sold 4,370 $ 85,896 17,647 $ 325,840
Shares issued on reinvestment
of distributions 117,109 2,158,329 64,121 1,068,246
Shares redeemed (48,814) (964,644) (96,898) (1,822,831)
------- ---------- ------- -----------
Net increase (decrease) 72,665 $1,279,581 (15,130) $ (428,745)
======= ========== ======= ===========
</TABLE>
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 administra-
tive 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 as-
sets 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 as-
sets through the period ended May 1, 1997. The amount of the reimbursement is
set forth in the Statement of Operations.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $4,600 for the six months ended June
30, 1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 1996 aggregated $2,200,610 and $2,826,719, respectively.
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 June 30, 1996, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income tax purposes, was as
follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation $4,609,804
Unrealized depreciation (244,359)
----------
Net unrealized appreciation $4,365,445
==========
</TABLE>
14
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (unaudited)
<TABLE>
<S> <C>
Assets
Investment in Templeton Variable Annuity Fund, at value
(cost $9,723,721) $12,122,224
Receivable from Templeton Funds Annuity Company 1,531
-----------
Net assets $12,123,755
===========
Net assets attributable to annuitants--Annuity reserves (Note 1) $12,123,755
===========
</TABLE>
STATEMENT OF OPERATIONS
for the six months ended June 30, 1996 (unaudited)
<TABLE>
<S> <C>
Investment Income:
Income:
Dividend distributions $ 172,002
Capital gains distributions 1,548,017
----------
Total income 1,720,019
Expenses:
Periodic charge (Note 2) 64,683
----------
Net investment income 1,655,336
----------
Realized and unrealized gain (loss) on investments:
Net realized gain on investments 274,970
Unrealized depreciation (408,050)
----------
Net loss on investments (133,080)
----------
Net increase in net assets from operations $1,522,256
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1995
---------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets from
operations:
Net investment income $ 1,655,336 $ 733,808
Net realized gain on investments 274,970 436,311
Unrealized appreciation (depreciation) of
investments for the year (408,050) 1,155,950
----------- -----------
Net increase in net assets from operations 1,522,256 2,326,069
----------- -----------
Annuity unit transactions:
Proceeds from units sold 65,647 228,833
Annuity payments (727,842) (1,368,267)
Increase (decrease) in annuity reserves for
mortality experience (Note 1) (18,506) 63,847
----------- -----------
Net decrease in net assets derived from
annuity unit transactions (680,701) (1,075,587)
----------- -----------
Total increase in net assets 841,555 1,250,482
Net Assets:
Beginning of period 11,282,200 10,031,718
----------- -----------
End of period $12,123,755 $11,282,200
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Templeton Funds Retirement Annuity Separate Account
Notes to Financial Statements (unaudited)
- -------------------------------------------------------------------------------
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 immedi-
ate variable annuity designed for distributing the benefits of tax deferred
retirement plans. The Separate Account invests all its assets in the Templeton
Variable Annuity Fund (the Fund). The following is a summary of significant
accounting 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
Liabilities 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
additional 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
assumed: 0.3% of average annual net assets to cover expenses, 0.3% to cover
expense risk and 0.5% to cover the mortality risk. The Periodic Charge is
guaranteed as to Annuities issued prior to the effective date of any change in
the Periodic Charge.
3. INVESTMENT TRANSACTIONS
During the six months ended June 30, 1996, purchases and sales of Templeton
Variable Annuity Fund shares aggregated $1,803,170 and $537,592 respectively.
Realized gains and losses are reported on an identified cost basis.
4. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Separate Account to con-
centrations of credit risk consist of investments in the Templeton Variable
Annuity Fund. The Fund's investment securities are managed by professional in-
vestment managers within established guidelines. As of June 30, 1996, in man-
agement's opinion, the Separate Account had no significant concentrations of
credit risk.
16
<PAGE>
Notes
-----
<PAGE>
Notes
-----
<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.
<TABLE>
<S> <C> <C> <C>
Templeton Funds Florida* Franklin Funds Seeking Franklin Templeton Global
American Trust Georgia Growth and Income Currency Funds
Americas Government Hawaii** Balance Sheet German Government
Securities Indiana Investment Fund Bond
Developing Markets Trust Kentucky Convertible Securities Fund Global Currency
Foreign Fund Louisiana Equity Income Fund High Income Currency
Global Infrastructure Fund Maryland Global Utilities Fund Hard Currency
Global Opportunities Trust Massachusetts*** Income Fund
Greater European Fund Michigan*** MicroCap Value Franklin Money
Growth Fund Minnesota*** Natural Resources Fund Market Funds
Growth and Income Fund Missouri Premier Return Fund Money Fund
Global Bond Fund New Jersey Real Estate Securities Fund Federal Money Fund
Latin America Fund New York* Rising Dividends Fund Tax-Exempt Money
Pacific Growth North Carolina Strategic Income Fund Fund
Global Real Estate Fund Ohio*** Utilities Fund California Tax-Exempt
Global Smaller Oregon Value Money Fund
Company Fund Pennsylvania New York Tax-Exempt
World Fund Tennessee Franklin Funds Seeking Money Fund
Texas High Current Income IFT U.S. Treasury Money
Franklin Funds Seeking Virginia AGE High Income Fund Market Portfolio
Tax-Free Income Washington** Global Government
Federal Tax-Free Income Fund Franklin Fund for Corporations
Income Fund Franklin Funds Investment Grade Corporate Qualified
Federal Intermediate-Term Seeking Capital Growth Income Fund Dividend Fund
Tax-Free Income Fund California Growth Fund U.S. Government
High Yield DynaTech Fund Securities Fund Franklin Tax-Deferred
Insured Tax-Free Equity Fund Annuity
Income Fund*** Global Health Care Franklin Funds Seeking Franklin Valuemark
Puerto Rico Tax-Free Gold Fund High Current Income and Franklin Templeton
Income Fund Growth Fund Stability of Principal Valuemark Income Plus
International Adjustable Rate (an immediate annuity)
Franklin State-Specific Equity Fund Securities Fund
Funds Seeking Tax-Free Income Japan Fund Adjustable U.S. Government
Alabama Small Cap Growth Fund Securities Fund
Arizona* Short-Intermediate U.S.
Arkansas** Government
California* Securities Fund
Colorado
Connecticut 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
</TABLE>
Fund Information: 1-800/342-5236
Shareholder Services: 1-800/632-2301
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
PRINCIPAL UNDERWRITER:
Franklin Templeton
Distributors, Inc.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Shareholder Services
1-800-632-2301
Fund Information
1-800-342-5236
This report must be preceded or accompanied by the current prospectus of the
Templeton Variable Annuity Fund, which contains more complete information
including charges and expenses.
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.
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.
[RECYCLE LOGO APPEARS HERE] TRA S96 08/96
TEMPLETON VARIABLE ANNUITY FUND
Semi-Annual Report
June 30, 1996
[LOGO OF FRANKLIN TEMPLETON APPEARS HERE]
