ANNUAL REPORT
DECEMBER 31, 1998
TEMPLETON RETIREMENT ANNUITY
- - TRA SEPARATE ACCOUNT
- - TEMPLETON VARIABLE
PRODUCTS SERIES FUND -
TEMPLETON STOCK FUND - CLASS 1
[FRANKLIN LOGO](R)
FRANKLIN(R) TEMPLETON(R)
PAGE
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Contract Owners. ................................................. 2
Manager's Discussion ....................................................... TS-1
Performance Summary ........................................................ TS-4
Financial Highlights and Statement of Investments .......................... TS-5
Financial Statements ....................................................... TS-11
Notes to Financial Statements .............................................. TS-14
Independent Auditor's Report ............................................... TS-17
Tax Designation ............................................................ TS-18
Templeton Funds Retirement
Annuity Separate Account
Financials ................................................................. SA-1
Templeton Variable Products Series Fund
Prospectus Supplement ...................................................... PS-1
</TABLE>
Please retain this document, including the enclosed prospectus supplement on
page PS-1, with your current prospectus for reference.
PAGE
LETTER TO CONTRACT OWNERS
Dear Contract Owner:
We are pleased to bring you the annual report of Templeton Retirement Annuity
for the 12 months ended December 31, 1998.
During the year under review, stock markets around the world gave new meaning to
the word "volatility." Some European and U.S. equity markets reached all-time
highs during the first part of the period, but by late summer, they suffered
major declines due largely to Asia's financial turmoil and Russia's economic
meltdown. However, they generally rallied in October and November, finishing the
year with significant gains. Conversely, many Latin American markets experienced
substantial losses in 1998, while Asian markets posted mixed results.
In the U.S., large-capitalization companies led the market, with the Dow
Jones(R) Industrial Average rising 18.1% and the Standard & Poor's(R) 500 Stock
Index posting a return of 28.6% for the reporting period. However, many
small-cap stocks did not fare as well, and the Russell 2000(R) Index declined
2.6%.*
Most European equity markets appreciated substantially in 1998 in an environment
of falling interest rates, benign inflation, government tax incentives, and
increased management focus on shareholder value. Italian, Spanish, and French
markets, all of which increased more than 40%, were among the region's leaders.*
On the other hand, non-performing loans and slowing economies contributed to
falling share prices in some Asian developing nations such as Indonesia, which
declined 30.6% over the one-year period. Latin American stock markets also
dropped sharply in the wake of falling commodity prices, ripple effects of
Asia's financial crises, and investor concerns about the devaluation of the
Brazilian real. Measured in U.S. dollars, Mexico's Bolsa Index plunged 37.4% and
Brazil's Bovespa Index dropped 38.2%.*
*Sources: Standard & Poor's Micropal and Bloomberg. Indices are unmanaged. Price
appreciation or depreciation is measured in U.S. dollars and includes reinvested
dividends or interest. One cannot invest directly in an index. Dow Jones
Industrial Average's total return is calculated by Wilshire Associates Inc.
2
PAGE
It is important to remember, of course, that all securities markets move up or
down, and bad years can be mixed with good years. Since no one can predict
exactly how financial markets will perform, 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 look
forward to serving your investment needs in the years to come.
Sincerely,
/s/CHARLES E. JOHNSON
Charles E. Johnson
President
Templeton Variable Products Series Fund
/s/RICHARD P. AUSTIN
Richard P. Austin
President
Templeton Funds Annuity Company
3
PAGE
TEMPLETON STOCK FUND
Investment Objective: Templeton Stock Fund seeks capital growth through a policy
of investing primarily in common stocks issued by companies, large and small, in
various nations throughout the world.
MANAGER'S DISCUSSION
During the 12 months under review, global stock markets experienced severe
volatility and provided mixed results. Although benign inflation and low
interest rates contributed to a considerable rise in U.S. and European stock
markets, Asia's financial turmoil and Russia's economic meltdown helped lead to
disappointing performances in many emerging markets.
NORTH AMERICA
The U.S. equity market surged upward during the reporting period, as the
Standard & Poor's(R) 500 Stock Index delivered a return of more than 20% for the
fourth consecutive year.(1) Within this environment, finding U.S. stocks that
meet our value criteria proved difficult, and at the end of the reporting
period, the Fund was underweighted in domestic holdings compared to the Morgan
Stanley Capital International(R) (MSCI) World Index.(2) However, two of our
holdings, Ford Motor Co. and Home Depot Inc., rose 81.9% and 107.9%,
respectively, and we sold our American Express shares at a significant profit.
EUROPE
During the past three years, Europe continued to progress toward a single
currency, as a number of European countries tightened fiscal policy to meet
membership requirements of the European Economic Union. Italy and Spain reduced
inflation and public debt, the French and German economies slowed, and interest
rates throughout Europe fell. Although many European stock markets performed
well in 1998, our value style of investing made it difficult to find bargain
stocks there. However, we initiated a position in Firstbus Plc., a U.K.
transportation company. During the period our holdings of Astra AB, A&B and
Telefonica SA rose considerably, and we sold shares of Lex Service Plc., a major
auto retailer, at a substantial profit.
(1) Source: Standard & Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
(2) The MSCI World Index includes approximately 1,500 companies representing the
stock markets of 22 countries, including the U.S., Canada, the United Kingdom,
and Japan.
You may find a complete listing of the Fund's portfolio holdings,
including the number of shares and dollar value, beginning on page x of this
report.
GEOGRAPHIC DISTRIBUTION
TEMPLETON STOCK FUND
BASED ON TOTAL NET ASSETS
12/31/98
[This chart shows in pie format the geographic distribution of Templeton Stock
Fund's portfolio holdings on December 31, 1998, based on total net assets.]
[PIE CHART]
EUROPE 49.4%
NORTH AMERICA 28.0%
LATIN AMERICA 9.4%
ASIA 7.5%
AUSTRALIA/NEW ZEALAND 4.9%
MIDDLE EAST/AFRICA 0.7%
SHORT-TERM
INVESTMENTS & OTHER
NET ASSETS 0.1%
TOP 10 COUNTRIES
REPRESENTED IN THE FUND
TEMPLETON STOCK FUND
12/31/98
[This chart shows in table format the top 10 countries represented in Templeton
Stock Fund as of December 31, 1998, based on total net assets.]
