ANNUAL REPORT
DECEMBER 31, 1997
TEMPLETON RETIREMENT ANNUITY
- - TRA SEPARATE ACCOUNT
- - TEMPLETON VARIABLE ANNUITY FUND
[TEMPLETON LOGO]
FRANKLIN TEMPLETON
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders......................................... 2
Report of Special Meeting of Shareholders...................... 4
Manager's Discussion........................................... 5
Performance Summary............................................ 8
Financial Highlights........................................... 10
Statement of Investments....................................... 11
Financial Statements........................................... 14
Notes to Financial Statements.................................. 16
Independent Auditor's Report................................... 19
Templeton Funds Retirement Annuity
Separate Account Financial Statements.......................... 20
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
We are pleased to bring you the annual report of the Templeton
Retirement Annuity and the Templeton Variable Annuity Fund for the 12
months ended December 31, 1997.
During the year under review, benign inflation, relatively low interest
rates, and healthy corporate earnings characterized many economies
around the world. Although currency crises in Southeast Asia sent global
stock prices spiraling downward during the latter half of the period,
equity markets generally finished the year with an appreciable gain.
In the U.S., the Dow Jones(R) Industrial Average advanced 25%, marking
its third consecutive annual gain of more than 20% -- a historical
record. The Standard & Poor's(R) 500 Stock Index rose even more, posting
a return of 33.4% for the year. Even though large cap companies led the
market, many small cap stocks also fared well, as the Russell 2000(R)
Index appreciated 22.4%.*
Many European companies continued to generate strong profits as a result
of privatization, restructuring, and cost-reduction programs.
Corporations there also experienced significant merger and acquisition
activity, which often accompanies rising shareholder value. We believe
these factors contributed to the strong advance of most European stock
markets. Switzerland, Italy, and the Netherlands (three countries whose
markets rose more than 20%) were among the region's leaders.*
Emerging market equities posted mixed results during the period. Strong
exports, tight monetary policies, and increased capital flows into the
region helped Latin American markets deliver impressive returns. As
measured in U.S. dollars, Mexico's Bolsa Index increased 54.3% during
the year and Brazil's Bovespa Index 40.7%. However, bad banking loans
and slowing economies
2
<PAGE>
caused share prices to plummet in many Asian developing countries. For
example, Thailand's equity market fell 74.7%, Indonesia's 70.5%, and South
Korea's 69.2%.*
It is important to remember, of course, that securities markets always have
been -- and always will be -- subject to volatility. No one can predict
exactly how they will perform in the future. For this reason, we urge you to
exercise patience and focus not on short-term market movements, but on your
long-term investment goals.
We appreciate your participation in the Templeton Retirement Annuity and the
Templeton Variable Annuity Fund and look forward to serving your investment
needs in the years to come.
Sincerely,
[/s/ CHARLES E. JOHNSON]
Charles E. Johnson
President
Templeton Variable Annuity Fund
[/s/ RICHARD P. AUSTIN]
Richard P. Austin
President
Templeton Funds Annuity Company
--------------------------------------------------------------------------
Note: At a Special Meeting on February 3, 1998, the Fund's shareholders
approved an Agreement and Plan of Reorganization (the "Merger Plan") which
will merge the Fund with the Templeton Stock Fund (the "Stock Fund"), a
series of Templeton Variable Products Series Fund, as of May 1, 1998.
Under the Merger Plan, the Fund's shareholders will receive Stock Fund
Class 1 shares equal in value to their Templeton Variable Annuity Fund
shares.
--------------------------------------------------------------------------
*Indices are unmanaged. Price appreciation is measured in U.S. dollars and
includes reinvested dividends. One cannot invest directly in an index. Dow
Jones Industrial Average's total return is calculated by Wilshire
Associates, Inc.
3
<PAGE>
REPORT OF SPECIAL MEETING OF SHAREHOLDERS
At the Special Meeting of Shareholders of Templeton Variable Annuity Fund held
on February 3, 1998, shareholders voted as follows:
1. Regarding the approval of the Agreement and Plan of Reorganization between
the Templeton Variable Annuity Fund and the Templeton Stock Fund, a series of
Variable Products Series Fund:
<TABLE>
<CAPTION>
% OF % OF % OF
SHARES SHARES SHARES SHARES SHARES
SHARES VOTED SHARES VOTED FOR VOTED VOTED AGAINST VOTED VOTED ABSTAIN VOTED
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
791,078.018 721,463.152 91.2% 60,913.007 7.7% 8,701.858 1.1%
</TABLE>
There being no further business to come before the meeting, upon motion duly
made, seconded and carried, the Meeting was adjourned.
4
<PAGE>
MANAGER'S DISCUSSION
- --------------------------------------------------------------------------------
Your Fund's objective: Templeton Variable Annuity Fund seeks long-term capital
growth through a flexible policy of investing primarily in stocks and debt
obligations of companies and governments of any nation.
