TEMPLETON VARIABLE PRODUCTS SERIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995,
AS AMENDED SEPTEMBER 29, 1995, IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON VARIABLE PRODUCTS
SERIES FUND DATED MAY 1, 1995, AS AMENDED FROM TIME TO TIME,
WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 292-9293.
TABLE OF CONTENTS
General Information and History........................... 1
Investment Objectives and Policies........................ 1
-Investment Policies..................................... 1
-Futures Contracts....................................... 1
-Foreign Currency Hedging
Transactions .......................................... 2
-Stock Index Futures Contracts........................... 4
-Risk Factors............................................ 6
Investment Restrictions................................... 11
Trading Policies.......................................... 13
-Personal Securities Transactions........................ 14
Management of the Trust................................... 14
Trustee Compensation...................................... 20
Principal Shareholders.................................... 21
Investment Management and Other
Services................................................ 22
-Investment Management Agreements........................ 22
-Management Fees......................................... 24
-The Investment Managers................................. 24
-Business Manager........................................ 25
-Custodian............................................... 26
-Legal Counsel........................................... 26
-Independent Accountants................................. 26
-Reports to Shareholders................................. 26
Brokerage Allocation...................................... 27
-Portfolio Turnover...................................... 30
Purchase, Redemption and Pricing
of Shares............................................... 30
Tax Status................................................ 32
Description of Shares..................................... 36
Yield and Performance
Information............................................. 37
Financial Statements...................................... 42
Appendix - Corporate Bond, Preferred
Stock and Commercial Paper Ratings....................... i
GENERAL INFORMATION AND HISTORY
Templeton Variable Products Series Fund (the "Trust") was organized as
a Massachusetts business trust on February 25, 1988 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company. The Trust currently has five series of Shares:
Templeton Money Market Fund, Templeton Bond Fund, Templeton Stock Fund,
Templeton Asset Allocation Fund and Templeton International Fund (collectively,
the "Funds").
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The investment objective and policies
of each Fund are described in the Prospectus under the heading
"Investment Objectives and Policies."
FUTURES CONTRACTS. Templeton Bond, Asset Allocation and
International Funds may purchase and sell financial futures
contracts. Currently, futures contracts are available on several
types of fixed-income securities including: U.S. Treasury bonds,
notes and bills, commercial paper, and certificates of deposit.
As long as required by regulatory authorities, Templeton Bond, Asset
Allocation and International Funds will limit their use of futures contracts to
hedging transactions in order to
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avoid being a commodity pool. For example, they might use futures contracts to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Funds' securities or the price of the securities which
the Funds intend to purchase. The Funds' hedging may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce the Funds' exposure to interest rate fluctuations, they may be able to
hedge their exposure more effectively and perhaps at a lower cost by using
futures contracts.
At the time a Fund purchases or sells a futures contract, it is
required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange or board of trade
on which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on initial margin deposits.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Funds pay or receive
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, a Fund will mark
to market its open futures positions. In addition, the Fund must deposit in a
segregated account additional cash or high quality debt securities to ensure the
futures contracts are unleveraged. The value of assets held in the segregated
account must be equal to the daily market value of all outstanding futures
contracts less any amounts deposited as margin.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge
against foreign currency exchange rate risks, Templeton Bond and
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Asset Allocation Funds may enter into forward foreign currency exchange
contracts, as well as purchase put or call options on foreign currencies. In
addition, for hedging purposes only, Templeton Bond, Asset Allocation and
International Funds may enter into foreign currency futures contracts, as
described below. The Funds may also conduct their foreign currency exchange
transactions on a spot (I.E., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. A Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security. In addition, for example, when a Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with a Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, a Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked-to-market on a daily
basis. While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority
to regulate forward contracts. In such event, a Fund's ability to utilize
forward contracts in the manner set forth above may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a Fund than if it
had not engaged in such contracts.
Templeton Bond and Asset Allocation Funds may purchase and write put
and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign
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portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and a Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuation in exchange rates, although, in the event
of rate movements adverse to a Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
Templeton Bond, Asset Allocation and International Funds may enter into
exchange-traded contracts for the purchase or sale for future delivery of
foreign currencies ("foreign currency futures"). This investment technique will
be used only to hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of a Fund's portfolio securities or
adversely affect the prices of securities that a Fund intends to purchase at a
later date. The successful use of foreign currency futures will usually depend
on the ability of a Fund's Investment Manager to forecast currency exchange rate
movements correctly. Should exchange rates move in an unexpected manner, a Fund
may not achieve the anticipated benefits of foreign currency futures or may
realize losses.
STOCK INDEX FUTURES CONTRACTS. Templeton Stock, Asset Allocation and
International Funds may buy and sell index futures contracts with respect to any
stock index, and Templeton Bond Fund may buy and sell index futures contracts
with respect to any bond index traded on a recognized stock exchange or board of
trade. The Funds may invest in index futures contracts for hedging purposes
only, and not for speculation. A Fund may engage in such transactions only to an
extent that the total contract value of the futures contracts do not exceed 20%
of the Fund's total assets at the time when such contracts are entered into.
Successful use of stock index futures is subject to the ability of Templeton
Investment Counsel, Inc. (the Investment Manager of Templeton Stock Fund,
Templeton Asset Allocation Fund, and Templeton International Fund) and the
Templeton Global Bond Managers division of Templeton Investment Counsel, Inc.
(the Investment Manager of Templeton Bond Fund and Templeton Money Market Fund)
(collectively, the "Investment Managers") to predict correctly movements in the
direction of the stock markets. No assurance can be given that the Investment
Manager's judgment in this respect will be correct.
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A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the contract
is made. The value of a unit is the current value of the stock index. For
example, the Standard & Poor's Stock Index ("S&P 500 Index" or "Index") is
composed of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. The S&P 500 Index assigns a relative weighing to the value of
one share of each of these 500 common stocks included in the Index, and the
Index fluctuates with changes in the market values of the shares of those common
stocks. In the case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one contract would be
worth $75,000 (500 units x $150). The stock index futures contract specifies
that no delivery of the actual stocks making up the index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if a Fund enters into a futures contract to buy 500 units of the S&P 500 Index
at a specified future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will gain $2,000 (500 units x gain of $4).