% OF TOTAL
COUNTRY NET ASSETS
- ---------------------------------
UNITED STATES 21.6%
UNITED KINGDOM 10.6%
FRANCE 9.8%
NETHERLANDS 6.3%
SWEDEN 5.4%
HONG KONG 4.5%
AUSTRALIA 4.0%
SPAIN 4.0%
BRAZIL 3.9%
SWITZERLAND 3.9%
TS-1
PAGE
TOP 10 HOLDINGS
TEMPLETON STOCK FUND
12/31/98
[The following chart shows in table format the top 10 holdings of Templeton
Stock Fund as of December 31, 1998, based on total net assets.]
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- -------------------------------------------------
INTEL CORP.
ELECTRONIC COMPONENTS &
INSTRUMENTS, U.S. 2.7%
ZURICH ALLIED AG
INSURANCE, SWITZERLAND 2.5%
AXA-UAP
FINANCIAL SERVICES, FRANCE 2.5%
IBERDROLA SA, BR.
UTILITIES ELECTRIC & GAS, SPAIN 2.0%
RHONE-POULENC SA, A
CHEMICALS, FRANCE 1.9%
ING GROEP NV
FINANCIAL SERVICES, NETHERLANDS 1.9%
SAFEWAY PLC.
MERCHANDISING, UNITED KINGDOM 1.8%
MOTOROLA INC.
ELECTRICAL & ELECTRONICS, U.S. 1.8%
FANNIE MAE
FINANCIAL SERVICES, U.S. 1.8%
ANTEC CORP.
ELECTRICAL & ELECTRONICS, U.S. 1.7%
For a complete list of portfolio holdings, please see the Fund's Statement of
Investments.
ASIA
Although many Asian stock markets rallied toward the end of the reporting
period, this region continued to be a difficult environment for investors for
many reasons, including concerns about debt repayments, currency devaluations
and corporate bankruptcies. Compared to the MSCI World Index, we were
underweighted in Asia (especially in Japan, where we felt most share prices were
overvalued), and on December 31, 1998, our Asian exposure represented only 7.5%
of total net assets.
LATIN AMERICA
Throughout the year, Asia's economic malaise and Russia's financial collapse
were among the events that negatively impacted Latin American equity markets,
where we were overweighted compared to the Morgan Stanley Capital
International(R) (MSCI) World Index.(2) Because of its heavy debt refinancing
schedule and overvalued currency, Brazil, in particular, was placed in an
extremely vulnerable position. Apparently, believing that the Brazilian
government would be forced to devalue the real (its currency) to make exports
more competitive, a number of investors withdrew money from Brazil, and its
stock market plummeted 38.2% during the reporting period.(3) Many investors
seemed to think that most emerging-market economies were at risk, and other
South American equity markets also plunged. Taking advantage of price declines,
we initiated a position in Perez Companc SA, B, one of Argentina's largest oil
and gas companies.
Looking forward, we are optimistic about international equity markets' long-term
prospects, but believe significant risks still exist for global investors. Many
nations now depend on exports to the U.S., and if consumer demand slackens
there, the global economy could be hurt.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of December 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which may affect our
strategies and the Fund's portfolio composition. Although past performance is
not predictive of future results, these insights may help you understand our
investment and management philosophy.
(2) The MSCI World Index includes approximately 1,500 companies representing the
stock markets of 22 countries, including the U.S., Canada, the United Kingdom,
and Japan.
(3) Source: Bloomberg. Market return is measured in U.S. dollars and includes
reinvested dividends.
TS-2
PAGE
It is important to remember that foreign securities investments involve special
risks including changes in currency values, market price swings, and economic,
social, and political developments in the countries where the portfolios are
invested. Developing markets involve similar but heightened risks related to
their smaller size and lesser liquidity. These risks are discussed in the
prospectus.
We thank you for investing in Templeton Stock Fund and welcome your comments or
suggestions.
Sincerely,
/s/MARK R. BEVERIDGE
Mark R. Beveridge, CFA, CIC
Portfolio Manager
Templeton Stock Fund
TS-3
PAGE
TEMPLETON STOCK FUND
CLASS 1
PERFORMANCE SUMMARY AS OF 12/31/98
TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (1/1/89 - 12/31/98)
The MSCI World Index includes approximately 1,500 companies representing the
stock markets of 22 countries, and includes reinvested dividends. The Consumer
Price Index (CPI) is a commonly used measure of inflation. The Fund's
performance differs from an index's because an index is not managed, 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. Sources for indices are Standard & Poor's Micropal and MSCI.
[The following line graph hypothetically compares the performance of Templeton
Stock Fund Class 1 shares to that of the MSCI EAFE Index and the Consumer Price
Index (CPI), based on a $10,000 investment from 1/1/89 - 12/31/98.]