- --------------------------------------------------------------------------------
During the 12 months under review, moderate economic growth, low inflation, and
healthy corporate profits provided a favorable environment for U.S. stocks. Two
of the strongest sectors were banking and financial services. The value of our
shares of Federal National Mortgage Association rose significantly and we sold
our holdings of American Express Co. and Morgan Stanley Dean Witter Discover &
Co. at a considerable gain. However, the high price/earnings ratios and low
dividend yields of U.S. equity markets made it difficult to identify investment
bargains, and our domestic exposure decreased from 20.4% of total net assets on
December 31, 1996 to 19.7% at year end.
In Europe, it appeared many economies were restrained by fiscal policies
designed to help them meet European Monetary Union criteria. Encouraged by low
interest rates and benign inflation resulting from these requirements, investors
bid up many stocks' prices. Among the Fund's ten largest holdings, the share
prices of Kuoni Reisen Holdings AG, B and Alcatel Alsthom Cie Generale
D'Electricite SA appreciated substantially in 1997. The strength of the European
banking industry prompted us to sell our holdings of Bankinter SA (Spain) at a
profit, which also benefited the Fund.
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
12/31/97
Europe 52.6%
North America 23.8%
Latin America 10.0%
Asia 7.6%
Australia/New Zealand 5.9%
Short-Term Investments
& Other Net Assets 0.1%
5
<PAGE>
Equity markets in Asia performed poorly during the reporting period. Over the
course of many years of strong economic growth, investors in developed countries
had lent large sums of capital to Asian corporations. When the region's
economies slowed and currency crises erupted in mid-1997, fears that these
companies would be unable to repay their loans caused many stock markets to
plunge. Fortunately, we had maintained a relatively low weighting in Asia and
these declines did not significantly impact the Fund.
Although Latin American equity markets experienced severe volatility toward the
end of the period, many advanced during the year. The telecommunications sector
performed especially well, and the value of our holdings of
Telebras-Telecomunicacoes Brasileiras SA (Telebras) and Telmex-Telefonos de
Mexico SA rose substantially. In our opinion, demand for the services of these
companies will continue to increase, and deregulation of Brazil's telephone
industry could provide Telebras with strong growth potential.
Of course, it is important to remember that investments in foreign securities
involve special risks including changes in currency values, market price swings,
and economic, social, and political developments in the countries where the
portfolio is invested. Developing markets involve similar but higher risks
related to their smaller size and lesser liquidity. These risks are discussed in
the prospectus.
Please remember that this discussion accurately reflects our views and opinions
as of December 31, 1997, the end of the reporting period. However, market and
economic conditions are changing constantly, which may affect our strategies and
portfolio holdings. Although historic performance is no guarantee of future
results, these insights may help you understand our investment and management
philosophy.
TOP 10 HOLDINGS
12/31/97
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
Kuoni Reisen Holdings AG, B
Leisure & Tourism,
Switzerland 2.8%
Telebras-Telecomunicacoes
Brasileiras SA, pfd.
Telecommunications, Brazil 2.6%
Nycomed Amersham Plc., fgn.
Health & Personal Care,
United Kingdom 2.5%
Rhone-Poulenc SA
Chemicals, France 2.4%
Telecom Italia SpA, di Risp
Telecommunications,
Italy 2.2%
Novartis AG
Health & Personal Care,
Switzerland 2.2%
Alcatel Alsthom Cie
Generale D'Electricite SA
Electrical & Electronics,
France 2.2%
VEBA AG
Utilities Electrical & Gas,
Germany 2.2%
Total SA, B
Energy Sources, France 2.0%
Federal National Mortgage
Association
Financial Services, U.S. 1.9%
For a complete list of portfolio holdings, please see
page 11 of this report.
6
<PAGE>
As always, we will strive to build and improve our ability to serve investors
while maintaining the traditional values and principles that have served our
clients well for so long. We appreciate your participation in the Templeton
Variable Annuity Fund and welcome any comments or suggestions you may have.
Sincerely,
/s/ Mark R. Beveridge
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Variable Annuity Fund
TOP 10 COUNTRIES
REPRESENTED IN THE FUND
12/31/97
% OF TOTAL
COUNTRY NET ASSETS
----------------------------------------------------
United States 19.7%
France 12.6%
Switzerland 8.1%
United Kingdom 6.5%
Netherlands 4.5%
Hong Kong 4.4%
Australia 4.2%
Sweden 3.7%
Germany 3.7%
Italy 3.4%
7
<PAGE>
PERFORMANCE SUMMARY
The Templeton Variable Annuity Fund provided a 12.50% total return for the
12-month period ended December 31, 1997. Total return represents the cumulative
or average annual change in value, assuming reinvestment of dividends and
capital gains. Average returns smooth out variations in returns, which can be
significant; they are not the same as year-by-year results. Past expense
reductions by the manager increased returns.
We have always maintained a long-term perspective when managing the Fund, and we
encourage you to view your investments in a similar manner. As you can see from
the table on page 8, the Fund delivered a cumulative total return of more than
324% since its inception on February 16, 1988.
