AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1997.
File Nos.
33-11771
811-5024
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 10 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
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, Including Area Code:(813) 823-8712
BARABARA GREEN 700 CENTRAL AVENUE, P.O. BOX 33030, ST. PETERSBURG, FLORIDA
33733-8030
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on May 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Declaration Pursuant to Rule 24f-2. The issuer has registered an
indefinite number or amount of securities under the Securities Act of
1933 pursuant to Rule 24(f)(2) under the Investment Company Act of
1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year
was filed on February 26, 1997.
TEMPLETON VARIABLE ANNUITY FUND
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "General Description" "Investment
Objective and Policies; Description
of Securities and Investment
Techniques"
5. Management of the Fund "Management of Fund"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Dividends and Distributions"; "Other
Securities Information"
7. Purchase of Securities "Sale and Redemption of Shares", "Net
Being Offered Asset Value"
8. Redemption or Repurchase "Sale and Redemption of Shares" "Net
Asset Value"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information "General Information and History"
and History
13. Fund Investment "Investment Practices and Restrictions"
Objectives and
Policies
14. Management of the Fund "Management of the Fund"
15. Control Persons and "General Description" (Prospectus)
Principal Holders of
Securities
16. Investment Advisory "Investment Management and Other Services"
and Other Services
17. Brokerage Allocation "Brokerage Allocation"
18. Capital Stock and "Description of Shares" (Prospectus)
Other Securities
19. Purchase, Redemption "Purchase, Redemption and Pricing of
and Pricing of Shares"
Securities Being
Offered
20. Tax Status "Tax Status"
21. Underwriters "Sale and Redemption of Shares," "General
Description" (Prospectus)
22. Calculation of "Performance Information"
Performance Data
23. Financial Statements Financial Statements
A MUTUAL FUND SEEKING LONG TERM GROWTH
TEMPLETON VARIABLE ANNUITY FUND
PROSPECTUS
MAY 1, 1997
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, 1997, 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 Trust, 700 Central Avenue, St.
Petersburg, Florida 33701 or by calling the Annuity Department at (800)
774-5001 or (813) 823-8712.
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS RISK FACTORS
GENERAL DESCRIPTION SALE AND REDEMPTION OF SHARES
INVESTMENT OBJECTIVE NET ASSET VALUE
AND POLICIES MANAGEMENT OF THE FUND
INVESTMENT TECHNIQUES GENERAL INFORMATION
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.
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.
SHARES OF THE FUND ARE SOLD ONLY TO INSURANCE COMPANY SEPARATE ACCOUNTS TO FUND
THE BENEFITS OF CERTAIN VARIABLE ANNUITY CONTRACTS.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OFFERING
THE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country, in which the offering is unauthorized. No
sales representative, dealer or other person is authorized to give any
information or make any representations other than those contained in this
prospectus.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by McGladrey & Pullen, LLP, the Fund's independent auditors. Their
report for each of the last five fiscal years, appears in the financial
statements in the Fund's Annual Report for the fiscal year end December 31,
1996. The Fund's annual report also includes more information about the
Fund's performance. For a free copy, please call 1-800-774-5001.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988*
Per share
operating
performance(for a
share outstanding
throughout the
year)
NET ASSET VALUE,
BEGINNING OF YEAR $20.62 $17..96 $19.50 $14.99 $15.20$11.76 $13.63 $10.26 $10.00
- ---------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment .35 .32 .21 .24 .37 .31 .27 .22 .12
income
Net realized and
unrealized gain 4.14 3.89 (.96) 5.31 1.16 3.58 (1.80) 3.42 .24
(loss)
TOTAL FROM
INVESTMENT 4.49 4.21 (.75) 5.55 1.53 3.89 (1.53) 3.64 .36
OPERATIONS
- ---------------------------------------------------------------------------------------
Distributions:
Dividends from net
investment income (.32) (.20) -- (.24) (.39) (.29) (.26) (.23) (.10)
Distributions from
net realized gains (2.88) (1.35) (.79) (.80) (1.33) (.16) (.08) (.04) --
Distributions from
other sources (.02)
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.20) (1.55) (.79) (1.04) (1.74) (.45) (.34) (.27) (.10)
- ---------------------------------------------------------------------------------------
Change in net
asset value for 1.29 2.66 (1.54) 4.51 (.21) 3.44 (1.87) 3.37 .26
