ANNUAL REPORT
DECEMBER 31, 1998
TEMPLETON RETIREMENT ANNUITY
- - TRA SEPARATE ACCOUNT
- - TEMPLETON VARIABLE
PRODUCTS SERIES FUND -
TEMPLETON STOCK FUND - CLASS I
[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>
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.
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>
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.
Past performance cannot predict or guarantee future results.
TS-4
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
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
This page intentionally left blank.
PAGE
This page intentionally left blank.
PAGE
This page intentionally left blank.