The graph on the following page compares the performance of the Fund's shares
since inception with the unmanaged Morgan Stanley Capital International(R)
(MSCI) World Index. The MSCI World Index includes approximately 1,500 companies
representing the stock markets of 23 countries, including the U.S., Canada, the
United Kingdom, and Japan. The graph also shows the Fund's performance versus
the Consumer Price Index (CPI), a commonly used measure of inflation. Please
remember that the Fund's performance differs from that of an index because an
index does not contain cash (the Fund generally carries a certain percentage of
cash at any given time) and includes no sales charges or management expenses. Of
course, one cannot invest directly in an index, nor is an index representative
of the Fund's portfolio.
NOTE: PERFORMANCE REFLECTS THE FUND'S OPERATING EXPENSES, BUT DOES NOT INCLUDE
ANY FEES, EXPENSES, OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT
FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED,
PERFORMANCE WOULD BE LOWER. FOR A COMPLETE DESCRIPTION OF EXPENSES, INCLUDING
ANY APPLICABLE SALES CHARGES, PLEASE REFER TO THE CONTRACT PROSPECTUS.
Past performance is not predictive of future results.
8
<PAGE>
TOTAL RETURN INDEX COMPARISON
$10,000 Investment (2/16/88 - 12/31/97)
<TABLE>
<CAPTION>
Date Templeton Variable Annuity MSCI World Index CPI
<S> <C> <C> <C>
2/16/88 $10,000 $10,000 $10,000
2/29/88 $10,030 $10,460 $10,012
3/31/88 $9,890 $10,777 $10,056
4/30/88 $9,890 $10,915 $10,107
5/31/88 $9,690 $10,699 $10,142
6/30/88 $9,970 $10,686 $10,186
7/31/88 $9,770 $10,889 $10,227
8/31/88 $9,730 $10,293 $10,271
9/30/88 $10,170 $10,731 $10,340
10/31/88 $10,540 $11,448 $10,374
11/30/88 $10,310 $11,848 $10,384
12/31/88 $10,371 $11,957 $10,401
1/31/89 $11,259 $12,392 $10,453
2/28/89 $11,219 $12,316 $10,495
3/31/89 $11,482 $12,239 $10,555
4/30/89 $11,969 $12,524 $10,625
5/31/89 $12,020 $12,219 $10,685
6/30/89 $11,989 $12,083 $10,712
7/31/89 $12,993 $13,450 $10,738
8/31/89 $13,530 $13,127 $10,755
9/30/89 $13,864 $13,499 $10,789
10/31/89 $13,256 $13,051 $10,842
11/30/89 $13,702 $13,575 $10,866
12/31/89 $14,053 $14,013 $10,883
1/31/90 $13,136 $13,361 $10,996
2/28/90 $13,177 $12,790 $11,047
3/31/90 $13,363 $12,020 $11,108
4/30/90 $13,114 $11,849 $11,126
5/31/90 $14,390 $13,099 $11,151
6/30/90 $14,525 $13,008 $11,212
7/31/90 $14,671 $13,129 $11,254
8/31/90 $13,239 $11,902 $11,358
9/30/90 $11,963 $10,649 $11,453
10/31/90 $11,900 $11,645 $11,522
11/30/90 $12,212 $11,456 $11,547
12/31/90 $12,481 $11,699 $11,547
1/31/91 $13,319 $12,129 $11,617
2/28/91 $14,220 $13,254 $11,634
3/31/91 $14,134 $12,865 $11,651
4/30/91 $14,315 $12,968 $11,668
5/31/91 $14,655 $13,264 $11,702
6/30/91 $13,805 $12,447 $11,738
7/31/91 $14,804 $13,037 $11,755
8/31/91 $15,176 $12,998 $11,789
9/30/91 $15,346 $13,341 $11,841
10/31/91 $15,537 $13,560 $11,858
11/30/91 $15,112 $12,971 $11,892
12/31/91 $16,610 $13,918 $11,902
1/31/92 $16,829 $13,662 $11,919
2/29/92 $17,387 $13,429 $11,962
3/31/92 $16,961 $12,799 $12,022
4/30/92 $17,435 $12,979 $12,039
5/31/92 $18,120 $13,497 $12,056
6/30/92 $17,723 $13,047 $12,100
7/31/92 $17,822 $13,083 $12,126
8/31/92 $17,634 $13,404 $12,160
9/30/92 $17,446 $13,283 $12,194
10/31/92 $17,579 $12,927 $12,237
11/30/92 $17,988 $13,160 $12,254
12/31/92 $18,311 $13,269 $12,247
1/31/93 $18,702 $13,316 $12,307
2/28/93 $19,008 $13,633 $12,350
3/31/93 $19,789 $14,427 $12,394
4/30/93 $20,095 $15,098 $12,428
5/31/93 $20,449 $15,449 $12,445
6/30/93 $20,425 $15,321 $12,462
7/31/93 $20,571 $15,639 $12,462
8/31/93 $22,245 $16,359 $12,497
9/30/93 $22,391 $16,059 $12,522
10/31/93 $22,442 $16,504 $12,575
11/30/93 $23,259 $15,573 $12,583
12/31/93 $25,131 $16,338 $12,583
1/31/94 $26,522 $17,419 $12,618
2/28/94 $25,711 $17,195 $12,661
3/31/94 $24,501 $16,457 $12,705
4/30/94 $24,837 $16,969 $12,722
5/31/94 $25,146 $17,015 $12,730
6/30/94 $24,300 $16,971 $12,773
7/31/94 $25,468 $17,297 $12,807
8/31/94 $26,367 $17,821 $12,860
9/30/94 $25,736 $17,356 $12,894
10/31/94 $25,642 $17,852 $12,903
11/30/94 $24,555 $17,082 $12,920
12/31/94 $24,099 $17,250 $12,920
1/31/95 $23,750 $16,994 $12,971
2/28/95 $24,434 $17,245 $13,023
3/31/95 $25,080 $18,080 $13,066
4/30/95 $25,989 $18,713 $13,109
