STATEMENT OF ADDITIONAL INFORMATION TO THE PROSPECTUS
FOR
TEMPLETON RETIREMENT ANNUITIES
ISSUED BY
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
OF
TEMPLETON FUNDS ANNUITY COMPANY
700 Central Avenue
St. Petersburg, Florida 33701-3628
Dated November 20, 1996
This Statement of Additional Information is not a prospectus. It provides
information which is supplemental to that contained in the current Prospectus
for Templeton Retirement Annuities, dated November 20, 1996. This Statement
should be read in conjunction with the Prospectus, which may be obtained by
calling (800) 774-5001, or by writing Templeton Funds Annuity Company, P. O. Box
33030, St. Petersburg, Florida 33733-8030.
<PAGE>
TABLE OF CONTENTS
Page
Templeton Funds Annuity Company.........................................
Independent Accountants.................................................
Performance Information.................................................
Financial Information...................................................
Financial Statements--Templeton Funds Retirement Annuity Separate Account
Financial Statements--Templeton Funds Annuity Company...................
TEMPLETON FUNDS ANNUITY COMPANY
Templeton Funds Annuity Company (the "Company"), the sponsor of Templeton
Funds Retirement Annuity Separate Account (the "Separate Account"), is a Florida
insurance company which was organized on January 25, 1984 and is licensed to
engage in the life insurance business in Florida. The Company is the underwriter
of Contracts pursuant to which Templeton Retirement Annuities are issued, and is
custodian of the assets of the Separate Account. The Company is wholly owned by
Franklin Agency, Inc. ("Franklin Agency") and is located at 700 Central Avenue,
St. Petersburg, Florida 33701-3628. Franklin Agency is an affiliate of Franklin
Templeton Distributors, Inc. ("FTD"), a registered broker-dealer which serves as
principal underwriter for all of the publicly-distributed open-end Templeton
Funds. Franklin Agency, FTD and Franklin Templeton Trust Company are
wholly-owned subsidiaries of Franklin Resources, Inc. ("Franklin"), a
publicly-traded financial services company whose stock is listed on the New York
Stock Exchange. Franklin and its affiliates act as an investment adviser to
several of the funds in the Franklin Templeton group of funds.
INDEPENDENT ACCOUNTANTS
The firm of Coopers & Lybrand L.L.P. serves as independent accountants for
the Separate Account.
PERFORMANCE INFORMATION
Performance information for the Separate Account, including yield and
total return, may appear in advertisements, reports, and promotional literature
to current or prospective Contractowners.
Quotations of yield for the Separate Account will be based on all
investment income per Annuity Unit earned during a particular 30-day period,
less expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of the Annuity Unit on
the last day of the period, according to the following formula:
YIELD = 2[((a - b/cd) / 1)6 - 1]
where a = net investment income earned during the period by the Fund
attributable to shares owned by the Separate Account,
b = expenses accrued for the period (net of reimbursements),
<PAGE>
c = the average daily number of Annuity Units outstanding during
the period that were entitled to receive dividends,
and
d = the maximum offering price per Annuity Unit on the last day of
the period.
Quotations of average annual total return for the Separate Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in an Annuity over a period of one, five, and ten years
(or, if less, up to the life of the Separate Account), 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, 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 the
Administration Fee and the Mortality and Expense Risk Fee. Quotations of total
return may simultaneously be shown for the same or other periods that do not
take into account certain contractual charges such as the Administration Fee.
Performance information for the Separate Account may be compared, in
reports and promotional literature, to the Standard & Poor's 500 Stock Index
("S&P 500"), the Dow Jones Industrial Average ("DJIA"), or other indices that
measure performance of a pertinent group of securities so that investors may
compare the Separate Account's results with those of a group of securities
widely regarded by investors as representative of the securities markets in
general or representative of a particular type of security. Performance
information may also be compared to (i) other groups of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications or persons who
rank such investment companies on overall performance or other criteria; and
(ii) the Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment in an Annuity. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Separate Account reflects only the
performance of a hypothetical Contract, the assets of which are invested in the
Fund, during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies of the Fund, 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.
Reports and promotional literature may also contain other information
including the ranking of the Separate Account derived from rankings of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services or by other rating services, companies, publications, or
other persons who rank separate accounts or other investment products on overall
performance or other criteria.