---- ---- ------ ---- ----- ---- ------ ---- ---
the year
NET ASSET VALUE,
END OF YEAR $21.91 $20.62 $17.96 $19.50 $14.99$15.20 $11.76 $13.63 $10.26
- ---------------------------------------------------------------------------------------
TOTAL RETURN 24.71% 25.49% (4.06)% 37.24% 10.17%33.29% (11.25)% 35.64% 3.61%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year in (000) $15,649 $14,120 $12,569$12,698 $9,258$9,147 $6,185 $6,317 $3,649
Ratio of expenses
to average net .96% 1.06% 1.49% 1.37% 1.52% 1.62% 2.00% 2.22% 3.01%**
assets
Ratio of expenses,
net of
reimbursement, to
average net assets .96% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%**
Ratio of net 1.64% 1.62% 1.09% 1.36% 2.06% 2.33% 2.24% 2.21% 2.24%**
investment income
to average net
assets
Portfolio turnover 30.27% 33.64% 19.85% 22.13% 27.86%25.84% 24.12% 8.89% 8.85%
rate
Average commission
rate paid (per $.003 -- -- -- -- -- -- -- --
share)
</TABLE>
*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, 1998. 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. No fee reduction
was necessary in 1996.
+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 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 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 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&Por 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 or if unrated are of equivalent investment quality as determined by the
Investment Manager. 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 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. The Fund is not
intended as a complete investment program.
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
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. Hong Kong is scheduled to
revert to the sovereignty of China on July 1, 1997. As with any major
political transfer of power, this could result in political, social,
economic, market or other developments in Hong Kong, China or other countries
that could affect the value of Fund investments.
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.
The Fund may invest in companies with relatively small revenues and limited
product lines. Smaller capitalization companies may lack depth of management,
they may be unable to internally generate funds necessary for growth or
potential development or to generate such funds through external financing on
favorable terms. Due to these and other factors, smaller companies may suffer
significant losses, as well as realize substantial growth.
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 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
THE BOARD
The Board oversees the management of the Fund and elects its officers. The
officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER
Templeton Investment Counsel, Inc., is a Florida corporation with offices at
Broward Financial Centre, Fort Lauderdale, Florida 33394-3091. TICI manages
the Fund's assets and makes its investment decisions. TICI also performs
similar services for other funds. TICI is wholly owned by Franklin Resources,
Inc.("Resources"), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources. Together TICI and its
affiliates manage over $179 billion in assets. The Templeton organization has
been investing globally since 1940. TICI and its affiliates have offices in
Argentina, Australia, Bahamas, Canada, France, Germany, Hong Kong, India,
Italy, Luxembourg, Poland, Russia, Scotland, Singapore, South Africa, U.S.,
and Vietnam. Please see "Investment Management and Other Services" and
"Brokerage Allocation" in the SAI for information on securities transactions
and a summary of the Fund's Code of Ethics.
PORTFOLIO MANAGEMENT
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. William T. Howard Jr., Vice President of TICI, and Howard J. Leonard,
Senior Vice President of TICI, exercise secondary portfolio management
responsibilities. Mr. Howard holds a BA in international studies from Rhodes
College and an MBA in finance from Emory University. He is a Chartered Financial
Analyst and a member of the Financial Analyst Society. Before joining the
Templeton Organization in 1993, Mr. Howard was a portfolio manager and analyst
with the Tennessee Consolidated Retirement System in Nashville, Tennessee, where
he was responsible for research and management of the international equity
portfolio, and specialized in the Japanese equity market. As a portfolio manager
and research analyst with Templeton, Mr. Howard's research responsibilities
include the transportation, shipping, machinery and engineering industries
worldwide. He is also responsible for country coverage of both Japan and New
Zealand. He has managed the Fund since June 1996. 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.