[TOTAL RETURN INDEX COMPARISON LINE GRAPH]
<TABLE>
<CAPTION>
Total Return Index Comparison
<S> <C> <C> <C>
Templeton Stock Fund-Class I MSCI World Index CPI
----------------------------------------------------------------
1/1/89 $10,000 $10,000 $10,000
1/31/89 $10,467 $10,364 $10,051
2/28/89 $10,282 $10,300 $10,091
3/31/89 $10,478 $10,236 $10,149
4/30/89 $10,721 $10,474 $10,216
5/31/89 $10,692 $10,218 $10,274
6/30/89 $10,526 $10,105 $10,299
7/31/89 $11,219 $11,248 $10,324
8/31/89 $11,502 $10,978 $10,341
9/30/89 $11,473 $11,290 $10,373
10/31/89 $10,809 $10,915 $10,424
11/30/89 $10,985 $11,353 $10,448
12/31/89 $11,463 $11,719 $10,464
1/31/90 $11,043 $11,174 $10,572
2/28/90 $11,112 $10,697 $10,622
3/31/90 $11,309 $10,053 $10,680
4/30/90 $10,882 $9,909 $10,697
5/31/90 $11,706 $10,955 $10,722
6/30/90 $11,716 $10,879 $10,780
7/31/90 $11,716 $10,980 $10,821
8/31/90 $10,872 $9,954 $10,920
9/30/90 $9,878 $8,906 $11,012
10/31/90 $9,749 $9,739 $11,078
11/30/90 $10,047 $9,581 $11,102
12/31/90 $10,216 $9,784 $11,102
1/31/91 $10,772 $10,143 $11,169
2/28/91 $11,498 $11,084 $11,186
3/31/91 $11,418 $10,759 $11,202
4/30/91 $11,429 $10,845 $11,218
5/31/91 $11,797 $11,093 $11,251
6/30/91 $11,194 $10,410 $11,285
7/31/91 $11,868 $10,903 $11,302
8/31/91 $12,042 $10,870 $11,334
9/30/91 $12,144 $11,157 $11,385
10/31/91 $12,298 $11,340 $11,401
11/30/91 $11,960 $10,848 $11,434
12/31/91 $13,003 $11,640 $11,443
1/31/92 $13,044 $11,426 $11,459
2/29/92 $13,463 $11,230 $11,501
3/31/92 $13,187 $10,704 $11,559
4/30/92 $13,626 $10,854 $11,575
5/31/92 $14,128 $11,288 $11,592
6/30/92 $13,783 $10,912 $11,633
7/31/92 $13,814 $10,942 $11,659
8/31/92 $13,522 $11,210 $11,691
9/30/92 $13,532 $11,109 $11,724
10/31/92 $13,407 $10,811 $11,766
11/30/92 $13,647 $11,006 $11,782
12/31/92 $13,929 $11,097 $11,775
1/31/93 $14,117 $11,136 $11,833
2/28/93 $14,441 $11,402 $11,874
3/31/93 $14,907 $12,065 $11,916
4/30/93 $15,141 $12,626 $11,949
5/31/93 $15,621 $12,920 $11,965
6/30/93 $15,706 $12,813 $11,982
7/31/93 $15,940 $13,079 $11,982
8/31/93 $16,983 $13,681 $12,015
9/30/93 $17,111 $13,430 $12,040
10/31/93 $17,835 $13,802 $12,090
11/30/93 $17,388 $13,024 $12,098
12/31/93 $18,666 $13,663 $12,098
1/31/94 $19,699 $14,567 $12,132
2/28/94 $18,996 $14,381 $12,174
3/31/94 $18,115 $13,763 $12,215
4/30/94 $18,395 $14,191 $12,232
5/31/94 $18,643 $14,230 $12,239
6/30/94 $18,104 $14,193 $12,281
7/31/94 $19,020 $14,465 $12,313
8/31/94 $19,710 $14,904 $12,364
9/30/94 $19,106 $14,515 $12,397
10/31/94 $19,300 $14,930 $12,406
11/30/94 $18,481 $14,285 $12,422
12/31/94 $18,255 $14,426 $12,422
1/31/95 $18,029 $14,213 $12,471
2/28/95 $18,573 $14,423 $12,521
3/31/95 $18,902 $15,120 $12,562
4/30/95 $19,626 $15,650 $12,604
5/31/95 $20,361 $15,787 $12,629
6/30/95 $20,833 $15,785 $12,654
7/31/95 $21,864 $16,578 $12,653
8/31/95 $21,634 $16,212 $12,688
9/30/95 $22,248 $16,687 $12,711
10/31/95 $21,743 $16,428 $12,753
11/30/95 $22,259 $17,001 $12,744
12/31/95 $22,862 $17,502 $12,736
1/31/96 $23,312 $17,821 $12,811
2/29/96 $23,695 $17,932 $12,852
3/31/96 $24,197 $18,235 $12,918
4/30/96 $24,723 $18,666 $12,968
5/31/96 $25,090 $18,686 $12,993
6/30/96 $25,273 $18,784 $13,001
7/31/96 $24,197 $18,124 $13,026
8/31/96 $25,041 $18,336 $13,051
9/30/96 $25,640 $19,057 $13,092
10/31/96 $26,032 $19,193 $13,134
11/30/96 $27,414 $20,272 $13,159
12/31/96 $27,989 $19,951 $13,159
1/31/97 $29,163 $20,194 $13,200
2/28/97 $29,059 $20,430 $13,240
3/31/97 $29,208 $20,030 $13,273
4/30/97 $29,046 $20,688 $13,289
5/31/97 $30,464 $21,969 $13,281
6/30/97 $32,111 $23,067 $13,296
7/31/97 $33,637 $24,134 $13,312
8/31/97 $31,733 $22,523 $13,338
9/30/97 $34,447 $23,750 $13,371
10/31/97 $31,382 $22,504 $13,404
11/30/97 $31,058 $22,905 $13,396
12/31/97 $31,314 $23,188 $13,380
1/31/98 $30,963 $23,838 $13,404
2/28/98 $33,083 $25,455 $13,431
3/31/98 $35,275 $26,533 $13,458
4/30/98 $35,546 $26,796 $13,482
5/31/98 $35,049 $26,465 $13,507
6/30/98 $34,643 $27,096 $13,523
7/31/98 $34,582 $27,057 $13,539
8/31/98 $28,111 $23,452 $13,555
9/30/98 $27,359 $23,871 $13,572
10/31/98 $29,872 $26,034 $13,604
11/30/98 $31,859 $27,586 $13,604
12/31/98 $32,177 $28,938 $13,596
</TABLE>
[BEGIN CALL BOX]
Expenses: Performance reflects the Fund's Class 1 operating expenses, but does
not include any Contract fees, expenses, or sales charges. If they had been
included, performance would be lower. These charges and deductions, particularly
for variable life policies, can have a significant effect on Contract values and
insurance benefits. See the Contract prospectus for a complete description of
these expenses, including sales charges.
[END CALL BOX]
PERFORMANCE
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.