If a Fund enters into a futures contract to sell 500 units of the stock index at
a specified future date at a contract price of $150 and the S&P 500 Index is at
$154 on the future date, the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, Templeton
Stock Fund, Templeton Asset Allocation Fund or Templeton International Fund may
enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the securities
which a Fund proposes to purchase change in value in correlation with the stock
index contracted for, the purchase of futures contracts on that index would
result in gains to the Fund which could be offset against rising prices of such
common stock.
During or in anticipation of a period of market decline, Templeton
Stock Fund, Templeton Asset Allocation Fund or Templeton International Fund may
"hedge" common stock in its portfolio by selling stock index futures for the
purpose of limiting the exposure of its portfolio to such decline. To the extent
that a Fund's portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index could
substantially reduce the risk to the portfolio of a market decline and, by so
doing, provide an
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alternative to the liquidation of securities positions in the
portfolio with resultant transaction costs.
RISK FACTORS. Templeton Bond Fund, Templeton Stock Fund, Templeton
Asset Allocation Fund and Templeton International Fund have an unlimited right
to purchase securities in any foreign country, developed or developing, if they
are listed on an exchange, as well as a limited right to purchase such
securities if they are unlisted. Investors should consider carefully the risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Funds' investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Funds could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the Funds' Shareholders.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial
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reporting standards, and auditing practices and requirements may not be
comparable to those applicable to United States companies. Foreign markets have
substantially less volume than the New York Stock Exchange ("NYSE"), and
securities of some foreign companies are less liquid and more volatile than
securities of comparable United States companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the United States, are likely to be higher. In many foreign countries there is
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the United States.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness of corruption and crime in the
Russian economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (6)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on a Funds' ability to exchange local currencies for U.S. dollars; (7) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (8) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (9)
dependency on exports and the corresponding importance of international trade;
(10) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (11) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent
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formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While each Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive a Fund of
its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent a Fund from
investing in the securities of certain Russian companies deemed suitable by the
Investment Manager. Further, this also could cause a delay in the sale of
Russian company securities by a Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
The Funds endeavor to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when a Fund changes investment from one
country to another or when proceeds of the sale of Shares in U.S. dollars are
used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent a Fund from transferring cash out of the
country or withhold portions of interest and dividends at the source, or impose
other taxes with
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respect to a Fund's investments in securities of issuers of that country. There
is the possibility of expropriation, nationalization or confiscatory taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments which
could affect investments in securities of issuers in those nations.
Each Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Through each Fund's flexible policy, the Investment
Managers endeavor to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where from time to time it places a
Fund's investments. The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and other decisions
such as changing the emphasis on investments from one nation to another and from
one type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if any,
will exceed losses.
The Trustees consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Trustees also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services -- Custodian"). However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Investment Managers, or reckless
disregard of the obligations and duties under the Investment Management
Agreements, any losses resulting from the holding of a Fund's portfolio
securities in foreign countries and/or with securities depositories will be at
risk of the Shareholders. No assurance can be given that the Trustees' appraisal
of the risks will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are several risks associated with the use of futures contracts
and stock index futures contracts as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount invested. There
can be significant differences between the securities and futures markets that
could result in an imperfect correlation between the
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markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures, including technical influences in futures
trading, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when, and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and, therefore, does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures position, and it would remain obligated
to meet margin requirements until the position is closed. Templeton Bond, Stock,
Asset Allocation and International Funds intend to purchase or sell futures only
on exchanges or boards of trade where there appears to be an active secondary
market, but there is no assurance that a liquid secondary market will exist for
any particular contract or at any particular time. In addition, many of the
futures contracts available may be relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use of stock
index futures by a Fund for hedging purposes also depends upon the Investment
Manager's ability to predict correctly movements in the direction of the market,
as to which no assurance can be given.
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Templeton Bond, Asset Allocation and International Funds may enter into
a contract for the purchase or sale of a security denominated in a foreign
currency and may enter into a forward foreign currency contract ("forward
contract") in order to "lock in" the U.S. dollar price of the security. In
addition, when the Investment Manager believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the amount of the
former foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the Funds to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between a Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
INVESTMENT RESTRICTIONS
The Funds have imposed upon themselves certain investment restrictions
which, together with their investment objectives, are fundamental policies
except as otherwise indicated. No changes in a Fund's investment objectives,
policies or investment
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restrictions (except those which are not fundamental policies) can be made
without the approval of the Shareholders of that Fund. For this purpose, the
provisions of the 1940 Act require the affirmative vote of the lesser of either
(a) 67% or more of the Fund's Shares present at a Shareholders' meeting at which
the holders more than 50% of the outstanding Shares are present or represented
by proxy or (b) more than 50% of the outstanding Shares of the Fund.
In accordance with these restrictions, a Fund will not:
1. Invest in real estate or mortgages on real estate, or
purchase or sell commodity contracts, except that
Templeton Bond and Asset Allocation Funds may invest in
marketable securities secured by real estate or
interests therein, such as CMOs, or issued by companies
or investment trusts which invest in real estate or
interests therein and Templeton Bond, Asset Allocation
and International Funds may purchase and sell foreign
currency futures and financial futures, and Templeton
Stock, Asset Allocation and International Funds may
purchase and sell stock index futures contracts, and
Templeton Bond Fund may purchase and sell bond index
futures contracts.
2. With respect to 75% of its total assets, invest more
than 5% of the total value of its assets in the
securities of any one issuer, or purchase more than 10%
of any class of securities of any one company,
including more than 10% of its outstanding voting
securities (except for investments in obligations
issued or guaranteed by the U.S. Government or its
agencies or instrumentalities).
3. Act as an underwriter or issue senior securities.
4. Lend money, except that all Funds may purchase publicly
distributed bonds, debentures, notes and other evidences of
indebtedness and may buy from a bank or broker-dealer U.S.
Government obligations with a simultaneous agreement by the
seller to repurchase them at the original purchase price plus
accrued interest, and may lend their portfolio securities.