MANAGEMENT FEES
For the fiscal year ended December 31, 1996, management fees, totaled .50% of
the Fund's average daily net assets.
PORTFOLIO TRANSACTIONS
TICI tries to obtain the best execution on all transactions. If TICI believes
more than one broker or dealer can provide the best execution, consistent
with internal policies it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see
"Brokerage Allocation" in the SAI for more information.
ADMINISTRATIVE SERIVCES
Templeton Funds Annuity Company, 700 Central Avenue, P.O. Box 33030, St.
Petersburg, Florida 33733-8030, telephone (800) 774-5001 (the "Fund
Administrator"), 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 million to 0.10% of such assets in excess of $700 million and
0.075% of such assets in excess of $1.2 billion.
TOTAL EXPENSES
For the fiscal year ended December 31, 1996, the total expenses of the fund
amounted to .96% of the Fund's average daily net assets.
DISTRIBUTOR
The Fund's principal underwriter is Franklin Templeton Distributors, Inc.,
("Distributors") 700 Central Avenue, St. Petersburg, Florida 33701, toll free
telephone (800) 292-9293.
DIVIDENDS AND DISTRIBUTIONS
The Fund normally intends to pay an annual dividend representing
substantially all of its net investment income and to distribute annually 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 INCOME TAX STATUS
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 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.
OTHER INFORMATION
THE FUND'S ORGANIZATION
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.
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.
For more information on the Trust, the Fund and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request 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.
The Fund's investments results will vary. Performance figures are always
based on past performance and do not guarantee future results.
STATEMENTS AND REPORTS
The Fund's fiscal year ends on December 31. Annual reports containing audited
financial statements of the Fund and semi-annual reports containing unaudited
financial statements, as well as proxy materials are sent to Contract Owners,
annuitants or beneficiaries, as appropriate. Inquires may be directed to the
Fund at the telephone number or address set forth on the cover page of this
prospectus.
TEMPLETON VARIABLE ANNUITY FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF TEMPLETON VARIABLE ANNUITY FUND DATED MAY 1, 1997,
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
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................................................ 7
-Trading Policies............................................ 11
-Personal Securities Transactions............................ 11
Management of the Fund......................................... 11
Trustee Compensation........................................... 17
Principal Shareholder.......................................... 17
Investment Management and Other Services....................... 18
-Investment Management Agreement............................. 18
-Management Fees............................................. 19
-Expense Limitation ......................................... 19
-The Investment Manager...................................... 20
-Business Manager............................................ 20
-Custodian................................................... 21
-Legal Counsel............................................... 21
-Independent Accountants..................................... 21
-Reports to Shareholders..................................... 21
Brokerage Allocation........................................... 22
Purchase, Redemption and Pricing of Shares..................... 24
Tax Status..................................................... 25
Description of Shares.......................................... 29
Performance Information........................................ 29
Financial Statements........................................... 32
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
Metro Center chief executive officer of General Host
1 Station Place Corporation (nursery and craft
Stamford, Connecticut centers); and a director of RBC
Trustee Holdings (U.S.A.) Inc. (a bank holding
company) and Bar-S Foods (a meat
packing company); and director, trustee
or managing gerneral partner, as the
case may be, of 56 of the investment
companies in the Franklin Templeton
Group of Funds. Age 64.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
NICHOLAS F. BRADY* Chairman of Templeton Emerging Markets
102 East Dover Street Investment Trust PLC; chairman of
Easton, Maryland Templeton Latin America Investment
Trustee Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an 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; and director or trustee of 23
of the investment companies in the
Franklin Templeton Group of Funds. Age
65.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; Director of
Florham Park, New Jersey General Host Corporation; director,
Trustee trustee or managing general partner, as
the case may be, of 58 of the
investment companies in the Franklin
Templeton Group of Funds. Age 63.