TEMPLETON STOCK FUND - CLASS 1
PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (8/31/88)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CUMULATIVE TOTAL RETURN 1.26% 69.96% 221.77% 225.64%
AVERAGE ANNUAL TOTAL RETURN 1.26% 11.18% 12.39% 12.08%
VALUE OF $10,000 INVESTMENT $10,126 $16,996 $32,177 $32,564
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------------------------------------------------------------------------------
ONE-YEAR TOTAL RETURN -2.20% 25.24% 22.48% 11.88% 1.26%
</TABLE>
[BEGIN CALL BOX]
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
[END CALL BOX]
Past performance cannot predict or guarantee future results.
TS-4
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS 1
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................... $23.19 $22.88 $20.83 $16.94 $17.53
--------------------------------------------------------------------
Income from investment operations:
Net investment income................................ .39 .47 .41 .40 .26
Net realized and unrealized gains (losses)........... .04 2.11 3.88 3.80 (.64)
--------------------------------------------------------------------
Total from investment operations...................... .43 2.58 4.29 4.20 (.38)
--------------------------------------------------------------------
Less distributions from:
Net investment income................................ (.49) (.40) (.40) (.27) (.21)
Net realized gains................................... (2.06) (1.87) (1.84) (.04) --
--------------------------------------------------------------------
Total distributions................................... (2.55) (2.27) (2.24) (.31) (.21)
--------------------------------------------------------------------
Net asset value, end of year.......................... $21.07 $23.19 $22.88 $20.83 $16.94
--------------------------------------------------------------------
--------------------------------------------------------------------
Total Return*......................................... 1.26% 11.88% 22.48% 25.24% (2.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)....................... $646,865 $732,248 $644,366 $498,777 $378,849
Ratios to average net assets:
Expenses............................................. .89% .81% .65% .66% .73%
Net investment income................................ 1.65% 2.05% 2.06% 2.18% 1.81%
Portfolio turnover rate............................... 37.27% 25.82% 23.40% 33.93% 5.10%
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE CONTRACT LEVEL FOR COST OF
INSURANCE CHARGES, PREMIUM LOAD, ADMINISTRATIVE CHARGES, MORTALITY AND EXPENSE
RISK CHARGES OR OTHER CHARGES THAT MAY BE INCURRED UNDER THE VARIABLE ANNUITY
CONTRACT FOR WHICH THE FUND SERVES AS AN UNDERLYING
INVESTMENT VEHICLE.
TS- 5
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS 2
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997+
-----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $23.15 $21.62
-----------------------
Income from investment operations:
Net investment income...................................... .40 .06
Net realized and unrealized gains (losses)................. (.03) 1.47
-----------------------
Total from investment operations............................ .37 1.53
-----------------------
Less distributions from:
Net investment income...................................... (.47) --
Net realized gains......................................... (2.06) --
-----------------------
Total distributions......................................... (2.53) --
-----------------------
Net asset value, end of year................................ $20.99 $23.15
-----------------------
-----------------------
Total Return*............................................... .99% 7.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $25,593 $16,414
Ratios to average net assets:
Expenses................................................... 1.14% 1.14%**
Net investment income...................................... 1.37% .75%**
Portfolio turnover rate..................................... 37.27% 25.82%
</TABLE>
*TOTAL RETURN DOES NOT INCLUDE DEDUCTIONS AT THE CONTRACT LEVEL FOR COST OF
INSURANCE CHARGES, PREMIUM LOAD, ADMINISTRATIVE CHARGES, MORTALITY AND EXPENSE
RISK CHARGES OR OTHER CHARGES THAT MAY BE INCURRED UNDER THE VARIABLE ANNUITY
CONTRACT FOR WHICH THE FUND SERVES AS AN UNDERLYING
INVESTMENT VEHICLE. TOTAL RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
+FOR THE PERIOD MAY 1, 1997 (EFFECTIVE DATE) TO DECEMBER 31, 1997.
See Notes to Financial Statements.
TS- 6
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 96.6%
AEROSPACE & MILITARY TECHNOLOGY 1.0%
Boeing Co................................................... United States 202,800 $ 6,616,350
Raytheon Co., A............................................. United States 255 13,180
------------
6,629,530
------------
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp................................................... Japan 101,500 7,405,541
------------
AUTOMOBILES 2.9%
Fiat SpA.................................................... Italy 1,452,780 5,044,822
Ford Motor Co............................................... United States 130,000 7,629,375
Volvo AB, B................................................. Sweden 299,100 6,863,308
------------
19,537,505
------------
BANKING 6.3%
Australia & New Zealand Banking Group Ltd. ................. Australia 603,200 3,951,310
Banco Bradesco SA, ADR...................................... Brazil 987,100 5,473,677
Banque Nationale de Paris................................... France 83,454 6,875,073
Deutsche Bank AG, Br. ...................................... Germany 111,900 6,602,745
HSBC Holdings Plc. ......................................... Hong Kong 267,804 6,671,551
*Thai Farmers Bank Public Co. Ltd., fgn. ................... Thailand 3,165,100 5,574,966
Unidanmark AS, A............................................ Denmark 76,800 6,938,487
------------
42,087,809
------------
BROADCASTING & PUBLISHING .9%
News Corp. Ltd., ADR........................................ Australia 124,900 3,302,044
Television Broadcasts Ltd. ................................. Hong Kong 1,136,000 2,932,654
------------
6,234,698
------------
BUSINESS & PUBLIC SERVICES 1.6%
Lex Service Plc. ........................................... United Kingdom 582,100 3,699,562
Waste Management Inc. ...................................... United States 151,018 7,041,191
------------
10,740,753
------------
CHEMICALS 3.4%
Akzo Nobel NV............................................... Netherlands 216,900 9,881,681
Rhone-Poulenc SA, A......................................... France 254,302 13,092,488
------------
22,974,169
------------
DATA PROCESSING & REPRODUCTION 3.0%
*3Com Corp. ................................................ United States 239,800 10,746,037
*Newbridge Networks Corp. .................................. Canada 304,700 9,255,263
------------
20,001,300
------------
ELECTRICAL & ELECTRONICS 6.9%
ABB AB, A................................................... Sweden 621,300 6,630,123
Alcatel SA.................................................. France 52,735 6,457,116
*Antec Corp. ............................................... United States 571,700 11,505,462
Motorola Inc. .............................................. United States 195,300 11,925,506
Philips Electronics NV...................................... Netherlands 146,800 9,856,024
------------
46,374,231
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.7%
Intel Corp. ................................................ United States 155,000 18,377,187
------------
</TABLE>
TS- 7
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 6.0%
Norsk Hydro AS.............................................. Norway 205,900 $ 6,904,771