For the one- and five-year periods ended December 31, 1995, and for the
period of February 16, 1988 (commencement of operations) to December 31, 1995,
the average annual total return of the Separate Account, reflecting the
deduction for the Administration Fee and the Mortality and Expense Risk Fee, was
24.12%, and 17.58%, and 13.25%, respectively.
<PAGE>
FINANCIAL INFORMATION
The financial statements of the Company included in this Statement of
Additional Information ("SAI") should be considered only as bearing on the
ability of the Company to meet its obligations under the Contracts.
<PAGE>
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
Assets
Investment in Templeton Variable Annuity Fund,
at value (cost $8,458,143)
$11,264,697
Receivable from Templeton Funds Annuity
Company 17,503
Net Assets $11,282,200
Net assets attributable to annuitants--Annuity reserves (Note 1)
$11,282,200
STATEMENT OF OPERATIONS
for the year ended December 31, 1995
Investment Income:
Income:
Dividend distributions $110,058
Capital gains distributions 742,890
Total income 852,948
Expenses:
Periodic charge (Note 2) 119,140
Net investment income 733,808
Realized and unrealized gain on investments:
Net realized gain on investments
Unrealized appreciation 436,311
1,155,950
Net gain on investments 1,592,261
Net increase in net assets from operations $2,326,069
See Notes to Financial Statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 1995 and
1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income
Net realized gain on $733,808 $340,663
investments 436,311 469,901
Unrealized appreciation
(depreciation) 1,155,950 (1,356,713)
Net increase (decrease) in net assets from
operations 2,326,069 (546,149)
Annuity unit transactions:
Proceeds from units sold 228,833 350,411
Annuity Payments (1,368,267) (1,274,550)
Increase in annuity reserves for mortality
experience (Note 1) 63,847 9,728
Net decrease in net assets derived from annuity
unit transactions
(1,075,587) (914,411)
Total increase (decrease) in net assets
1,250,482 (1,460,560)
Net Assets:
Beginning of year 10,031,718 11,492,278
End of year $11,282,200 $10,031,718
</TABLE>
See Notes to Financial Statements.
<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:
Investment in shares of the Fund are carried in the Statement of Assets and
Liabilities at net asset value (market value).
B. Dividends:
Dividend income and capital gain distributions are recorded as income on the
ex-dividend date and reinvested in additional shares of the Fund.
C. Income Taxes:
Operations of the Separate Account form a part of the Company, which is taxed as
a life insurance company under the Internal Revenue Code (the "Code"). Under
current law, no federal income taxes are payable with respect to the Separate
Account. Under the principles set forth in Internal Revenue Service Ruling
81-225 and Section 817(h) of the Code and regulations thereunder, the Company
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 assess 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.
<PAGE>
3. Investment Transactions
During the year ended December 31, 1995, purchases and sales of Templeton
Variable Annuity Fund shares aggregated $1,081,781 and $1,020,671 respectively.
Realized gains and losses are reported on an identified cost basis.
4. Concentration 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, 1995, in
management's opinion, the Separate Account had no significant concentrations of
credit risk.
<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, 1995, and
the related statement of operations for the year then ended and the statements
of changes in net assets for the years ended December 31, 1995 and 1994. These
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 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 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, 1995, 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Templeton Funds Retirement
Annuity Separate Account as of December 31, 1995, and the results of its
operations for the year then ended and the changes in its net assets for the
years ended December 31, 1995, and 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 9, 1996
<PAGE>
COOPERS & LYBRAND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Templeton Funds Annuity Company
St. Petersburg, Florida
We have audited the accompanying balance sheets of Templeton Funds Annuity
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
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. 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 referred to above present fairly, in
all material respects, the financial position of Templeton Funds Annuity Company
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1, effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
/s/ COOPERS & LYBRAND, L.L.P.