5/31/95 $26,898 $18,877 $13,135
6/30/95 $27,690 $18,875 $13,161
7/31/95 $29,040 $19,823 $13,160
8/31/95 $28,776 $19,385 $13,196
9/30/95 $29,670 $19,953 $13,221
10/31/95 $28,556 $19,643 $13,264
11/30/95 $29,480 $20,329 $13,255
12/31/95 $30,242 $20,927 $13,246
1/31/96 $31,078 $21,309 $13,324
2/29/96 $31,706 $21,442 $13,367
3/31/96 $32,774 $21,804 $13,436
4/30/96 $33,565 $22,320 $13,488
5/31/96 $34,082 $22,343 $13,514
6/30/96 $34,615 $22,460 $13,522
7/31/96 $32,619 $21,671 $13,548
8/31/96 $33,927 $21,925 $13,574
9/30/96 $34,770 $22,787 $13,617
10/31/96 $35,218 $22,950 $13,660
11/30/96 $37,180 $24,240 $13,686
12/31/96 $34,714 $23,856 $13,686
1/31/97 $39,383 $24,147 $13,729
2/28/97 $39,288 $24,429 $13,770
3/31/97 $39,481 $23,950 $13,805
4/30/97 $38,968 $24,737 $13,821
5/31/97 $40,954 $26,269 $13,813
6/30/97 $43,132 $27,582 $13,829
7/31/97 $44,990 $28,857 $13,846
8/31/97 $42,555 $26,932 $13,872
9/30/97 $46,313 $28,398 $13,907
10/31/97 $42,470 $26,908 $13,942
11/30/97 $41,915 $27,388 $13,933
12/31/97 $42,427 $27,727 $13,917
</TABLE>
* Index includes reinvested dividends.
** Source: U.S. Bureau of Labor Statistics, December 31, 1997.
TEMPLETON VARIABLE ANNUITY FUND
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR 5-YEAR (2/16/88)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return 12.50% 20.74% 18.30% 15.76%
Cumulative Total Return 12.50% 76.06% 131.82% 324.28%
Value of $10,000 Investment $11,250 $17,606 $23,182 $42,427
</TABLE>
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return 37.24% -4.06% 25.49% 24.71% 12.50%
</TABLE>
Investment return and the value of your principal will go up and down with
market conditions, currencies and the economic, social, and political climates
of the countries where investments are made. Emerging markets involve similar
but higher risks related to their smaller size and lesser liquidity of those
markets. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
9
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year......................................... $21.91 $20.62 $17.96 $19.50 $14.99
--------------------------------------------------
Income from investment operations:
Net investment income..................................................... .37 .35 .32 .21 .24
Net realized and unrealized gain (loss)................................... 2.08 4.14 3.89 (.96) 5.31
--------------------------------------------------
Total from investment operations........................................... 2.45 4.49 4.21 (.75) 5.55
--------------------------------------------------
Less distributions from:
Net investment income..................................................... (.35) (.32) (.20) -- (.24)
Net realized gains........................................................ (4.14) (2.88) (1.35) (.79) (.80)
--------------------------------------------------
Total distributions........................................................ (4.49) (3.20) (1.55) (.79) (1.04)
--------------------------------------------------
Net asset value, end of year............................................... $19.87 $21.91 $20.62 $17.96 $19.50
--------------------------------------------------
Total Return*.............................................................. 12.50% 24.71% 25.49% (4.06)% 37.24%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of year (000's)............................................ $15,554 $15,649 $14,120 $12,569 $12,698
Ratios to average net assets:
Expenses.................................................................. 0.97% 0.96% 1.00% 1.00% 1.00%
Expenses, excluding waiver and payments by affiliate...................... 0.97% 0.96% 1.06% 1.49% 1.37%
Net investment income..................................................... 1.76% 1.64% 1.62% 1.09% 1.36%
Portfolio turnover rate.................................................... 23.19% 30.27% 33.64% 19.85% 22.13%
Average commission rate paid**............................................. $.0132 $.0030 -- -- --
</TABLE>
*Total return does not reflect sales commissions.
**Relates to purchases and sales of equity securities. Prior to fiscal year 1996
disclosure of average commission rate was not required.
See Notes to Financial Statements.