5. Borrow money for any purpose other than redeeming its Shares
or purchasing its Shares for cancellation, and then only as a
temporary measure up to an amount not exceeding 5% of the
value of its total assets, except that Templeton Bond, Stock,
Asset Allocation and
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International Funds may borrow money in amounts up to 30% of
the value of its net assets.
6. Invest more than 25% of its total assets in a single
industry, except that this limitation will not apply to
investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, or
repurchase agreements on such securities, and Templeton
Money Market Fund may invest in obligations issued by
domestic banks (including certificates of deposit,
repurchase agreements, and bankers' acceptances)
without regard to this limitation.
As non-fundamental investment policies, which may be changed by the
Board of Trustees without Shareholder approval, a Fund will not invest more than
15% of its total assets in securities of foreign issuers which are not listed on
a recognized United States or foreign securities exchange, or more than 10% of
its total assets in (a) securities with a limited trading market, (b) securities
subject to legal or contractual restrictions as to resale, and (c) repurchase
agreements not terminable within seven days. In addition, as non-fundamental
investment policies, Templeton Stock, Asset Allocation and International Funds
will not invest more than 5% of each Fund's assets in debt securities rated
lower than Baa by Moody's Investors Service, Inc. or BBB by Standard & Poor's
Corporation.
Whenever any investment policy or investment restriction states a
maximum percentage of a Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of the Fund's acquisition of such
security or property. The investment restrictions do not preclude a Fund from
purchasing the securities of any issuer pursuant to the exercise of subscription
rights distributed to a Fund by the issuer, unless such purchase would result in
a violation of investment restriction number 6, or the non-fundamental
investment policies discussed above.
TRADING POLICIES
The Investment Managers and their affiliated companies serve as
investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or
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<PAGE>
the quantity which may be bought or sold for each party. If the transaction is
large enough, brokerage commissions may be negotiated below those otherwise
chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT OF THE TRUST
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Principal Executive
Officers of the Trust are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
HARRIS J. ASHTON
Metro Center
1 Station Place
Stamford, Connecticut
Trustee
Chairman of the Board,
president, and chief executive
officer of General Host
Corporation (nursery and craft
centers); and a director of
RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-
S Foods. Age 63.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
NICHOLAS F. BRADY*
102 East Dover Street
Easton, Maryland
Trustee
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Trustee Retired; formerly, credit adviser for the National Bank of Canada,
Toronto. Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Trustee
Farmer; and president of
Clairhaven Investments, Ltd.
and other private investment
companies. Age 79.
S. JOSEPH FORTUNATO
12 Brannick Drive
Madison, New Jersey
Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director
of General Host Corporation. Age 63.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Trustee Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982-February 1990)
and director of various of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd College (1991-present); and
a director of Checkers Drive-In Restaurants, Inc. Age 72.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of Franklin Administrative Services,
Inc., General Host Corporation, and Templeton Global Investors, Inc.; and
officer and director, trustee or managing general partner, as the case may be,
of most other subsidiaries of Franklin and of 55 of the investment companies in
the Franklin Templeton Group. Age 62.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Trustee
Director or trustee of various civic associations; formerly, economic analyst,
U.S.
Government. Age 66.
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland 20817
Trustee
Chairman of White River
Corporation (information
services); director of Fund
America Enterprises Holdings,
Inc., Lockheed Martin
Corporation, MCI Communications Corporation, Fusion Systems Corporation,
Infovest Corporation, and Medimmune, Inc.; and formerly held the following
positions: chairman of Hambrecht and Quist Group; director, H&Q Healthcare
Investors; and president of the National Association of Securities Dealers, Inc.
Age 67.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Trustee
Manager of personal
investments (1978-present); chairman and chief executive officer of Landmark
Banking Corporation (1969-1978); financial vice president of Florida Power and
Light (1965- 1969); vice president of The Federal Reserve Bank of Atlanta
(1958-1965); and a director of various other business and nonprofit
organizations. Age 66.
CHARLES E. JOHNSON
777 Mariners Island Blvd.
San Mateo, California
President Senior vice president and director of Franklin Resources, Inc.;
senior vice president of Franklin Templeton Distributors, Inc.; president and
director of Franklin Institutional Service Corporation and Templeton Worldwide,
Inc.; chairman of the board of Templeton Investment Counsel, Inc.; vice
president and/or director, as the case may be, for some of the subsidiaries of
Franklin Resources, Inc.; and an officer and/or director or trustee, as the case
may be, of 24 of the investment companies in the Franklin Templeton Group. Age
39.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President President and director of Templeton, Galbraith & Hansberger
Ltd.; director of global equity research for Templeton Worldwide, Inc.;
president or vice president of the Templeton Funds; formerly, investment
administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985).
Age 35.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president,
treasurer, and chief financial officer of Franklin Resources, Inc.; executive
vice president and director of Templeton Investment Counsel, Inc.; director,
president and chief executive officer of Templeton Global Investors, Inc.;
director or trustee and president or vice president of various Templeton Funds;
accountant with Arthur Andersen & Company (1982- 1983); and a member of the
International Society of Financial Analysts and the American Institute of
Certified Public Accountants.
Age 35.
SAMUEL J. FORESTER, JR.
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President President of the Templeton Global Bond Managers Division of
Templeton Investment Counsel, Inc.; president or vice president of other
Templeton Funds; founder and partner of Forester, Hairston Investment Management
(1989- 1990); managing director (Mid-East Region) of Merrill Lynch, Pierce,
Fenner & Smith Inc. (1987-1988); and an advisor for Saudi Arabian Monetary
Agency (1982-1987). Age 47.
DANIEL L. JACOBS
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Executive vice president and director of Templeton Investment
Counsel, Inc.; director of Templeton Global Investors, Inc.; and president or
vice president of various Templeton Funds. AGe 43.
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<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors,
Inc. and Templeton Worldwide,
Inc.; assistant vice president
of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller,
the Keystone Group, Inc.
Age 55.
THOMAS J. LATTA
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the
Templeton Global Bond Managers division of Templeton Investment Counsel, Inc.;
vice president of various Templeton Funds; formerly, portfolio manager, Forester
& Hairston (1988-1991); investment adviser, Merrill Lynch, Pierce, Fenner &
Smith Incorporated (1981-1988).