Tampa, Florida
February 9, 1996
<PAGE>
TEMPLETON FUNDS ANNUITY COMPANY
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
Cash and investments:
Cash and cash equivalents $ 1,153,899 $ 447,200
Investments in securities 13,244,216 12,121,344
14,398,115 12,568,544
Receivables:
Interest 242,920 244,639
Due from affiliates 16,485 6,756
Other 120,589 123,058
Refundable income taxes 0 39,786
Other assets 293,132 159,730
Recoverable on future annuity
benefits liability 3,825,883 225,282
Assets held in separate
accounts 14,114,938 12,566,130
$ 33,012,062 $ 25,933,925
LIABILITIES AND
STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued
expenses $ 281,656 $ 234,575
Due to affiliates 152,302 133,459
Income taxes payable 59,635 0
Deferred income taxes
payable 540,000 76,000
Liability for future annuity
benefits 3,825,883 225,282
Liabilities related to
separate accounts 14,114,938 12,566,130
Total liabilities 18,974,414 13,235,446
Stockholder's equity:
Common stock, par value $1
per share; authorized
and issued
2,500,000 shares 2,500,000 2,500,000
Additional paid-in capital 5,976,970 5,976,970
Unrealized investment gains
(losses), net 741,192 (48,535)
Retained earnings 4,819,486 4,270,044
Total stockholder's 14,037,648 12,698,479
equity
$ 33,012,062 $ 25,933,925
The accompanying notes are an integral part of these financial statements.
<PAGE>
TEMPLETON FUNDS ANNUITY COMPANY
STATEMENTS OF INCOME
for the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenue:
Premiums and annuity
considerations $ 3,905,740 $2,383,931 $ 1,408,228
Business management fees 1,393,325 1,024,304 584,766
Interest and dividends 894,563 831,367 806,120
$6,193,628 $4,239,602 $2,799,114
Benefits and expenses:
Salaries and other
compensation costs 707,290 631,375 393,894
Annuity and death benefits 1,820,940 1,432,045 1,231,016
Increase in liability for
future annuity benefits 1,992,025 777,619 35,650
Professional fees 136,709 213,521 251,577
Other 783,776 578,203 390,917
5,440,740 3,632,763 2,303,054
Income before income taxes
and realized gains on sales of
investments 752,888 606,839 496,060
Realized gains on sales of
investments 65,475 156,427 499,435
Income before taxes 818,363 763,266 995,495
Income taxes (credits)
Current 303,921 240,140 395,836
Deferred (35,000) (46,000) (37,000)
268,921 194,140 358,836
Net Income 549,442 569,126 636,659
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TEMPLETON FUNDS ANNUITY COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
for the years ended December 31, 1995, 1994, and 1993
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized
Additional Investment
Common Stock Paid-in Gains Retained
Shares Amount Capital (Losses), Net Earnings
Balance, December
31, 1992 $ 2,500,000 $ 2,500,000 $ 5,976,970 $ 738,888 $ 3,064,259
Net income 0 0 0 0 636,659
Increase in
unrealized
investment gains,
net of deferred
taxes of $127,000 0 0 0 209,821 0
Balance, December
31, 1993 2,500,000 2,500,000 5,976,970 948,709 3,700,918
Net income 0 0 0 0 569,126
Increase in
unrealized
investment (losses)
net of deferred
taxes of $602,000 0 0 0 (997,244) 0
Balance, December
31, 1994 2,500,000 2,500,000 5,976,970 (48,535) 4,270,044
Net income 0 0 0 0 549,442
Increase in
unrealized
investment gains,
net of deferred
taxes of $499,000 0 0 0 789,727 0
Balance, December
31, 1995 2,500,000 2,500,000 5,976,970 $ 741,192 $4,819,486
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TEMPLETON FUNDS ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
Cash flows from operating activities:
Net income $ 549,422 $ 569,126 $ 636,659
Adjustments to reconcile net
income to net cash provided
by operating activities:
Realized gains on sales of
investments (65,475) (156,427) (499,435)
Amortization of premium on
investments 60,270 60,270 60,270
Accretion of discount on
investments (78,183) (52,704) (25,897)
Deferred income taxes (35,000) (46,000) (37,000)
Change in asset and liability
accounts:
Receivables (5,541) (36,483) (51,286)
Refundable income taxes 39,786 (39,786) 67,000
Accounts payable, accrues
expenses and due to affiliates 65,924 132,010 89,929
Income taxes payable 59,635 (58,210) 58,210
Net cash provided by operating 590,858 371,796 298,450
activities
Cash flows from investing activities:
Purchases of investments (1,786,586) (3,522,594) (2,612,046)
Proceeds on sales and maturities of
investments 2,035,829 3,097,767 2,352,910
Increase in other assets (133,402) (80,423) (23,358)
Net cash provided by (used in)
investing activities 115,841 (505,250) (282,494)
Net increase (decrease) in cash and
cash equivalents 706,699 (133,454) 15,956
Cash and cash equivalents:
Beginning of year 447,200 580,654 564,698
End of year $ 1,153,899 $ 447,200 $580,654
Supplemental disclosure of cash flow information:
Income taxes paid during the year $ 204,499 $ 338,136 $ 270,626
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TEMPLETON FUNDS ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Templeton Funds Annuity Company (the Company) is a wholly
owned subsidiary of Templeton Global Investors, Inc. (TGII). Prior to December
1, 1993, the Company was a wholly owned subsidiary of Templeton Funds
Management, Inc. (TFM). On December 1, 1993, all of the Company's stock was
transferred to TGII by dividend. On October 30, 1992, as part of a merger
agreement between TGII's parent and Franklin Resources, Inc. (Franklin), the
stock of TGII was sold to Franklin. As a result of the merger, the Company
became an indirect wholly owned subsidiary of Franklin. On January 1, 1996,
ownership of the Company was transferred to Franklin Agency, Inc.