10
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 95.9%
AEROSPACE & MILITARY TECHNOLOGY 0.1%
Raytheon Co., A.................................................................. United States 255 $ 12,575
-----------
AUTOMOBILES 4.1%
Fiat SpA......................................................................... Italy 59,180 171,652
General Motors Corp. ............................................................ United States 4,000 242,500
Volvo AB, B...................................................................... Sweden 8,600 230,708
-----------
644,860
-----------
BANKING 6.5%
Banque Nationale de Paris BNP.................................................... France 3,050 162,116
Banque Nationale de Paris BNP, ADR, 144A......................................... France 700 37,207
Deutsche Bank AG................................................................. Germany 3,300 230,762
HSBC Holdings Plc. .............................................................. Hong Kong 7,288 179,637
*Philippine National Bank........................................................ Philippines 59,887 131,604
Unidanmark AS, A................................................................. Denmark 3,700 271,618
-----------
1,012,944
-----------
BUILDING MATERIALS & COMPONENTS 1.8%
Cie de Saint Gobain.............................................................. France 1,300 184,681
Pioneer International Ltd. ...................................................... Australia 37,000 101,041
-----------
285,722
-----------
BUSINESS & PUBLIC SERVICES 3.9%
Lex Service Plc. ................................................................ United Kingdom 32,000 245,171
SGS Societe Generale de Surveillance Holdings Ltd., br. ......................... Switzerland 100 191,564
Wheelabrator Technologies Inc. .................................................. United States 11,000 176,688
-----------
613,423
-----------
CHEMICALS 4.0%
Akzo Nobel NV.................................................................... Netherlands 1,400 241,383
Rhone-Poulenc SA, A.............................................................. France 8,386 375,653
-----------
617,036
-----------
DATA PROCESSING & REPRODUCTION 2.0%
*Bay Networks Inc. .............................................................. United States 6,100 155,931
*Newbridge Networks Corp. ....................................................... Canada 4,400 153,450
-----------
309,381
ELECTRICAL & ELECTRONICS 4.9%
Alcatel Alsthom Cie Generale D'Electricite SA.................................... France 2,700 343,192
*DSC Communications Corp. ....................................................... United States 8,100 194,400
Motorola Inc. ................................................................... United States 3,800 216,837
-----------
754,429
-----------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.5%
BICC Plc. ....................................................................... United Kingdom 38,000 107,345
Intel Corp. ..................................................................... United States 4,000 281,000
-----------
388,345
-----------
ENERGY SOURCES 6.1%
Societe Elk Aquitane SA.......................................................... France 2,600 302,401
Total SA, B...................................................................... France 2,862 311,475
Transportadora de Gas del Sur SA, ADR B.......................................... Argentina 14,000 156,625
YPF Sociedad Anonima, ADR........................................................ Argentina 5,400 184,612
-----------
955,113
-----------
FINANCIAL SERVICES 4.0%
AXA SA........................................................................... France 3,061 236,854
Federal National Mortgage Association............................................ United States 5,300 302,431
Industrial Credit & Inv. Corp. of India, GDR, 144A............................... India 6,600 85,305
-----------
624,590
-----------
FOOD & HOUSEHOLD PRODUCTS 1.3%
The Oshawa Group Ltd. ........................................................... Canada 11,100 194,185
-----------
</TABLE>
11
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 3.3%
*Asia Pacific Resources International Hldgs. Ltd., A............................. Indonesia 35,000 $ 65,625
Carter Holt Harvey Ltd. ......................................................... New Zealand 44,226 68,308
Enso OY, R....................................................................... Finland 12,000 93,151
Fletcher Challenge Ltd. Forestry Division........................................ New Zealand 118,728 98,583
Stora Kopparbergs Bergslags AB, B................................................ Sweden 15,000 186,085
-----------
511,752
-----------
HEALTH & PERSONAL CARE 6.7%
Astra AB, B...................................................................... Sweden 9,600 161,413
Medeva Plc. ..................................................................... United Kingdom 52,900 140,313
Novartis AG...................................................................... Switzerland 213 345,370
*Nycomed Amersham Plc., fgn. .................................................... United Kingdom 10,408 393,740
-----------
1,040,836
-----------
INDUSTRIAL COMPONENTS 3.7%
BTR Plc. ........................................................................ United Kingdom 41,500 127,115
Exide Corp. ..................................................................... United States 8,300 214,762
Madeco Manufacturera de Cobre SA, ADR............................................ Chile 7,500 114,375