JOHN Wm. GALBRAITH President of Galbraith Properties,
360 Central Avenue Inc. (personal investment company);
Suite 1300 director of Gulfwest Banks, Inc.
St. Petersburg, Florida (bank holding company) (1995-present)
Trustee and Mercantile Bank (1991-present);
vice chairman of Templeton, Galbraith
& Hansberger Ltd. (1986-1992); and
chairman of Templeton Funds
Management, Inc. (1974-1991). Age 74.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
ANDREW H. HINES, JR. Consultant for the Triangle Consulting
150 2nd Avenue N. Group; Chairman and Director of Precise
St. Petersburg, Florida Power Corporation;
Trustee Executive-in-Residence of Eckerd
College (1991-present); Director of
Checkers Drive-In Restaurants, Inc.;
formerly, Chairman of the Board and
Chief Executive Officer of Florida
Progress Corporation (1982-1990) and a
director of various of its
subsidiaries; and a director or trustee
of 24 of the invesment companies in the
Franklin Templeton Group of Funds. Age
72.
CHARLES B. JOHNSON* President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Chairman of the Board
San Mateo, California and Director, Franklin Advisers, Inc.,
Chairman of the Board and Franklin Investment Advisory Services,
Vice President Inc. and Franklin Templeton
Distributors, Inc.; Director,
Franklin/Templeton Investor Services,
Inc. and General Host Corporation; and
officer and/or director, trustee or
managing general partner, as the case
may be, of most other subsidiaries of
Franklin Resources, Inc. and of 57 of
the investment companies in the
Franklin Templeton Group of Funds.Age
63.
RUPERT H. JOHNSON, JR. Executive Vice President and Director,
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin
San Mateo, California Templeton Distributors, Inc.;
Trustee and Vice President President and Director, Franklin
Advisers, Inc.; Senior Vice President
and Director, Franklin Advisory
Services, Inc. and Franklin Investment
Advisory Services, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director,
trustee or managing general partner,
as the case may be, of most of the
other subsidiaries of Franklin
Resources, Inc. and of 61 of the
investment companies in the Franklin
Templeton Group of Funds.Age 55.
BETTY P. KRAHMER Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic
Wilmington, Delaware analyst, U.S. Government; and director
Trustee or trustee of 23 of the investment
companies in the Franklin Templeton
Group of Funds. Age 67.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
GORDON S. MACKLIN Chairman, White River Corporation
8212 Burning Tree Road (information and financial services);
Bethesda, Maryland 20817 Director, Fund American Enterprises
Trustee Holdings, Inc.(financial services), MCI
Communications Corporation, CCC
Information Services Group, Inc.
(information services), MedImmune, Inc.
(biotechnology), Source One Mortgage
Services Corporation (financial
services), Shoppers Express (home
shopping), Spacehab, Inc. (aerospace
services); and director, trustee or
managing general partner, as the case
may be, of 53 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group (venture
capital and investment banking);
Director, H & Q Healthcare Investors
(investment trust); and President,
National Association of Securities
Dealers, Inc.
Age 67.
FRED R. MILLSAPS Manager of Personal Investments
2665 NE 37th Drive (1978-present); Chairman and Chief
Fort Lauderdale, Florida Executive Officer of Landmark Banking
Trustee Corporation (1969-1978); Financial Vice
President of Florida Power and Light
(1965-1969); Vice President of the
Federal Reserve Bank of Atlanta
(1958-1965); a director of various
other business and nonprofit
organizations; and director or trustee
of 24 of the investment companies in
the Franklin Templeton Group of Funds.
Age 67.
CHARLES E. JOHNSON President and Director, Franklin
777 Mariners Island Blvd. Resources, Inc.; Chairman of the Board
San Mateo, California and Director, Franklin Advisers, Inc.,
President Franklin Investment Advisory Services,
Inc. and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host
Corporation; and officer and/or director,
trustee or managing general partner, as
the case may be, of most other
subsidiaries of Franklin Resources, Inc.
and of 57 of the investment companies in
the Franklin Templeton Group of Funds.