The Company operates as a life insurance enterprise, with its principal product
being variable annuity contracts sold to participants throughout the 39 states
and the District of Columbia where it is licensed to do business. The Company
has established the Templeton Funds Retirement Annuity Separate Account and the
Templeton Immediate Variable Annuity Separate Account (the Separate Accounts),
which are registered with the Securities and Exchange Commission as unit
investment trusts. The Separate Accounts constitute separate records of the
Company's fiduciary responsibility to fund its liability to holders of the
variable annuity contracts. Investment income, gains and losses of the separate
accounts are not reflected in the Company's financial statements. The Company is
also engaged in certain reinsurance activities as described in Note 4.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION - The accompanying financial statements are prepared in
accordance with generally accepted accounting principles, which differ in some
respects with accounting practices prescribed by the Insurance Department of the
State of Florida. The more significant differences are as follows: (a) policy
reserves are not computed on "surplus relief" contracts which do not transfer
substantial risk to the Company, (b) unrealized investment gains and losses are
reported as a separate component of stockholder's equity, (c) deferred income
taxes are recognized, and (d) deferral of policy acquisition costs.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to use estimates and assumptions
based on analytical methods in determining deferred acquisition costs, deferred
income taxes, liabilities for future annuity benefits, and various other
accruals. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS - For purposes of statement of cash flows, the Company
considers all debt instruments which have a maturity of three months or less
from the date of purchase and other highly liquid investments which are readily
convertible into cash to be cash equivalents. Cash equivalents are stated at
cost, which approximates value.
VALUATION OF SECURITIES - Effective January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115 (SFAS No.
115), Accounting for Certain Investments in Debt and Equity Securities, that
addresses the accounting and reporting for investments in marketable equity
securities and for all investments in debt securities. SFAS No. 115 requires
investments in debt and marketable equity securities to be classified in three
categories and accounted for as follows: held to maturity (recorded at amortized
cost), available for sale (recorded at fair value with unrealized gains and
losses reported as a separate component of stockholder's equity), and trading
securities (recorded at fair value with unrealized gains and losses included in
earnings). As investments in securities were previously stated at value and were
<PAGE>
deemed to be available for sale, there was no cumulative effect of adopting SFAS
No. 115. The cost of investments sold is determined by specific identification.
SEPARATE ACCOUNTS - The assets of the Separate Accounts are stated at market
value and are not subject to claims which may arise out of other business
activities of the Company. Investment income and investment gains and losses
related to the assets of the Separate Accounts accrue directly to the contract
holders.
Annuity reserves held in the Separate Accounts are computed according to the
1983a Blended Unisex Mortality Table with a 50% male/female content. The assumed
interest rates are 9%, 7%, 5%, and 3%. Changes 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 Accounts.
RECOVERABLE ON FUTURE ANNUITY BENEFITS LIABILITY - This recoverable represents
assets held by the ceding insurance company for holders of variable annuity
contracts issued under a modified coinsurance agreement described in Note 4.
DEFERRED POLICY ACQUISITION COSTS - The costs of acquiring new business,
principally first-year commissions, have been deferred. These acquisition costs
are being amortized in proportion to the present value of expected future gross
profits. Unamortized deferred acquisition costs of approximately $239,000 and
$117,000 are included in other assets at December 31, 1995 and 1994,
respectively.