Age 35.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary Senior vice president of Templeton Global Investors, Inc.; vice
president of Franklin Templeton Distributors, Inc.; secretary of the Templeton
Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill,
Hollingdale & Page (1988); and judicial clerk, U.S. District Court (Eastern
District of Virginia) (1984- 1985). Age 42.
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<PAGE>
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company; formerly, senior tax manager, Ernst & Young
(certified public accountants) (1977-1989).
Age 41.
JACK L. COLLINS
700 Central Avenue
St. Petersburg, Florida
Assistant Treasurer Assistant treasurer of the Templeton Funds; assistant vice
president of Franklin Templeton Investor Services, Inc.; formerly, partner,
Grant Thornton, independent public accountants. Age 66.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price &
Rhoads. Age 50.
* These are Trustees who are "interested persons" of the Trust
as that term is defined in the 1940 Act. Mr. Brady and
Franklin Resources, Inc. are limited partners of Darby
Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady
established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner
of Darby Overseas. In addition, Darby Overseas and
Templeton, Galbraith & Hansberger, Ltd. are limited partners
of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees.
TRUSTEE COMPENSATION
All of the Trust's Officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Trust to any officer or trustee who is an officer, trustee or employee of
the Investment Managers or their affiliates. Each Templeton Fund pays its
independent
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<PAGE>
directors and trustees and Mr. Brady an annual retainer and/or fees for
attendance at Board and Committee meetings, the amount of which is based on the
level of assets in each fund. Accordingly, the Trust currently pays the
independent Trustees and Mr. Brady an annual retainer of $4000.00 and a fee of
$350.00 per meeting attended of the Board and its Committees. The independent
Trustees and Mr. Brady are reimbursed for any expenses incurred in attending
meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No
pension or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the
Trustees by the Trust and by all investment companies in the
Franklin Templeton Group:
<TABLE>
<CAPTION>
NUMBER OF TOTAL COMPENSATION
NAME AGGREGATE FRANKLIN TEMPLETON FROM ALL FUNDS IN
OF COMPENSATION FUND BOARDS ON WHICH FRANKLIN TEMPLETON
TRUSTEE FROM THE TRUST* TRUSTEE SERVES GROUP*
- ------- -------------- -------------------- -------------
<S> <C> <C> <C>
Harris J. Ashton $2,850 54 $319,925
Nicholas F. Brady 2,850 23 86,125
F. Bruce Clarke 3,350 19 95,275
Hasso-G von Diergardt-Naglo 2,850 19 75,275
S. Joseph Fortunato 2,850 56 336,065
Andrew H. Hines, Jr. 3,350 23 106,125
Betty P. Krahmer 2,850 23 75,275
Gordon S. Macklin 2,850 51 303,695
Fred R. Millsaps 3,350 23 106,125
</TABLE>
* For the fiscal year ended December 31, 1994.
PRINCIPAL SHAREHOLDERS
Shares of the Fund are sold to and owned only by insurance company
separate accounts to serve as the investment vehicle for variable annuity
contracts. As of March 24, 1995, there were 22,838,642 Shares of Templeton Money
Market Fund outstanding, of which no Shares were owned by the Trustees and
officers of the Trust; 2,856,232 Shares of Templeton Bond Fund outstanding, of
which no Shares were owned by the Trustees and officers of the Trust; 23,454,897
Shares of Templeton Stock Fund outstanding, of which no Shares were owned, by
the Trustees and officers of the Trust; 19,835,756 Shares of Templeton Asset
Allocation Fund outstanding, of which no Shares were owned by the Trustees and
officers of the Trust; and 14,780,740 Shares of Templeton
- 21 -
<PAGE>
International Fund outstanding, of which no Shares were owned by the Trustees
and officers of the Trust. As of March 24, 1995, Phoenix Home Mutual Life
Insurance Company ("Phoenix Home Life") owned 100% of the outstanding Shares of
Templeton Money Market Fund, 62% of the outstanding Shares of Templeton Bond
Fund, 63% of the outstanding Shares of Templeton Stock Fund, 40% of the
outstanding Shares of Templeton Asset Allocation Fund, and 40% of the
outstanding Shares of Templeton International Fund, including Shares received in
return for monies paid in connection with the initial capital advances made to
the Trust. As of March 24, 1995, The Travelers Insurance Company ("The
Travelers") owned 38% of the outstanding Shares of Templeton Bond Fund, 37% of
the
outstanding Shares of Templeton Stock Fund, and 44% of the outstanding Shares
of Templeton Asset Allocation Fund. As of March 24, 1995, the Variable Annuity
Life Insurance Company ("VALIC") owned 16% of the outstanding shares of
Templeton Asset Allocation Fund and 59% of Templeton International Fund.
However, Phoenix Home Life, The Travelers and VALIC will exercise voting rights
attributable to these Shares in accordance with voting instructions received by
owners of the contracts issued by Phoenix Home Life, The Travelers, and VALIC.
To this extent, Phoenix Home Life, The Travelers and VALIC do not exercise
control over the Trust by virtue of the voting rights from their ownership of
Trust Shares. To the knowledge of management, as of March 24, 1995, no other
person owned of record or beneficially 5% or more of the Shares of any of the
Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of Templeton
Money Market Fund and Templeton Bond Fund is the Templeton Global Bond Managers
division ("TGBM") of Templeton Investment Counsel, Inc., a Florida corporation
with offices in Fort Lauderdale, Florida. The Investment Manager of Templeton
Asset Allocation Fund, Templeton Stock Fund, and Templeton International Fund is
Templeton Investment Counsel, Inc. ("TICI"). The Investment Management
Agreements between the Investment Managers and the Trust on behalf of the Funds
(the "Management Agreements"), dated October 30, 1992, and amended and restated
on February 25, 1994, were approved by the Shareholders of the Funds on October
30, 1992, and were last approved by the Board of Trustees, including a majority
of the Trustees who were not parties to the Agreements or interested persons of
any such party, at a meeting held on February 24, 1995, and will continue
through April 30, 1996. The Management Agreements will continue from year to
year thereafter subject to approval annually by the Board of Trustees or by vote
of a majority of the outstanding Shares of each Fund (as defined in the 1940
Act) and also, in either event, the approval of a majority of those Trustees who
are not parties to the Management Agreements or interested persons of any such
party in person at a meeting called for the purpose of voting on such approval.