Yamato Kogyo Co. Ltd. ........................................................... Japan 19,000 114,230
-----------
570,482
-----------
INSURANCE 10.6%
GIO Australia Holdings Ltd. ..................................................... Australia 85,310 218,122
HIH Winterthur International Holdings Ltd. ...................................... Australia 55,469 118,940
ING Groep NV..................................................................... Netherlands 5,076 213,790
Partnerre Ltd. .................................................................. Bermuda 6,000 278,250
Reliastar Financial Corp. ....................................................... United States 7,000 288,312
Torchmark Corp. ................................................................. United States 6,000 252,375
Zuerich Versicherung, new........................................................ Switzerland 600 285,705
-----------
1,655,494
-----------
LEISURE & TOURISM 2.8%
Kuoni Reisen Holding AG, B....................................................... Switzerland 115 430,763
-----------
MACHINERY & ENGINEERING 1.0%
New Holland NV................................................................... Netherlands 5,900 155,981
-----------
MERCHANDISING 1.8%
Home Depot Inc. ................................................................. United States 3,200 188,400
Macintosh NV..................................................................... Netherlands 4,247 92,160
-----------
280,560
-----------
METALS & MINING 0.8%
Boehler Uddeholm AG.............................................................. Austria 2,000 117,247
-----------
MULTI-INDUSTRY 5.0%
DESC SA de CV DESC, B............................................................ Mexico 18,000 171,960
DESC SA de CV DESC, C............................................................ Mexico 180 1,695
Hicom Holdings Bhd. ............................................................. Malaysia 78,900 45,439
Hutchison Whampoa Ltd. .......................................................... Hong Kong 25,500 159,930
Jardine Matheson Holdings Ltd. (Singapore)....................................... Hong Kong 31,310 159,681
La Cemento Nacional CA, GDR, 144A................................................ Ecuador 300 62,400
La Cemento Nacional SA, GDR...................................................... Ecuador 600 124,800
Metro Pacific Corp. MDI.......................................................... Philippines 1,771,740 48,996
-----------
774,901
-----------
REAL ESTATE 2.7%
National Health Investors Inc. .................................................. United States 5,000 209,375
Summit Properties Inc. .......................................................... United States 9,700 204,912
-----------
414,287
-----------
TELECOMMUNICATIONS 7.0%
Jasmine International Public Co. Ltd., fgn. ..................................... Thailand 98,000 20,940
Nokia AB, A...................................................................... Finland 1,900 132,845
Telecom Italia SpA, di Risp...................................................... Italy 79,600 349,763
</TABLE>
12
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
Telefonica de Argentina SA, B, ADR............................................... Argentina 3,000 $ 111,750
Telefonica de Espana SA, ADR..................................................... Spain 2,800 254,975
Telmex-Telefonos de Mexico SA, L, ADR............................................ Mexico 4,000 224,250
-----------
1,094,523
-----------
TEXTILES & APPAREL 0.8%
*Fruit of the Loom Inc., A....................................................... United States 5,057 129,586
-----------
TRANSPORTATION 1.9%
Air New Zealand Ltd., B.......................................................... New Zealand 45,800 91,748
Helikopter Services Group ASA.................................................... Norway 16,600 202,576
-----------
294,324
-----------
UTILITIES ELECTRICAL & GAS 6.6%
Endesa SA, ADR................................................................... Spain 14,400 261,900
Evn Energie-Versorgung Niederoesterreich AG...................................... Austria 1,920 252,322
Hong Kong Electric Holdings Ltd. ................................................ Hong Kong 47,000 178,623
VEBA AG.......................................................................... Germany 5,000 340,467
-----------
1,033,312
-----------
TOTAL COMMON STOCKS (COST $11,331,610)..................................... 14,916,651
-----------
PREFERRED STOCKS 4.0%
News Corp. Ltd., pfd. ........................................................... Australia 44,742 221,446
Telebras-Telecomunicacoes Brasileiras SA, pfd. .................................. Brazil 2,496,267 284,732
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR.............................. Brazil 1,000 116,437
-----------
TOTAL PREFERRED STOCKS (COST $285,167)..................................... 622,615
-----------
PRINCIPAL
AMOUNT**
--------
SHORT TERM INVESTMENTS (COST $38,663) 0.3%
U.S. Treasury Bills, 4.86% to 5.20%, with maturities to 3/12/98.................. United States $ 39,000 38,679
-----------
TOTAL INVESTMENTS (COST $11,655,440) 100.2%............................... 15,577,945
OTHER ASSETS, LESS LIABILITIES (0.2%)..................................... (24,295)
-----------
TOTAL NET ASSETS 100.0%................................................... $15,553,650
===========
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
See Notes to Financial Statements.