LIABILITY FOR FUTURE ANNUITY BENEFITS - The liability for future annuity
benefits represents annuity reserves the Company has assumed under a modified
coinsurance agreement described in Note 4. Annuity reserves are computed
according to the 1983a Blended Unisex Mortality Table with a 50% male/female
content. The assumed interest rates are 5% and 3%.
REVENUES - Premiums and annuity considerations are recognized when due. Business
management fees are recorded as revenue when earned. Interest and dividends are
recognized on the accrual basis.
INCOME TAXES - Deferred income taxes are provided on temporary differences which
represent the differences between the tax bases of unrealized investment gains
and losses, and death and surrender benefits and reserves for policy benefits
and the amounts at which these items are reported in the financial statements
using the enacted marginal tax rate. Deferred income tax expense or credits are
based on changes in the asset or liability from period to period. Deferred tax
amounts are adjusted to reflect changes in tax rates or other provisions of tax
law in the period in which a new tax law is enacted.
RECLASSIFICATION - Certain amounts in the 1993 and 1994 financial statements
have been reclassified to conform with the presentation adopted in 1995.
<PAGE>
2. INVESTMENTS IN SECURITIES:
Investments in securities available for sale at December 31, 1995 and 1994 are
as follows:
<TABLE>
<S> <C> <C> <C> <C>
1995
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
Gains Losses Value
U.S. Treasury securities $7,472,066 $1,202,345 $ 0 $8,674,411
Convertible debentures 3,312,409 132,281 138,190 3,306,500
Municipal bonds 1,248,549 14,756 0 1,263,305
$12,033,024 $1,349,382 $ 138,190 $13,244,216
1994
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
Gains Losses Value
U.S. Treasury securities $7,533,934 $ 402,127 $ 128,397 $7,807,664
Convertible debentures 3,416,948 30,005 329,828 3,117,125
Municipal bonds 1,247,997 0 51,442 1,196,555
$12,198,879 $ 432,132 $ 509,667 $12,121,344
</TABLE>
The cost and market value of investments at December 31, 1995 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
certain of these obligations.
Amortized Market
Cost Value
Due in one year or less $ 995,778 $ 995,778
Due after one year through five years 4,648,092 4,880,234
Due after five years through ten years 2,351,506 2,484,220
Due after ten years 4,037,648 4,883,984
$ 12,033,024 $
13,244,216
Gross realized investment gains were $71,277, $173,802 and $508,922 and gross
realized investment losses were $6,633, $17,375 and $9,487 for 1995, 1994 and
1993, respectively.
At December 31, 1995 and 1994, securities with a market value of $4,038,333 and
$4,858,214 have been pledged as collateral in connection with the bulk
reinsurance contract referred to in Notes 1 and 4 and in accordance with state
insurance laws for the protection of the Company's policyholders and creditors.
3. RELATED PARTY TRANSACTIONS:
The Company provides business management services to certain Templeton mutual
funds. Total business management fee revenue for these services amounted to
$1,393,325, $1,024,304, and $584,766 in 1995, 1994, and 1993, respectively.
Expenses related to business management services provided by TFM and TGII of
$297,680, $216,664, and $120,833 in 1995, 1994, and 1993, respectively, are
included in other expenses in the accompanying financial statements.
The Company shares office space, personnel and other common administrative
expenses with its
<PAGE>
parent and affiliated companies. Rent is allocated on the basis of square
footage utilized; administrative and shared expenses are allocated on the basis
of the number of employees. Total rental and administrative cost amounted to
$114,208, $54,693 and $21,399 in 1995, 1994 and 1993, respectively.
The Company also provides group term life insurance coverage on the employees of
certain affiliated companies. The Company reinsures a portion of its risk with
another company. Net premiums from group term life insurance amounted to
$63,118, $44,997 and $35,172 in 1995, 1994 and 1993, respectively.
4. REINSURANCE:
The Company has assumed a portion of risk associated with specified insurance
policies written by the ceding company under a bulk reinsurance agreement, which
is in substance a surplus relief contract. The Company has retroceded a portion
of its assumed risk, and has structured the agreement so that its net risk
decreases annually to zero over a ten-year period. The Company has determined
that its risk of material loss under the bulk reinsurance agreement is remote
and, accordingly, accounts for the contracts as financing transactions and
provides no reserves.
Effective July 1, 1994, the Company entered into a modified coinsurance
agreement, whereby the Company assumes a 50% quota share of single premium
immediate variable annuity contracts issued by the ceding company.