Age 39.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
HARMON E. BURNS Executive Vice President, Secretary and
777 Mariners Island Blvd. Director, Franklin Resources, Inc.;
San Mateo, California Executive Vice President and Director,
Vice President Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc. and Franklin Templeton
Services, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the
case may be, of most of the other
subsidiaries of Franklin Resources,
Inc.; and officer and/or director or
trustee of 61 of the investment
companies in the Franklin Templeton
Group of Funds. Age 51.
MARTIN L. FLANAGAN Senior Vice President, Chief Financial
777 Mariners Island Blvd. Officer and Treasurer, Franklin
San Mateo, California Resources, Inc.; President, Franklin
Vice President Templeton Services, Inc.; Executive
Vice President, Templeton Worldwide,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc.;
Senior Vice President,
Franklin/Templeton Investor Services,
Inc.; Treasurer, Franklin Advisory
Services, Inc. and Franklin Investment
Advisory Services, Inc.; officer of
most of the other subsidiaries of
Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the
investment companies in the Franklin
Templeton Group of Funds. Age 36.
DEBORAH R. GATZEK Senior Vice President and General
777 Mariners Island Blvd. Counsel, Franklin Resources, Inc.;
San Mateo, California Senior Vice President Franklin
Vice President Templeton Services, Inc., and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisors, Inc.,
Franklin Advisory Services, Inc., and
officer of 61 of the investment
companies in the Franklin Templeton
Group of Funds. Age 47.
MARK G. HOLOWESKO President and director of Templeton
Lyford Cay Global Advisors Limited; chief
Nassau, Bahamas investment officer of the global equity
Vice President group for Templeton Worldwide, Inc.;
president or vice president of the
Templeton Funds; formerly, investment
administrator with Roy West Trust
Corporation (Bahamas) Limited
(1984-1985); and director or trustee of
22 of the investment companies in the
Franklin Templeton Group. Age 36.
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
JOHN R. KAY Vice president of the Templeton Funds;
500 East Broward Blvd. vice president and treasurer of
Fort Lauderdale, Florida Templeton Global Investors, Inc. and
Vice President Templeton Worldwide, Inc.; assistant
vice president of Franklin Templeton
Distributors, Inc.; formerly, vice
president and controller, the Keystone
Group, Inc.; and director or trustee of
22 of the investment companies in the
Franklin Templeton Group. Age 56.
JAMES R. BAIO Certified public accountant; treasurer
500 East Broward Blvd. of the Templeton Funds; senior vice
Fort Lauderdale, Florida president of Templeton Worldwide, Inc.,
Treasurer Templeton Global Investors, Inc., and
Templeton Funds Trust Company;
formerly, senior tax manager, Ernst &
Young (certified public accountants)
(1977-1989). And director or trustee of
22 of the investment companies in the
Franklin Templeton Group. Age 42.
* These are Trustees who are "interested persons" of the Trust as that term
is defined in the 1940 Act. Charles B. Johnson is an interested person due
to his ownership interest in Franklin Resources, Inc. 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. The
remaining Trustees are not interested persons ("Independent Trustees").
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, 1996, 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, 1996:
NUMBER OF
BOARDS IN THE
FRANKLIN TOTAL
TEMPLETON GROUP COMPENSATION
AGGREGATE OF FUNDS ON FROM ALL FUNDS
FEES FROM WHICH TRUSTEE IN FRANKLIN
NAME OF TRUSTEE THE TRUST* SERVES*** TEMPLETON GROUP*
Harris J. Ashton $ 100 56 $343,591
Nicholas F. Brady 100 23 119,275
F. Bruce Clarke** 128 19 69,500
Hasso-G von Diergardt-Naglo** 100 20 66,375
S. Joseph Fortunato 100 58 360,411
John Wm. Galbraith 100 23 102,475
Andrew H. Hines, Jr. 195 24 130,525
Betty P. Krahmer 100 23 119,275
Gordon S. Macklin 167 53 335,541
Fred R. Millsaps 105 24 125,275
*For the fiscal year ended December 31, 1996.