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<PAGE>
The Investment Management Agreements require the Investment Managers to
manage the investment and reinvestment of each Fund's assets. The Investment
Managers are not required to furnish any personnel, overhead items or facilities
for the Funds, including daily pricing or trading desk facilities, although such
expenses are paid by investment advisers of some other investment companies.
The Management Agreements provide that the Investment Managers will
select brokers and dealers for execution of each Fund's portfolio transactions
consistent with the Fund's brokerage policies (see "Brokerage Allocation").
Although the services provided by broker-dealers in accordance with the
brokerage policies incidentally may help reduce the expenses of or otherwise
benefit the Investment Managers and other investment management clients of the
Investment Managers and of their affiliates, as well as the Funds, the value of
such services is indeterminable and the Investment Managers' fee is not reduced
by any offset arrangement by reason thereof.
Under the Management Agreements, the Investment Manager is permitted to
provide investment advisory services to other clients, including clients which
may invest in the same types of securities as the Funds and, in providing such
services, the Investment Managers may use information furnished by others.
Conversely, information furnished by others to the Investment Managers in
providing services to other clients may be useful to the Investment Managers in
providing services to the Funds. When an Investment Manager determines to buy or
sell the same security for a Fund that the Investment Manager or certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be placed for execution by methods determined by the Investment
Manager, with approval by the Board of Trustees, to be impartial and fair, in
order to seek good results for all parties. Records of securities transactions
of persons who know when orders are placed by a Fund are available for
inspection at least four times annually by the compliance officer of the Trust
so that the non-interested Trustees (as defined in the 1940 Act) can be
satisfied that the procedures are generally fair and equitable to all parties.
The Management Agreements provide that the Investment Managers shall
have no liability to the Trust, a Fund or any Shareholder of a Fund for any
error of judgment, mistake of law, or any loss arising out of any investment or
other act or omission in the performance by the Investment Manager of its duties
under the Management Agreement, or for any loss or damage resulting from the
imposition by any government of exchange control restrictions which might affect
the liquidity of a Fund's
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<PAGE>
assets, or from acts or omissions of custodians or securities depositories, or
from any wars or political acts of any foreign governments to which such assets
might be exposed, except any liability resulting from willful misfeasance, bad
faith or gross negligence on the Investment Manager's part, or reckless
disregard of its duties under the Management Agreement. The Management
Agreements will terminate automatically in the event of their assignment, and
may be terminated by the Trust on behalf of a Fund at any time without payment
of any penalty on 60 days' written notice, with the approval of a majority of
the Trustees in office at the time or by vote of a majority of the outstanding
voting securities of that Fund (as defined by the 1940 Act).
MANAGEMENT FEES. For its services, Templeton Money Market Fund pays its
Investment Manager a monthly fee equal on an annual basis to 0.35% of its
average daily net assets up to $200 million, reduced to 0.30% of such net assets
from $200 million up to $1,300 million and further reduced to 0.25% of such net
assets in excess of $1,300 million. Templeton Bond, Stock, Asset Allocation and
International Funds each pay their Investment Manager a monthly fee equal on an
annual basis to 0.50% of its average daily net assets up to $200 million,
reduced to 0.45% of such net assets from $200 million up to $1,300 million and
further reduced to 0.40% of such net assets in excess of $1,300 million. During
the fiscal year ended December 31, 1994, Templeton Money Market Fund, Templeton
Bond Fund, Templeton Stock Fund, Templeton Asset Allocation Fund, and Templeton
International Fund paid investment management fees of $88,106, $149,843,
$1,686,602, $1,186,540, and $404,532, respectively. During the fiscal year ended
December 31, 1993, Templeton Money Market Fund, Templeton Bond Fund, Templeton
Stock Fund, Templeton Asset Allocation Fund, and Templeton International Fund
paid investment management fees of $55,445, $111,575, $1,089,643, $608,471, and
$95,518, respectively. During the fiscal year ended December 31, 1992, Templeton
Money Market Fund, Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund, and Templeton International Fund paid investment management
fees of $77,049, $55,211, $702,809, $264,566, and $13,597, respectively.
THE INVESTMENT MANAGERS. The Investment Managers are
indirect wholly owned subsidiaries of Franklin, a publicly traded
company whose shares are listed on the NYSE. Charles B. Johnson
(a Trustee and Vice President of the Trust), Rupert H. Johnson,
Jr., and R. Martin Wiskemann are principal shareholders of
Franklin and own, respectively, approximately 20%, 16% and 9.2%
of its outstanding shares. Messrs. Charles B. Johnson and Rupert
H. Johnson, Jr. are brothers.
- 24 -
<PAGE>
BUSINESS MANAGER. Templeton Funds Annuity Company performs
certain administrative functions as Business Manager for the
Trust, including:
o providing office space, telephone, office equipment and
supplies for the Trust;
o paying compensation of the Trust's officers for
services rendered as such;
o authorizing expenditures and approving bills for
payment on behalf of the Trust;
o supervising preparation of annual and semi-annual
reports, notices of dividends, capital gains
distributions and tax credits;
o daily pricing of the Funds' investment portfolios and
supervising publication of daily quotations of the bid and
asked prices of the Funds' Shares, earnings reports and other
financial data;
o providing trading desk facilities for the Funds;
o monitoring relationships with organizations serving the
Trust, including the Custodian and printers;
o supervising compliance by the Trust with recordkeeping
requirements under the 1940 Act and regulations thereunder,
with state regulatory requirements, maintaining books and
records for the Trust (other than those maintained by the
Custodian and Transfer Agent), and filing of tax reports on
behalf of the Trust other than the Trust's income tax returns;
and
o providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on
an annual basis to 0.15% of the combined average daily net assets of the Funds,
reduced to 0.135% of the Funds' aggregate net assets in excess of $200 million,
further reduced to 0.10% annually of such net assets in excess of $700 million
and further reduced to 0.075% annually of such net assets in excess of $1,200
million. The fee is allocated among the Funds according to their respective
average daily net assets. Since the Business Manager's fee covers services often
provided by investment advisers to other funds, the Funds' combined expenses for
management and administrative services together may be higher than those of some
other investment companies. During the fiscal
- 25 -
<PAGE>
years ended December 31, 1994, 1993, and 1992, the Business Manager received
fees of $1,006,867, $568,481 and $339,772, respectively.