13
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investments in securities, at value
($11,655,440) $15,577,945
Cash 2,690
Dividends receivable 26,538
-----------
Total Assets 15,607,173
-----------
Liabilities:
Payables:
Fund shares redeemed 10,053
To affiliates 8,540
Other liabilities 34,930
-----------
Total liabilities 53,523
-----------
Net assets, at value $15,553,650
===========
Net assets consist of:
Undistributed net investment income $ 282,804
Net unrealized appreciation 3,922,505
Accumulated net realized gain 1,733,834
Beneficial shares 9,614,507
-----------
Net assets, at value $15,553,650
===========
Net asset value per share
($15,553,650 / 782,617 shares
outstanding) $ 19.87
===========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $34,207)
Dividends $ 433,545
Interest 11,872
----------
Total investment income $ 445,417
Expenses:
Management fees (Note 3) 81,596
Administrative fees (Note 3) 24,479
Custodian fees 6,193
Reports to shareholders 14,430
Registration and filing fees 1,650
Professional fees (Note 3) 24,035
Trustees' fees and expenses 5,100
Other 54
----------
Total expenses 157,537
----------
Net investment income 287,880
==========
Realized and unrealized gains
(losses):
Net realized gain (loss) from:
Investments 1,735,646
Foreign currency transactions (330)
----------
Net realized gain 1,735,316
Net unrealized depreciation on
investments (95,483)
----------
Net realized and unrealized gain 1,639,833
----------
Net increase in net assets
resulting from operations $1,927,713
==========
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.............................................................. $ 287,880 $ 244,068
Net realized gain from investments and foreign currency transactions............... 1,735,316 2,908,249
Net unrealized appreciation (depreciation) on investments.......................... (95,483) 128,497
---------------------------
Net increase in net assets resulting from operations............................ 1,927,713 3,280,814
---------------------------
Distributions to shareholders from:
Net investment income.............................................................. (246,215) (215,833)
Net realized gains................................................................. (2,908,858) (1,942,495)
Fund share transactions (Note 2).................................................... 1,131,667 407,120
---------------------------
Net increase (decrease) in net assets........................................... (95,693) 1,529,606
===========================
Net assets:
Beginning of year................................................................... 15,649,343 14,119,737
---------------------------
End of year......................................................................... $15,553,650 $15,649,343
===========================
Undistributed net investment income included in net assets:
End of year......................................................................... $ 282,804 $ 243,664
===========================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Variable Annuity Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. Shares of the
Fund are only sold to Templeton Funds Annuity Company to fund the benefits of
Templeton Retirement Annuities and Templeton Immediate Variable Annuities. The
Fund seeks long-term capital growth through a flexible policy of investing
primarily in stocks and debt obligations of companies and governments of any
nation. The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, the differences between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
16
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements (continued)
2. BENEFICIAL SHARES
At December 31, 1997, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold............................................................. 2,279 $ 52,451 4,369 $ 85,896
Shares issued on reinvestment of distributions.......................... 169,173 3,155,073 117,110 2,158,328
Shares redeemed......................................................... (103,251) (2,075,857) (91,811) (1,837,104)
--------------------------------------------------------
Net increase............................................................ 68,201 $ 1,131,667 29,668 $ 407,120
========================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also directors or officers of Templeton
Investment Counsel, Inc. (TICI), and Templeton Funds Annuity Company (TFAC), the
funds investment manager and administrative manager, respectively.
The Fund pays an investment management fee to TICI based on the average daily
net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------
<S> <C>
0.50% First $200 million
0.45% Over $200 million, up to and including $1.3 billion
0.40% Over $1.3 billion
</TABLE>
The Fund pays an administrative fee to TFAC based on the Fund's average daily
net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -------------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
TFAC agreed in advance to reduce fees to the extent necessary to limit total
expenses to an annual rate of 1.00% of the Fund's average daily net assets
through May 1, 1998. For the year ended December 31, 1997, no reimbursement was
necessary under the agreement.
Included in professional fees are legal fees of $7,894 that were paid to a law
firm in which a partner is an officer of the Fund.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
statement of investments. At December 31, 1997, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation........................................................................ $ 5,121,425
Unrealized depreciation........................................................................ (1,198,920)
-----------
Net unrealized appreciation.................................................................... $ 3,922,505
===========
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $3,691,088 and $5,266,701 respectively.
17
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Notes to Financial Statements (continued)
6. MERGER
On February 3, 1998, the Fund's shareholders approved an Agreement and Plan of
Reorganization (the "Merger Plan") which will merge the Fund with the Templeton
Stock Fund (the "Stock Fund"), a series of Templeton Variable Products Series
Fund, as of May 1, 1998. Under the Merger Plan, the Fund's shareholders will
receive Stock Fund Class I shares equal in value to their Variable Annuity Fund
shares.
18
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Annuity Fund
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton Variable Annuity Fund as of December
31, 1997, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Variable Annuity Fund as of December 31, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
January 30, 1998, except for note 6, as to which the date is February 3, 1998.