Perez Companc SA, B......................................... Argentina 461,600 1,954,327
Repsol SA................................................... Spain 117,100 6,255,997
Societe Elf Aquitaine SA, Br. .............................. France 84,420 9,762,508
Total SA, B................................................. France 92,597 9,382,031
YPF Sociedad Anonima, ADR................................... Argentina 208,300 5,819,381
------------
40,079,015
------------
FINANCIAL SERVICES 7.2%
AXA-UAP..................................................... France 113,891 16,514,215
Fannie Mae.................................................. United States 160,200 11,854,800
ICICI Ltd., GDR, 144A....................................... India 321,700 2,139,305
ING Groep NV................................................ Netherlands 207,537 12,662,112
Morgan Stanley Dean Witter & Co............................. United States 68,900 4,891,900
*Waddell & Reed Financial Inc............................... United States 7,169 169,816
------------
48,232,148
------------
FOOD & HOUSEHOLD PRODUCTS 1.2%
Archer-Daniels Midland Co................................... United States 482,370 8,290,734
------------
FOREST PRODUCTS & PAPER 2.7%
Assidomaen AB............................................... Sweden 55,400 874,830
Carter Holt Harvey Ltd. .................................... New Zealand 1,283,352 1,152,484
Fletcher Challenge Ltd. Forestry Division................... New Zealand 5,344,852 1,778,756
Georgia Pacific Corp. ...................................... United States 119,300 6,986,506
Stora Enso OY, R............................................ Finland 475,300 4,787,356
Stora Kopparbergs Bergslags AB, B........................... Sweden 240,000 2,664,759
------------
18,244,691
------------
HEALTH & PERSONAL CARE 6.1%
Astra AB, A................................................. Sweden 110,066 2,247,270
Astra AB, B................................................. Sweden 348,267 7,089,252
Medeva Plc. ................................................ United Kingdom 3,069,000 5,412,428
Novartis AG................................................. Switzerland 2,486 4,886,931
Nycomed Amersham Plc. ...................................... United Kingdom 879,923 6,121,000
*Skyepharma Plc. ........................................... United Kingdom 7,974,500 10,415,078
Teva Pharmaceutical Industries Ltd., ADR.................... Israel 119,300 4,854,019
------------
41,025,978
------------
INDUSTRIAL COMPONENTS 3.3%
BTR Plc. ................................................... United Kingdom 3,381,537 6,920,041
Goodyear Tire & Rubber Co................................... United States 110,000 5,548,125
Granges AB.................................................. Sweden 421,725 6,087,225
Yamato Kogyo Co. Ltd. ...................................... Japan 598,000 3,467,128
------------
22,022,519
------------
INSURANCE 9.4%
Ace Ltd. ................................................... Bermuda 196,100 6,753,194
Exel Ltd. .................................................. Bermuda 81,800 6,135,000
HIH Insurance Ltd. ......................................... Australia 2,558,865 3,390,077
Muenchener Rueckversicherungs-Gesellschaft.................. Germany 519 253,954
Muenchener Rueckversicherungs-Gesellschaft, Br. ............ Germany 12,976 4,269,241
*Muenchener Rueckversicherungs-Gesellschaft, wts. .......... Germany 519 24,305
National Mutual Asia Ltd. .................................. Hong Kong 3,820,000 2,859,853
Partnerre Ltd. ............................................. Bermuda 160,400 7,338,300
Reliastar Financial Corp.................................... United States 227,400 10,488,825
Torchmark Corp.............................................. United States 126,000 4,449,375
</TABLE>
TS- 8
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE (CONT.)
Waddell & Reed Financial Inc................................ United States 30,857 $ 717,425
Zurich Allied AG............................................ Switzerland 22,700 16,808,082
------------
63,487,631
------------
LEISURE & TOURISM .7%
Kuoni Reisen Holding AG, B.................................. Switzerland 1,185 4,702,039
------------
MACHINERY & ENGINEERING .6%
New Holland NV.............................................. Netherlands 288,200 3,944,737
------------
MERCHANDISING 3.6%
Home Depot Inc.............................................. United States 114,200 6,987,612
Safeway Plc. ............................................... United Kingdom 2,398,120 11,959,678
Storehouse.................................................. United Kingdom 2,297,000 5,235,654
------------
24,182,944
------------
METALS & MINING 1.9%
Eramet SA................................................... France 127,200 3,823,150
Ispat International NV...................................... Netherlands 253,300 1,963,075
WMC Ltd. ................................................... Australia 2,426,584 7,322,661
------------
13,108,886
------------
MULTI-INDUSTRY 4.0%
Alfa SA de CV, A............................................ Mexico 1,562,000 4,398,554
Cheung Kong Holdings Ltd. .................................. Hong Kong 905,000 6,512,472
DESC SA de CV DESC, B....................................... Mexico 4,464,500 3,828,004
DESC SA de CV DESC, C....................................... Mexico 900 850
Hicom Holdings Bhd. ........................................ Malaysia 3,806,800 1,263,535
Hutchison Whampoa Ltd. ..................................... Hong Kong 891,100 6,297,425
Inchcape Plc. .............................................. United Kingdom 1,619,100 3,461,515
La Cemento Nacional SA, GDR, 144A........................... Ecuador 2,650 286,200
La Cemento Nacional SA, GDR, Reg S.......................... Ecuador 1,000 108,000
Swire Pacific Ltd., B....................................... Hong Kong 609,000 404,834
------------
26,561,389
------------
REAL ESTATE 1.7%
National Health Investors Inc. ............................. United States 208,500 5,147,344
Summit Properties Inc. ..................................... United States 346,700 5,980,575
------------
11,127,919
------------
TELECOMMUNICATIONS 6.9%
Compania De Telecomunicaciones De Chile SA, ADR............. Chile 130,300 2,695,581
Hong Kong Telecommunications Ltd. .......................... Hong Kong 2,782,800 4,867,139
Nortel Inversora SA, ADR.................................... Argentina 143,700 2,371,050
Northern Telecom, Ltd. ..................................... Canada 133,860 6,709,733
Rostelecom, ADR............................................. Russia 253,100 1,059,856
Telecom Italia SpA.......................................... Italy 848,000 7,235,253
*Telecomunicacoes Brasileiras SA (Telebras), ADR............ Brazil 46,400 3,372,700
Telefonica SA............................................... Spain 158,100 7,040,525
*Telefonica SA, rts......................................... Spain 158,100 140,587
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 225,800 10,993,638
------------
46,486,062
------------
TRANSPORTATION 6.2%
Air New Zealand Ltd., B..................................... New Zealand 2,099,100 3,304,377
ASG AB, B................................................... Sweden 188,900 3,577,210
British Airways Plc. ....................................... United Kingdom 1,031,000 6,981,399
Canadian National Railway Co. .............................. Canada 126,400 6,562,760
Firstbus Plc. .............................................. United Kingdom 658,400 4,365,234
</TABLE>
TS- 9
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
----------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION (CONT.)