The Business Manager is relieved of liability to the Trust for any act
or omission in the course of its performance under the Business Management
Agreement, in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations and duties under the Agreement. The
Business Management Agreement may be terminated by a Fund at any time on 60
days' written notice without payment of penalty, provided that such termination
shall be directed or approved by vote of a majority of the Trustees of the Trust
in office at the time or by vote of a majority of the outstanding voting
securities of that Fund, and shall terminate automatically and immediately in
the event of its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned subsidiary
of Franklin.
CUSTODIAN. The Chase Manhattan Bank, N.A. serves as Custodian of the
Trust's assets, which are maintained at the Custodian's principal office,
MetroTech Center, Brooklyn, New York, New York 11245 and at the offices of its
branches and agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Trustees pursuant to Rule
17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians,
generally domestically and frequently abroad, do not actually hold certificates
for the securities in their custody, but instead have book records with domestic
and foreign securities depositories, which in turn have book records with the
transfer agents of the issuers of the securities. Compensation for the services
of the Custodian is based on a schedule of charges agreed on from time to time.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Trust.
INDEPENDENT ACCOUNTANTS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New
York, New York 10017, serves as independent accountants for the Trust. Its audit
services comprise examination of the Trust's financial statements, review of the
Trust's filings with the Securities and Exchange Commission ("SEC") and
preparation of the Trust's federal and state corporation tax returns.
REPORTS TO SHAREHOLDERS. The Trust's fiscal year ends on
December 31. Shareholders are provided at least semiannually
with reports showing the Funds' portfolios and other information,
including an annual report with financial statements audited by
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<PAGE>
independent accountants. Shareholders who would like to receive an interim
quarterly report may phone the Fund Information Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Management Agreements provide that the Investment Managers are
responsible for selecting members of securities exchanges, brokers and dealers
(such members, brokers and dealers being hereinafter referred to as "brokers")
for the execution of a Fund's portfolio transactions, and, when applicable, the
negotiation of commissions in connection therewith. All recommendations,
decisions and placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by an Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable securities price, taking into account
the other provisions hereinafter set forth. The
determination of what may constitute best execution and
price in the execution of a securities transaction by a
broker involves a number of considerations, including,
without limitation, the overall direct net economic
result to a Fund (involving both price paid or received
and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the
broker. Such considerations are judgmental and are
weighed by an Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Managers take into account its past experience as
to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by a
Fund.
3. The Investment Managers are authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for a Fund and/or other
accounts, if any, for which an Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions as to
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<PAGE>
which fixed minimum commission rates are not applicable, to
cause a Fund to pay a commission for effecting a securities
transaction in excess of the amount another broker would have
charged for effecting that transaction, if an Investment
Manager in making the selection in question determines in good
faith that such amount of commission is reasonable in relation
to the value of the brokerage and research services provided
by such broker, viewed in terms of either that particular
transaction or the Investment Manager's overall
responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment
discretion. In reaching such determination, an Investment
Manager is not required to place or to attempt to place a
specific dollar value on the research or execution services of
a broker or on the portion of any commission reflecting either
of said services. In demonstrating that such determinations
were made in good faith, the Investment Manager shall be
prepared to show that all commissions were allocated and paid
for purposes contemplated by the Trust's brokerage policy;
that the research services provide lawful and appropriate
assistance to an Investment Manager in the performance of its
investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. The
determination that commissions were within a reasonable range
shall be based on any available information as to the level of
commissions known to be charged by other brokers on comparable
transactions, but there shall be taken into account the
Trust's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it
is recognized that usually it is more beneficial to a Fund to
obtain a favorable price than to pay the lowest commission and
(ii) the quality, comprehensiveness and frequency of research
studies which are provided for an Investment Manager are
useful to the Investment Manager in performing its management
services under its Management Agreement with the Trust.
Research services provided by brokers to an Investment Manager
are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Manager
under its Management Agreement with the Trust. Research
furnished by brokers through whom a Fund effects securities
transactions may be used by an Investment Manager for any of
its accounts, and not all such research may be used by the
Investment Manager for that Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with
fixed brokerage
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commission rates, account may be taken of various services
provided by the broker, including quotations outside the
United States for daily pricing of foreign securities held in
a Fund's portfolio.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with
primary market makers acting as principal, except where, in
the judgement of an Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
5. Sales of shares of investment companies registered
under the 1940 Act which have either the same
investment adviser, or an investment adviser affiliated
with an Investment Manager, made by a broker is one
factor among others to be taken into account in
deciding to allocate portfolio transactions (including
agency transactions, principal transactions, purchases
in underwritings or tenders in response to tender
offers) for the account of a Fund to that broker;
provided that the broker shall furnish "best
execution," as defined in paragraph 1 above, and that
such allocation shall be within the scope of the Fund's
other policies as stated above; and provided further,
that in every allocation made to a broker in which such
sale of shares is taken into account there shall be no
increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set
forth in paragraph 3 above, on the basis of best
execution alone or best execution plus research
services, without taking account of or placing any
value upon such sale of shares.
Insofar as known to management, no Trustee or officer of the Trust, nor
the Investment Manager or Principal Underwriter or any person affiliated with
any of them, has any material direct or indirect interest in any broker employed
by or on behalf of the Trust. Franklin Templeton Distributors, Inc., the Trust's
Principal Underwriter, is a registered broker-dealer, but it has never executed
any purchase or sale transactions for the Funds' portfolios or participated in
any commissions on any such transactions, and has no intention of doing so in
the future. The total brokerage commissions on the Trust's portfolio
transactions during the fiscal years ended December 31, 1994, 1993, and 1992
were as follows: total commissions (not including any spreads or concessions on
principal transactions) of $672,000, $340,552 and $230,000, respectively. All
portfolio transactions are allocated to broker-dealers only when their
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prices and execution, in the good faith judgment of management, are equal to the
best available within the scope of the Trust's policies. There is no fixed
method used in determining which broker-dealers receive which order or how many
orders.