**Messrs. Clarke and Diergardt-Naglo resigned as Trustees during 1996.
*** We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 61 registered investment companies, with
approximately 171 U.S. based funds or series.
PRINCIPAL SHAREHOLDER
As of April 15, 1997, TFAC, on behalf of the Separate Accounts, owned
of record 858,927.841 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 will continue through
April 30, 1998. 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 million and
further reduced to 0.40% of such net assets in excess of $1.3 billion.
During the fiscal years ended December 31, 1996, 1995, and 1994, the
Investment Manager received fees of $74,375, $67,417, $66,500, and
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, 1998. 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, 1998, 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. No fee reduction was
necessary in 1996.
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.
FUND ADMINISTRATOR. Templeton Funds Annuity Company (the "Fund
Administrator"), 700 Central Avenue, P.O. Box 33030, St. Petersburg, Florida
33733-8030, telephone (813) 823-8712, performs certain administrative
functions as Fund Administrator for the Fund pursuant to a Fund
Administration Agreement dated October 30, 1992. The Agreement requires the
Fund Administrator to be responsible for various activities on behalf of the
Fund, including:
providing office space, telephone, office equipment and supplies
for the Fund;
paying compensation of the Fund's officers for services rendered
as such;
authorizing expenditures and approving bills for payment on
behalf of the Fund;
preparation of annual and semi-annual reports, notices of
dividends, capital gains distributions and tax credits;
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;
monitoring relationships with organizations serving the Fund,
including its custodian and printers;
providing trading desk facilities for the Fund;
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
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 million of the Fund's average
daily net assets, reduced to 0.135% annually of such net assets in excess of
$200 million further reduced to 0.10% annually of such net assets in excess
of $700 million and further reduced to 0.075% annually of such net assets in
excess of $1.2 billion. Since the Fund Administrator'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, 1996, 1995, and 1994, TFAC received business management fees of
$22,315, $20,222, and $19,950 respectively.
The Fund Administrator 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, 1996,
1995, and 1994 were $1,000, $21,000, and $19,000, 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, 1996 and for the period from February 16, 1988 (commencement of
operations) through December 31, 1996 were 24.71%, 17.81% and 16.14,
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 audited financial statements contained in the Fund's Annual Report
to Shareholders dated December 31, 1996, including the auditors' report are
incorporated herein by reference.
- --------
* 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.
TEMPLETON VARIABLE ANNUITY FUND
File Nos. 33-11771
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
(a) Financial Statements:
(1) The audited financial statements contained in the Fund's Annual
Report for the fiscal year ended December 31, 1996 and filed via
EDGAR on 3/10/97 are incorporated herein by reference.
(b) Exhibits:
The following exhibits where applicable, are herewith incorporated
by reference to the filings as noted with the exception of Exhibits
11(a) and 17(a); which are attached.