Helikopter Services Group ASA............................... Norway 478,600 $ 2,261,399
Koninklijke Nedlloyd Groep NV............................... Netherlands 291,500 3,960,809
Mayne Nickless Ltd., A...................................... Australia 1,011,799 3,754,552
Peninsular & Oriental Steam Navigation Co. ................ United Kingdom 581,100 6,864,337
------------
41,632,077
------------
UTILITIES ELECTRICAL & GAS 5.3%
Centrais Eletricas Brasileiras SA (Eletrobras), ADR......... Brazil 571,500 4,919,181
*Evn AG..................................................... Austria 65,520 9,281,404
Iberdrola SA, Br. .......................................... Spain 706,000 13,228,574
VEBA AG..................................................... Germany 144,000 8,533,141
------------
35,962,300
------------
TOTAL COMMON STOCKS (COST $539,788,357)..................... 649,453,792
------------
PREFERRED STOCKS 3.3%
Banco Itau SA, pfd. ........................................ Brazil 7,017,500 3,426,654
Embotelladora Andina SA, B, ADR, pfd. ...................... Chile 336,600 4,375,800
*Embratel Participacoes SA, pfd. ........................... Brazil 88,209,044 1,204,593
News Corp. Ltd., pfd. ...................................... Australia 294,809 1,795,554
News Corp. Ltd., pfd., ADR.................................. Australia 130,000 3,209,375
Petroleo Brasileiro SA, pfd. ............................... Brazil 22,799,900 2,585,215
*Tele Celular Sul Participacoes SA, pfd. ................... Brazil 88,209,044 148,931
*Tele Centro Oeste Celular Participacoes SA, pfd. .......... Brazil 88,209,044 92,717
*Tele Centro Sul Participacoes SA, pfd. .................... Brazil 88,209,044 765,829
*Tele Leste Celular Participacoes SA, pfd. ................. Brazil 88,209,044 51,104
*Tele Nordeste Celular Participacoes SA, pfd. .............. Brazil 88,209,044 80,306
*Tele Norte Celular Participacoes SA, pfd. ................. Brazil 88,209,044 40,883
*Tele Norte Leste Participacoes SA, pfd. ................... Brazil 88,209,044 1,102,385
*Tele Sudeste Celular Participacoes SA, pfd. ............... Brazil 88,209,044 372,329
Telecomunicacoes Brasileiras SA (Telebras), pfd. ........... Brazil 88,209,044 10,221
*Telemig Celular Participacoes SA, pfd. .................... Brazil 88,209,044 97,828
*Telesp Celular Participacoes SA, pfd. ..................... Brazil 88,209,044 649,750
*Telesp Participacoes SA, pfd. ............................. Brazil 88,209,044 2,007,655
------------
TOTAL PREFERRED STOCKS (COST $24,401,180)................... 22,017,129
------------
TOTAL INVESTMENTS (COST $564,189,537) 99.9%................. 671,470,921
OTHER ASSETS, LESS LIABILITIES .1%.......................... 987,091
------------
TOTAL NET ASSETS 100.0%..................................... $672,458,012
------------
------------
</TABLE>
*NON INCOME PRODUCING
See Notes to Financial Statements.
TS- 10
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $564,189,537).... $671,470,921
Receivables:
Investment securities sold................................ 2,538,017
Dividends................................................. 2,476,926
Other assets............................................... 90,682
------------
Total assets........................................... 676,576,546
------------
Liabilities:
Payables:
Investment securities purchased........................... 473,911
Fund shares redeemed...................................... 501,264
To affiliates............................................. 456,315
Funds advanced by custodian................................ 2,382,010
Accrued expenses........................................... 305,034
------------
Total liabilities...................................... 4,118,534
------------
Net assets, at value........................................ $672,458,012
============
Net assets consist of:
Undistributed net investment income........................ $ 11,403,074
Net unrealized appreciation................................ 107,281,384
Accumulated net realized gain.............................. 47,461,381
Beneficial shares.......................................... 506,312,173
------------
Net assets, at value........................................ $672,458,012
============
CLASS 1:
Net asset value per share ($646,865,387 / 30,699,638 shares
outstanding).............................................. $21.07
============
CLASS 2:
Net asset value per share ($25,592,625 / 1,219,406 shares
outstanding).............................................. $20.99
============
</TABLE>
See Notes to Financial Statements.