19
<PAGE>
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets:
Investment in Templeton Variable
Annuity Fund, at value (cost
$10,660,596) $12,246,778
-----------
Liabilities:
Payable to Templeton Funds Annuity
Company 86,453
-----------
Net assets 12,160,325
===========
Net assets attributable to annuitants -
Annuity reserves (Note 1) $12,160,325
===========
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Investment Income:
Income:
Dividend distributions $ 269,684
Capital gains distributions 2,224,193
----------
Total income 2,493,877
Expenses:
Periodic charge (Note 2) 140,930
----------
Net investment income 2,352,947
----------
Realized and unrealized gain on
investments:
Net realized gain on investments 535,182
Unrealized depreciation of investments for
the year (1,507,974)
----------
Net (loss) on investments (972,792)
----------
Net increase in net assets from operations $1,380,155
==========
</TABLE>
20
<PAGE>
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Increase in net assets from operations:
Net investment income............................................................... $ 2,352,947 $ 1,589,842
Net realized gain on investments.................................................... 535,182 583,838
Unrealized appreciation (depreciation) of investments for the year.................. (1,507,974) 308,083
---------------------------
Net increase in net assets from operations......................................... 1,380,155 2,481,763
---------------------------
Annuity unit transactions:
Proceeds from units sold........................................................... 42,451 65,647
Annuity payments..................................................................... (1,620,684) (1,481,530)
Increase (decrease) in annuity reserves for mortality experience (Note 1)............ 40,226 (29,903)
---------------------------
Net decrease in net assets derived from annuity unit transactions................... $(1,538,007) $(1,445,786)
---------------------------
Total increase (decrease) in net assets......................................... (157,852) 1,035,977
Net Assets:
Beginning of year................................................................... 12,318,177 11,282,200
---------------------------
End of year......................................................................... $12,160,325 $12,318,177
===========================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Notes to Financial Statements
1. SUMMARY OF ACCOUNTING POLICIES
The Templeton Funds Retirement Annuity Separate Account (the Separate Account)
was established on February 4, 1987 by resolution of the Board of Directors of
Templeton Funds Annuity Company (the Company) and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Separate Account
is sold exclusively for use with the Templeton Retirement Annuity, an immediate
variable annuity designed for distributing the benefits of tax deferred
retirement plans. The Separate Account invests all its assets in the Templeton
Variable Annuity Fund (the Fund). The following is a summary of significant
accounting policies followed by the Separate Account in the preparation of its
financial statements.
a. VALUATION OF SECURITIES:
Investments in shares of the Fund are carried in the Statement of Assets and
Liabilities at net asset value (market value).
b. DIVIDENDS:
Dividend income and capital gain distributions are recorded as income on the
ex-dividend date and reinvestment in additional shares of the Fund.
c. INCOME TAXES:
Operations of the Separate Account from a part of the Company, which is taxed as
a life insurance company under the Internal Revenue Code (the Code). Under
current law, no federal income taxes are payable with respect to the Separate
Account. Under the principles set forth in Internal Revenue Service Ruling
81-225 and Section 817(h) of the Code and regulations thereunder, the Company
understands that it will be treated as owner of the assets invested in the
Separate Account for federal income tax purposes, with the result that earnings
and gains, if any, derived from those assets will not be included in an
Annuitant's gross income until amounts are received pursuant to an Annuity.
d. ANNUITY RESERVES:
Annuity reserves are computed according to the 1983a Blended Unisex Mortality
Table, with a 50% male/female content. The assumed interest rates are 9%, 7% and
3%. Charges to annuity reserves for mortality experience are reimbursed to the
Company if the reserves required are less than originally estimated. If
additional reserves are required, the Company reimburses the Separate Account.
2. PERIODIC CHARGE
The Company assesses a Periodic Charge against the Separate Account, equal on an
annual basis to 1.1% of Separate Account assets. The Periodic Charge, in the
following amounts, compensates the Company for expenses of administering the
Separate Account and for assuming the risks that mortality experience will be
lower than the rate assumed and that expenses will be greater than what is
assumed: 0.3% of average annual net assets to cover expenses, 0.3% to cover
expense risk and 0.5% to cover the mortality risk. The Periodic Charge is
guaranteed as to Annuities issued prior to the effective date of any change in
the Periodic Charge.
3. INVESTMENT TRANSACTIONS
During the year ended December 31, 1997, purchases and sales of Templeton
Variable Annuity Fund shares aggregated $2,558,182 and $1,196,967, respectively.
Realized gains and losses are reported on an identified cost basis.
4. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Separate Account to
concentrations of credit risk consist of investments in the Templeton Variable
Annuity Fund. The Fund's investment securities are managed by professional
investment managers within established guidelines. As of December 31, 1997, in
management's opinion, the Separate Account had no significant concentration of
credit risk.
22
<PAGE>
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
REPORT OF INDEPENDENT ACCOUNTANTS
The Participants of
Templeton Funds Retirement Annuity Separate Account
We have audited the accompanying statement of assets and liabilities of
Templeton Funds Retirement Annuity Separate Account as of December 31, 1997, and
the related statement of operations and the statement of changes in net assets
for the year then ended. These financial statements are the responsibility of
the Separate Account's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997, by correspondence with
the Templeton Variable Annuity Fund. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Templeton Funds Retirement
Annuity Separate Account as of December 31, 1997, and the results of its
operations and the changes in its net assets for the year then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Jacksonville, Florida
February 6, 1998
23
<PAGE>
TEMPLETON VARIABLE ANNUITY FUND
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
8.40% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
24
<PAGE>
[TEMPLETON LOGO]
FRANKLIN TEMPLETON
100 Fountain Parkway
St. Petersburg, Florida 33716-1205
INSURANCE ISSUER
Templeton Funds Annuity Company
100 Fountain Pkwy.
St. Petersburg, FL 33716-1205
1-800-774-5001
INVESTMENT MANAGER
Templeton Investment Counsel, Inc.
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404-1585
This report was prepared for Templeton Variable Annuity Fund shareholders who
have previously received a prospectus.
To ensure the highest quality of service, telephone calls to or from our service
department may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
TRA A97 02/98 [RECYCLE LOGO] Printed on recycled paper
<PAGE>