PORTFOLIO TURNOVER. For reporting purposes, each Fund's portfolio
turnover rate is calculated by dividing the value of the lesser of purchases or
sales of portfolio securities for the fiscal year by the monthly average of the
value of the portfolio securities owned by the Fund during the fiscal year. In
determining such portfolio turnover, short-term U.S. Government securities and
all other securities whose maturities at the time of acquisition were one year
or less are excluded. A 100% portfolio turnover rate would occur, for example,
if all of the securities in the portfolio (other than short-term securities)
were replaced once during the fiscal year. The portfolio turnover rate for each
of the Funds will vary from year to year, depending on market conditions.
It is anticipated that the rate of portfolio turnover as defined above
for Templeton Stock, Asset Allocation and International Funds will be less than
50%, and for Templeton Bond Fund, less than 100%, under normal market
conditions. Portfolio turnover could be greater in periods of unusual market
movement and volatility. Templeton Bond Fund's portfolio turnover rates for the
fiscal years ended December 31, 1994, 1993, and 1992 were 203.91%, 170.3% and
148.7%, respectively. The increase in the Fund's portfolio turnover rate was the
result of trading by the Investment Manager to improve the Fund's yield in
response to rising interest rates and to hedge currency exposure. In light of
rising interest rates, the Investment Manager determined to increase the Fund's
positions in bonds with shorter maturities, which resulted in the higher
portfolio turnover rate.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which a Fund's Shares
may be purchased and redeemed. See "How to Buy Shares of the
Funds" and "How to Sell Shares of the Funds."
Net asset value per Share is calculated separately for each Fund. Net
asset value per Share is determined as of the scheduled closing time of the NYSE
(generally 4:00 p.m., New York time) every Monday through Friday (exclusive of
national business holidays). The Trust's offices will be closed, and net asset
value will not be calculated, on those days on which the NYSE is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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Templeton Money Market Fund uses the amortized cost method to determine
the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
which Templeton Money Market Fund would receive if the security were sold.
During these periods the yield to a shareholder may differ somewhat from that
which could be obtained from a similar fund which utilizes a method of valuation
based upon market prices. Thus, during periods of declining interest rates, if
the use of the amortized cost method resulted in a lower value of the Fund's
portfolio on a particular day, a prospective investor in the Fund would be able
to obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values, and existing Shareholders would receive
corresponding less income. The converse would apply during periods of rising
interest rates.
In accordance with Rule 2a-7, the Fund is required to (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase
only instruments having remaining maturities of 397 days or less; and (iii)
invest only in U.S. dollar denominated securities determined in accordance with
procedures established by the Board of Trustees to present minimal credit risks
and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board of
Trustees). If a security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board of Trustees,
including approval or ratification of the security by the Board except in the
case of U.S. Government securities. Pursuant to the Rule, the Board is required
to establish procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per Share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the Fund's
portfolio holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations deviates from $1.00 per Share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing
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Shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per Share by
using available market quotations.
The Board of Trustees may establish procedures under which a Fund may
suspend the determination of net asset value for the whole or any part of any
period during which (1) the NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE is restricted, (3) an emergency
exists, as determined by the SEC, as a result of which disposal of securities
owned by the Fund is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (4)
for such other period as the SEC may by order permit for the protection of the
holders of a Fund's Shares.
TAX STATUS
Templeton Money Market Fund intends to declare dividends daily and to
pay dividends monthly. Templeton Stock, Bond, Asset Allocation and International
Funds normally intend to pay an annual dividend representing substantially all
of their net investment income and to distribute annually any net realized
capital gains. By so doing and meeting certain diversification of assets and
other requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), and as described in the Prospectus, each Fund intends to qualify as a
regulated investment company under the Code. The status of the Funds as
regulated investment companies does not involve government supervision or
management of their investment practices or policies. As a regulated investment
company, each Fund will be relieved of liability for United States federal
income tax on that portion of its net investment income and net realized capital
gains which it distributes to its Separate Account Shareholders.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% excise tax
unless the exception described below applies. To avoid the tax if it otherwise
applies, a Fund must distribute during each calendar year, (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 98% of its capital gains in excess of its
capital losses for the twelve-month period ending on October 31 of the calendar
year (adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years.
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To avoid application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement. A
distribution will be treated as paid on December 31 of the calendar if it is
declared by a Fund during October, November, or December of that year to
Shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions will be taxable to
Shareholders (a Separate Account) in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. The excise tax provisions described above will not
apply in a given calendar year to a Fund if all of its shareholders at all times
during the calendar year are segregated asset accounts of life insurance
companies where the shares are held in connection with variable contracts. (For
this purpose, any shares of a regulated investment company attributable to an
investment not exceeding $250,000 made in connection with the organization of
the company is not taken into account.) Accordingly, if this condition regarding
the ownership of Shares of each of the Funds is met, the excise tax will be
inapplicable to that Fund even if the calendar year distribution requirement is
not met.
The Funds may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. If a Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which a Fund held the PFIC shares. A Fund itself will be subject to tax
on the portion, if any, of an excess distribution that is so allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election
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<PAGE>
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election may be
available that would involve marking to market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the Fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. The Fund's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC
shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Income received by a Fund from sources within a foreign country may be
subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and forward contracts, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's net investment income to be distributed to its Shareholders
as ordinary income.
Debt securities purchased by a Fund may be treated for federal income
tax purposes as having original issue discount. Original issue discount
essentially represents interest for federal income tax purposes and can be
defined generally as the excess of the stated redemption price at maturity over
the issue
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<PAGE>
price. Original issue discount, whether or not any income is actually received
by a Fund, is treated for U.S. federal income tax purposes as ordinary income
earned by the Fund, and therefore is subject to the distribution requirements of
the Code. Generally, the amount of original issue discount included in the
income of a Fund each year is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued but unpaid
interest.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semiannual compounding of interest.
Certain options, futures contracts and forward contracts in which the
Templeton Stock, Bond, Asset Allocation and International Funds may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60-40"), except for certain foreign currency gains and losses which will be
treated as ordinary in character. Also, section 1256 contracts held by a Fund at
the end of each taxable year (and, in some cases, for purposes of the 4% excise
tax, on October 31 of each year) are "marked-to-market" with the result that
unrealized gains or losses are treated as though they were realized.