TS- 11
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $2,092,812)
Dividends.................................................. $18,051,815
Interest................................................... 569,286
-----------
Total investment income............................... $ 18,621,101
Expenses:
Management fees (Note 4)................................... 5,100,755
Administrative fees (Note 4)............................... 702,686
Distribution fees - Class 2 (Note 4)....................... 53,988
Custodian fees............................................. 445,000
Reports to shareholders.................................... 204,000
Professional fees.......................................... 53,600
Trustees' fees and expenses................................ 18,000
Other...................................................... 13,396
-----------
Total expenses........................................ 6,591,425
------------
Net investment income........................... 12,029,676
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 47,606,776
Foreign currency transactions............................. (37,819)
-----------
Net realized gain..................................... 47,568,957
Net unrealized depreciation on investments............ (47,396,839)
------------
Net realized and unrealized gain............................ 172,118
------------
Net increase in net assets resulting from operations........ $ 12,201,794
------------
------------
</TABLE>
See Notes to Financial Statements.
TS- 12
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 12,029,676 $ 15,090,974
Net realized gain from investments and foreign currency
transactions............................................. 47,568,957 64,659,885
Net unrealized depreciation on investments................ (47,396,839) (2,630,723)
------------------------------
Net increase in net assets resulting from operations... 12,201,794 77,120,136
Distributions to shareholders from:
Net investment income:
Class 1.................................................. (15,083,722) (11,299,102)
Class 2.................................................. (357,002) --
Net realized gains:
Class 1.................................................. (63,413,199) (53,491,951)
Class 2.................................................. (1,560,086) --
Fund share transactions (Note 3):
Class 1.................................................. (19,220,136) 75,008,241
Class 2.................................................. 11,228,384 16,958,890
------------------------------
Net increase (decrease) in net assets.................. (76,203,967) 104,296,214
Net assets:
Beginning of year.......................................... 748,661,979 644,365,765
------------------------------
End of year................................................ $672,458,012 $748,661,979
------------------------------
------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 11,403,074 $ 15,048,456
------------------------------
------------------------------
</TABLE>
See Notes to Financial Statements.
TS- 13
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Stock Fund (the Fund) is a separate, diversified series of Templeton
Variable Products Series Fund (the Trust), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
capital growth through a policy of investing primarily in common stocks issued
by companies, large and small, in various nations throughout the world. 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, and the difference 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 currency 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.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the funds comprising
the Trust based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
TS- 14
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
2. MERGER OF TEMPLETON VARIABLE ANNUITY FUND
On May 8, 1998, the Fund acquired all of the net assets of Templeton Variable
Annuity Fund (Variable Annuity Fund) pursuant to a plan of reorganization
approved by Variable Annuity Fund's shareholders. The merger was accomplished by
a tax-free exchange of 699,965 Class 1 shares of the Fund (valued at $23.84 per
share) for the net assets of the Variable Annuity Fund which aggregated
$16,687,175, including $4,980,981 of unrealized appreciation. The combined net
assets of the Fund immediately after the merger were $839,071,006.
3. BENEFICIAL SHARES
The Fund offers two classes of shares: Class 1 and Class 2 shares. The shares
differ by their distribution fees, voting rights on matters affecting a single
class and the exchange privilege of each class.
At December 31, 1998, 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, 1998 DECEMBER 31, 1997
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 1 SHARES:
Shares sold................................................. 2,562,174 $ 50,875,104 4,159,792 $ 96,416,712
Shares issued on reinvestment of distributions.............. 3,523,201 78,496,920 2,970,704 64,791,053
Shares redeemed............................................. (6,963,562) (148,592,160) (3,715,179) (86,199,524)
--------------------------------------------------------------
Net increase (decrease)..................................... (878,187) $ (19,220,136) 3,415,317 $ 75,008,241
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS 2 SHARES:
Shares sold................................................. 641,741 $ 14,204,072 780,245 $ 18,686,201
Shares issued on reinvestment of distributions.............. 86,200 1,917,088 -- --
Shares redeemed............................................. (217,530) (4,892,776) (71,250) (1,727,311)
--------------------------------------------------------------
Net increase (decrease)..................................... 510,411 $ 11,228,384 708,995 $ 16,958,890
--------------------------------------------------------------
--------------------------------------------------------------
*Effective date of Class 2 shares was May 1, 1997.
</TABLE>
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Trust are also officers or directors of Templeton
Investment Counsel, Inc. (TICI), Franklin Templeton Services, Inc. (FT Services)
and Franklin/Templeton Distributors, Inc. (Distributors), the Fund's investment
manager, administrative manager and principal underwriter, respectively.
TS- 15
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Notes to Financial Statements (continued)
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>
The Fund pays its allocated share of an administrative fee to FT Services based
on the Trust's aggregate 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>
The Fund reimburses Distributors up to .25% per year of its average daily net
assets of Class 2 shares, for costs incurred in marketing the Fund's Class 2
shares.
Legal fees of $19,008 were paid to a law firm in which a partner is an officer
of the Fund.
5. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At December 31, 1998, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $188,552,791
Unrealized depreciation..................................... (81,271,407)
------------
Net unrealized appreciation................................. $107,281,384
------------
------------
</TABLE>
6. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $278,627,327 and $334,663,934, respectively.
TS- 16
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Templeton Variable Products Series Fund
We have audited the accompanying statement of assets and liabilities, including
the Statement of Investments, of the Templeton Stock Fund, series of Templeton
Variable Products Series Fund (the Trust) as of December 31, 1998, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended and the
financial highlights for the periods indicated in the accompanying financial
statements. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
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, 1998, 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 the
Templeton Stock Fund, series of Templeton Variable Products Series Fund as of
December 31, 1998, 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 28, 1999
TS- 17
PAGE
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON STOCK FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Templeton Stock
Fund hereby designates $51,870,821 as a capital gain dividend for the fiscal
year ended December 31, 1998.
Under Section 854(b)(2) of the Internal Revenue Code, the Templeton Stock Fund
hereby designates 9.97% of the ordinary income dividends as income qualifying
for the dividends received deduction for the fiscal year ended December 31,
1998.
TS- 18
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets:
Investment in Templeton Variable Products Series
Fund - Templeton Stock Fund, at value (cost
$11,455,760).............................................. $10,549,365
Receivable from Templeton Funds Annuity Company............ 28,205
-----------
Net assets.................................................. $10,577,570
-----------
-----------
Net assets attributable to annuitants - Annuity reserves
(Note 1).................................................. $10,577,570
-----------
-----------
</TABLE>
See Notes to Financial Statements.