The Company has also ceded a portion of its risk related to group term life
insurance coverage provided to employees of certain affiliated companies.
An analysis of the impact of reinsurance on the Company's operations is as
follows:
1995 1994 1993
Direct premiums and annuity
considerations $ 576,926 $2,187,478 $1,431,413
Assumed premiums and annuity
considerations 3,368,921 227,585 0
Ceded reinsurance premiums and
annuity considerations
(40,107) (31,132) (23,185)
Premiums and annuity considerations
$3,905,740 $2,383,931 $1,408,228
The Company is contingently liable for reinsurance ceded to reinsurance
companies in the event such reinsurance companies are unable to pay their
portion of the claims. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurance to
minimize exposure to significant losses from reinsurer insolvencies. At December
31, 1995, the Company does not believe there to be a significant concentration
of credit risk related to its reinsurance program.
<PAGE>
5. EMPLOYEE RETIREMENT PLAN:
The Company's parent has a defined contribution retirement plan covering
substantially all of the Company's employees. The Company's contribution to the
plan for the years ended December 31, 1995, 1994 and 1993 was $65,070, $83,632
and $42,935, respectively.
6. INCOME TAXES:
The provisions for federal and state income taxes for the years ended December
31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
Federal $ 232,441 $ 154,240 $ 307,472
State 36,480 39,900 51,364
$ 268,921 $ 194,140 $ 358,836
Income tax expense is less than the expected statutory rate due to the benefit
of Alternative Minimum Tax credits and tax-exempt interest.
Deferred income tax credits reflected in the statement of income arise primarily
from death and surrender benefits, and the net decrease in reserves under the
reinsurance and retrocession agreements.
At December 31, 1995 and 1994, the tax effects of temporary differences resulted
in net deferred tax payables of $540,000 and $76,000, respectively, computed as
follows:
1995 1994
Reserves under reinsurance and
retrocession agreements,
net of death and surrender
benefits $ 79,000 $ 113,000
Unrealized gains and (losses) on investments
470,000 (29,000)
Deferred bonuses (9,000) (8,000)
$ 540,000 $ 76,000
7. STATUTORY FINANCIAL INFORMATION:
The consolidated financial statements of the Company included herein have been
prepared in conformity with generally accepted accounting principles (GAAP). The
company separately reports to the Insurance Department of the State of Florida
on the basis of statutory accounting practices. <PAGE>
A reconciliation between consolidated GAAP stockholder's equity and statutory
capital and surplus of the Company follows:
1995 1994
Stockholder's equity (GAAP) $ 14,037,648 $ 12,698,479
Less certain asset exclusions:
Deferred policy acquisition
costs (239,032) (116,891)
Prepaid expenses (54,100) (42,839)
(293,132) (159,730)
Statutory investment reserves (345,980) (310,015)
GAAP accounting rules:
Income taxes (FAS 109) 540,000 76,000
Reinsurance (FAS 113) (199,250) (298,885)
Investments (FAS 115) (1,211,192) 77,535
Other (7,190) (6,782)
Statutory capital and surplus $12,520,904 $12,076,602
Results of the Company's operations for the years ended December 31, 1995, 1994,
and 1993 reconciled to a statutory basis are as follows:
1995 1994 1993
GAAP net income $549,442 $569,126 $636,659
Deferred policy acquisition costs
(122,141) (82,975) (24,082)
Statutory investment reserves
(23,180) (14,572) (238,338)
GAAP accounting rules:
Income taxes (FAS 109) (35,000) (46,000) (37,000)
Reinsurance (FAS 113) 99,633 99,614 89,808
Other (407) 11,301 24,903
Statutory net income $468,347 $536,494 $451,950
Payments of cash dividends are subject to restrictions relating to statutory
surplus and are limited to an amount equal to or less than the greater of
statutory net operating profits or realized capital gains for the immediately
preceding calendar year, among other restrictions.
8. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of cash and cash equivalents and separate account
assets. The Company maintains its cash and cash equivalents with what it
believes to be high credit quality financial institutions.
Separate account assets principally consist of investments in Templeton Variable
Annuity Fund, an open-end diversified management investment company whose
investments are managed by professional investment managers within established
guidelines. As of December 31, 1995, in management's opinion the Company has no
concentration of credit risk.