(1) Declaration of Trust
Filing: Pre-Effective Amendment No.1 on Form N-1A
File No. 33-11771
Filing Date: October 1, 1987
(2) copies of the By-Laws or instruments corresponding thereto;
Filing: Post Effective Amendment No.8 on Form N-1A
File No. 33-1171
Filing Date: May 1, 1995
(3) copies of any voting trust agreement with respect to more
than five percent of any class of equity securities of the
Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent
instruments, defining the rights of the holders of such
securities, and copies of each security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to
the management of the assets of the Registrant;
(a) Amended and Restated Investment Management Agreement
Filing: Post Effective Amendment No. 8 on Form N-1A
File No. 33-11771
Filing Date: May 1, 1995
(6) copies of each underwriting or distribution contract
between the Registrant and a principal underwriter, and
specimens or copies of all agreements between principal
underwriters and dealers;
Not Applicable
(7) copies of all bonus, profit sharing, pension or other
similar contracts or arrangements wholly or partly for
the benefit of Trustees or officers of the Registrant in
their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably detailed
description thereof;
Not Applicable
(8) copies of all custodian agreements and depository
contracts under Section 17(f) of the Investment Company
Act of 1940 (the "1940 Act"), with respect to securities
and similar investments of the Registrant, including the
schedule of renumeration;
(a) Custody Agreement
Filing: Pre-Effective Amendment No. 1 on Form N-1A
File No. 33-11771
Filing Date: October 7, 1987
(9) Copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;
(a) Business Management Agreement
Filing: Post-Effective Amendment No.6 on Form N-1A
File No. 33-11771
Filing Date: March 2, 1993
(10) an opinion and consent of counsel as to the legality of
the securities being registered, indicating whether they
will when sold be legally issued, fully paid and
nonassessable;
(a) Opinion of Counsel - filed with Rule 24f-2 Notice on
February 26, 1997
(11) Copies of any other rulings and consents to the use
thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(a) Consent of Independent Auditors dated May 30, 1997.
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in
consideration for providing the initial capital between or
among the Registrant, the underwriter, adviser, promoter
or initial stockholders and written assurances from
promoters or initial stockholders that their purchases
were made for investment purposes without any present
intention of redeeming or reselling;
(a) Letter concerning initial capital
Filing: Pre-Effective Amendment No. 3 on Form N-1A
File No. 33-11771
Filing Date: February 16, 1988
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant
offers its securities, any instructions thereto and any
other documents making up the model plan. Such form(s)
should disclose the costs and fees charged in connection
therewith;
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) copies of any plan entered into by Registrant pursuant to
Rule 12b-1 under the 1940 Act, which describes all
material aspects of the financing of distribution of
Registrant's shares, and any agreements with any person
relating to implementation of such plan.
Not Applicable
(16) Schedule for computation of each performance quotation
provided in the registration statement in response to Item
22 (which need not be audited).
(a) Previously filed with Post-Effective Amendment No. 8
to Registration Statement filed on May 1, 1995.
(17) Power of Attorney
(a) Power of Attorney from Officers and Directors of the
Registrant executed December 12, 1996.
Item 25 Persons Controlled by or under Common Control with Registrant
As of April 15, 1997, Templeton Funds Annuity Company, on behalf of Templeton
Funds Retirement Annuity Separate Account and Templeton Immediate Variable
Annuity Separate Account, owned 858,927.841 shares (100%) of the Trust.
Templeton Funds Annuity Company will vote shares in accordance with the voting
instructions of holders of variable annuity contracts or any other policies for
which the Registrant serves as the underlying investment vehicle.
Item 26 Number of Holders of Securities
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF April 15, 1997
-------------- --------------------
Shares of Beneficial Interest,
Par Value $0.01 per Share: 1 as of April 15, 1997
Item 27 Indemnification
Reference is made to Section 4.3 of the Registrant's Declaration of Trust,
which is incorporated herein by reference. 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 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 Underwriters
Not Applicable
Item 30 Location of Accounts and Records
Accounts and records required to be maintained by Registrant pursuant to Section
31(a) of the Investment Company Act of 1940 and rules promulgated thereunder are
in the possession of Templeton Funds Annuity Company, 700 Central Avenue, St.
Petersburg, Florida 33733-3080.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
(a) Not applicable
(b) Not applicable
(c) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person
to whom a prospectus is delivered a copy of the 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) of the Securities Act of 1993 and that it has duly caused this
Post-Effective Amendment No. 10 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
San Mateo and the State of California, on the ()th day of (), 1997.