SA- 1
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Investment Income:
Income:
Dividend distributions..................................... $ 291,498
Capital gains distributions................................ 2,103,695
-----------
Total income............................................. 2,395,193
Expenses:
Periodic charge (Note 2)................................... 132,694
-----------
Net investment income....................................... 2,262,499
-----------
Realized and unrealized gain on investments:
Net realized gain on investments........................... 208,281
Unrealized depreciation of investments..................... (2,513,058)
-----------
Net loss on investments.................................... (2,304,777)
-----------
Net decrease in net assets from operations.................. $ (42,278)
-----------
-----------
</TABLE>
See Notes to Financial Statements.
SA- 2
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income...................................... $ 2,262,499 $ 2,352,947
Net realized gain on investments........................... 208,281 535,182
Unrealized depreciation of investments for the year........ (2,513,058) (1,507,974)
--------------------------
Net increase (decrease) in net assets from operations.... (42,278) 1,380,155
--------------------------
Annuity unit transactions:
Proceeds from units sold................................... 0 42,451
Annuity payments........................................... (1,517,338) (1,620,684)
Increase (decrease) in annuity reserves for morality
experience (Note 1)....................................... (23,139) 40,226
--------------------------
Net decrease in net assets derived from annuity unit
transactions........................................... (1,540,477) (1,538,007)
--------------------------
Total decrease in net assets.......................... (1,582,755) (157,852)
Net assets:
Beginning of year.......................................... 12,160,325 12,318,177
--------------------------
End of year................................................ $10,577,570 $12,160,325
--------------------------
--------------------------
</TABLE>
See Notes to Financial Statements.
SA- 3
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT 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. On May 8, 1998, the Separate Account's shares in the Templeton
Variable Annuity Fund valued at $13,354,827 were exchanged for shares of equal
value in the Templeton Variable Products Series Fund - Templeton Stock Fund
Class 1. As of December 31, 1998, all assets of the Separate Account are
invested in the Templeton Variable Products Series Fund - Templeton Stock Fund
Class 1. 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 period ended December 31, 1998, purchases and sales of Templeton
Variable Annuity Fund aggregated $2,395,193 and $529,867 respectively. For
Templeton Products Series Fund - Templeton Stock Fund Class 1 shares purchases
and sales aggregated $0 and $1,257,963 respectively. Realized gains and losses
are reported on an identified cost basis.
SA- 4
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
Notes to Financial Statement (continued)
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
Products Series Fund - Templeton Stock Fund Class 1. The Fund's investment
securities are managed by professional investment managers within established
guidelines. As of December 31, 1998, in management's opinion, the Separate
Account had no significant concentration of credit risk.
SA- 5
PAGE
TEMPLETON FUNDS RETIREMENT ANNUITY SEPARATE ACCOUNT
REPORT OF INDEPENDENT ACCOUNTANTS
The Participants of
Templeton Funds Retirement Annuity Separate Account
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the Templeton Funds Retirement
Annuity Separate Account at December 31, 1998, and the results of its operations
for the year then ended and the changes in its net assets for each of the two
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PriceWaterhouseCoopers, L.L.P.
Jacksonville, Florida
February 12, 1999
SA- 6
PAGE
SUPPLEMENT DATED NOVEMBER 17, 1998
TO THE PROSPECTUS DATED MAY 1, 1998
OF
TEMPLETON VARIABLE PRODUCTS SERIES FUND
I. THE SECTION "FOREIGN SECURITIES" UNDER "EXPLANATION OF RISK FACTORS" IS
AMENDED BY DELETING THE FOURTH PARAGRAPH AND ADDING THE FOLLOWING TEXT AT
THE END OF THE SECTION:
Euro. On January 1, 1999, the European Monetary Union ("EMU") plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If a Fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
The process to establish the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the Funds. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent a Fund holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
Franklin Resources, Inc. ("Resources"), the parent company of the Funds'
Investment Managers, has created an interdepartmental team to handle all
Euro-related changes to enable the Franklin Templeton Group of Funds to
process transactions accurately and completely with minimal disruption to
business activities. While there can be no assurance that the Funds will not
be adversely affected, the Investment Managers and their affiliated service
providers are taking steps that they believe are reasonably designed to
address the Euro issue.
II. THE SECTION "YEAR 2000" UNDER "OTHER INFORMATION" IS REPLACED WITH THE
FOLLOWING:
Year 2000 Problem. The Funds' business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market
links. Many of the systems currently use a two digit date field to represent
the date, and unless these systems are changed or modified, they may not be
able to distinguish the Year 1900 from the Year 2000 (commonly referred to
as the Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the Funds' operations could be adversely
affected if the computer systems used by the Investment Managers, their
service providers and other third parties they do business with are not Year
2000 ready. For example, the Funds' portfolio holdings and operational areas
could be impacted, including securities trade processing, interest and
dividend payments, securities pricing, shareholder account services,
reporting, custody functions and others. The Funds could experience
difficulties in effecting transactions if any of their foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready
for Year 2000.
In evaluating current and potential portfolio positions, Year 2000 is only
one of the factors that the Funds' Investment Managers take into
consideration. The Investment Managers will rely upon public filings and
other statements made by companies regarding their Year 2000 readiness.
Issuers in countries outside of the U.S., and in particular in emerging
markets, may not be required to make the same level of disclosure regarding
Year 2000 readiness that is required in the U.S. The Investment Managers, of
course, cannot audit each company and their major suppliers to verify their
Year 2000 readiness. If a company any Fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security
will also be adversely affected. A decrease in the value of one or more of a
Fund's fund holdings will have a similar impact on the price of the Fund's
shares.
The Investment Managers and their affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the Funds' ability to reduce
the effects of the Year 2000 problem is also very much dependent upon the
efforts of third parties over which the Funds and their Investment Managers
may have no control.
Please keep this supplement with your prospectus for future reference.
PS- 1
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