TEMPLETON VARIABLE ANNUITY FUND
By: Charles E. Johnson*
Charles E. Johnson, President
*By:/s/ Karen L. Skidmore
Karen L. Skidmore
as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Charles E. Johnson* Principal Executive Officer
Charles E. Johnson and Trustee
Dated: (),1997
Charles B. Johnson* Chairman of the Board and
Charles B. Johnson Trustee
Dated: (), 1997
Harris J. Aston* Trustee
Harris J. Ashton Dated: April 30, 1997
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: April 30, 1997
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 30, 1997
John Wm. Galbraith* Trustee
John Wm. Galbraith Dated: (), 1997
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: April 30, 1997
Rupert H. Johnson, Jr* Trustee
Rupert H. Johnson Dated: (), 1997
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: April 30, 1997
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 30, 1997
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: April 30, 1997
James R. Baio* Trustee
James R. Baio Dated: April 30, 1997
*By /s/ Karen L. Skidmore
Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 17)
TEMPLETON VARIABLE ANNUITY FUND
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1 Declaration of Trust *
EX-99.B2 By-Laws *
EX-99.B5(a) Amended and Restated Investment Management Agreement *
EX-99.B8(a) Custody Agreement *
EX-99.B9(a) Business Management Agreement *
EX-99.B10(a) Opinion of Counsel *
EX-99.B11(a) Consent of Independent Auditors dated May 30, 1997 Attached
EX-99.B13(a) Letter concerning initial capital *
EX-99.B16(a) Scheduled for computation of each performance quotation *
EX-99.B17(a) Power of Attorney from Officers and Directors
of the Registrant executed December 12, 1996 *
*Incorporated by Reference
AUDITORS CONSENT
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 31 , 1997 on the
financial statements of Templeton Variable Annuity Fund referred to therein,
which appears in the 1996 Annual Report to Shareholders, and which is
incorporated herein by reference, in Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A, File No. 33-11771, as filed with the
Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under
the caption "Financial Highlights" and in the Statement of Additional
Information under the caption "Independent Accountants".
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
New York, New York
May 30, 1997
POWER OF ATTORNEY
The undersigned officers and Trustees of TEMPLETON VARIABLE ANNUITY FUND
(the "Registrant") hereby appoint Allan S. Mostoff, Jeffrey L. Steele, William
J. Kotapish, Deborah R. Gatzek, Barbara J. Green, Karen L. Skidmore, and John K.
Carter (with full power to each of them to act alone) his attorney-in-fact and
agent, in all capacities, to execute, and to file any of the documents referred
to below relating to Post-Effective Amendments to the Registrant's registration
statement on Form N-1A under the Investment Company Act of 1940, as amended, and
under the Securities Act of 1933 covering the sale of shares by the Registrant
under prospectuses becoming effective after this date, including any amendment
or amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and Trustees hereby execute this Power of Attorney
as of this 12th day of December, 1996.
/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
- -------------------------------------- ----------------------------------------
Harris J. Ashton, Trustee Rupert H. Johnson, Jr., Trustee
/s/ Nicholas F. Brady /s/ Betty P. Krahmer
- -------------------------------------- ----------------------------------------
Nicholas F. Brady, Trustee Betty P. Krahmer, Trustee
/s/ S. Joseph Fortunato /s/ Gordon S. Macklin
- -------------------------------------- ----------------------------------------
S. Joseph Fortunato, Trustee Gordon S. Macklin, Trustee
/s/ John Wm. Galbraith /s/ Fred R. Millsaps
- -------------------------------------- ----------------------------------------
John Wm. Galbraith, Trustee Fred R. Millsaps, Trustee
/s/ Andrew H. Hines, Jr. /s/ Hasso-G Von Diergardt-Naglo
- -------------------------------------- ----------------------------------------
Andrew H. Hines, Jr., Trustee Hasso-G Von Diergardt-Naglo, Trustee
/s/ Charles B. Johnson /s/ Charles E. Johnson
- -------------------------------------- ----------------------------------------
Charles B. Johnson, Trustee Charles E. Johnson, President
/s/ James R. Baio
----------------------------------------
James R. Baio, Treasurer