The hedging transactions undertaken by certain of the Funds may result
in "straddles" for federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Funds of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Funds which is taxed as ordinary income when
distributed to Shareholders.
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<PAGE>
Each Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
The requirements under the Code relating to the qualification of a Fund
as a regulated investment company may limit the extent to which a Fund may
engage in futures and forward currency contracts.
Distributions of any net investment income and of any net realized
short term capital gains are treated as ordinary income for tax purposes in the
hands of the Separate Account Shareholder. The excess of any net long-term
capital gains over net short-term capital losses will, to the extent distributed
and designated by the distributing Fund as a capital gain dividend, be treated
as long-term capital gains in the hands of the Shareholder regardless of the
length of time a Separate Account may have held the Shares.
Reference is made to the Prospectus for the applicable Contract for
information regarding the federal income tax treatment of distributions to
owners of contracts.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and other
rights, voting powers, restrictions and limitations as to dividends,
qualifications, and terms and conditions of redemption, except as follows: all
consideration received from the sale of Shares of a Fund, together with all
income, earnings, profits and proceeds thereof, belongs to that Fund and is
charged with liabilities in respect to that Fund and of that Fund's part of
general liabilities of the Trust in the proportion that the total net assets of
the Fund bear to the total net assets of all Funds. The net asset value of a
Share of a Trust is based on the assets belonging to that Fund less the
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liabilities charged to that Fund, and dividends are paid on Shares of a Fund
only out of lawfully available assets belonging to that Fund. In the event of
liquidation or dissolution of the Trust, the Shareholders of each Fund will be
entitled, out of assets of the Fund available for distributions, to the assets
belonging to that particular Fund.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Trust for acts or obligations of the Trust, which,
under the terms of the Declaration of Trust, are binding only on the property of
the Trust, which, under the terms of the Declaration of Trust, are binding only
on the property of the Trust. The Declaration of the Trust provides for
indemnification out of Trust property for all loss and expense of any
Shareholder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations and, thus, should be considered remote.
YIELD AND PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective yield
of Templeton Money Market Fund or the total return of all Funds in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised unless accompanied by
comparable performance information for a separate account to which the Funds
offer their Shares.
Current yield for Templeton Money Market Fund will be based on the
change in the value of a hypothetical investment (exclusive of capital changes)
over a particular seven-day period, less a pro-rata share of Templeton Money
Market Fund expenses accrued over that period (the "base period"), and stated as
a percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective Yield" for Templeton Money Market Fund assumes that all
dividends received during an annual period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return) 365/7 - 1
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YIELD = 2[(1 + A-B)6 - 1]
cd
WHERE a = dividend and interest earned during the period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of Shares outstanding
during the period that were entitled to receive
dividends, and
d = the maximum offering price per Share on the last
day of the period.
For the seven-day period ending December 31, 1994, the 7-day annualized
yield of Money Market Fund was 4.96% and the effective yield of Money Market
Fund was 5.05%.
Quotations of average annual total return for the Funds will be
expressed in terms of the average annual compounded rate of return for periods
in excess of one year or the total return for periods less than one year of a
hypothetical investment in the Funds over periods of one, five, or ten years (up
to the life of a Fund) calculated pursuant to the following formula: P(1 + T)n =
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return for periods of one year or more or the total return for periods of
less than one year, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the period). All
total return figures reflect the deduction of the maximum initial sales charge
and deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. Templeton
Money Market Fund's average annual total return for the one- and five-year
periods ended December 31, 1994 and from inception on August 31, 1988 through
December 31, 1994, was 3.48%, 4.40%, and 5.05% respectively. Templeton Bond
Fund's average annual total return for the one- and five-year periods ended
December 31, 1994 and from inception on August 31, 1988 through December 31,
1994, was -4.88%, 6.63%, and 6.73%, respectively. Templeton Stock Fund's average
annual total return for the one- and five-year periods ended December 31, 1994
and from inception on August 31, 1988 through December 31, 1994, was -2.20%,
9.75%, and 10.40%, respectively. Templeton Asset Allocation Fund's average
annual total return for the one- and five-year periods ended December 31, 1994
and from inception on August 31, 1988 through December 31, 1994, was -2.96%,
9.22%, and 9.79%, respectively. Templeton International Fund's average annual
total return for the one-year
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period ended December 31, 1994 and from inception on May 1, 1992 through
December 31, 1994, was -2.22% and 11.98%, respectively.
Performance information for a Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Quotations of yield or total return for a Fund will not take into
account charges and deductions against any separate account to which the Funds'
Shares are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a separate account will take
such charges into account. Performance information for a Fund reflects only the
performance of a hypothetical investment in a Fund during the particular time
period on which the calculations are based. Performance information should be
considered in light of a Fund's investment objective and policies,
characteristics and quality of the portfolio and the market conditions during
the given time period, and should not be considered as a representation of what
may be achieved in the future.
From time to time, each Fund and the Investment Managers may also refer
to the following information:
(1) The Investment Managers' and their affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets
relative to foreign markets prepared or published by
Morgan Stanley Capital International or a similar
financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
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(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment
improvements due to a liberalization of securities laws and a
reduction of foreign exchange controls, and improving
communication technology, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different
returns and risk characteristics of various
investments, the Fund may show historical returns of
various investments and published indices (E.G.,
Ibbotson Associates, Inc. Charts and Morgan Stanley
EAFE - Index).
(7) The major industries located in various jurisdictions
as published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual
fund shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking
relative to industry standards as published by Lipper
Analytical Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or
other securities.
(12) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and
long-term investing, including the following:
- --------
** Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Trust's Board on April 16, 1995. He in no longer
involved with the investment management process.
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<PAGE>
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
In addition, each Fund and the Investment Managers may also refer to
the number of Shareholders in the Fund or the aggregate number of shareholders
of the Franklin Templeton Funds or the
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dollar amount of fund and private account assets under management in advertising
materials.
FINANCIAL STATEMENTS
The financial statements contained in the Trust's Annual Report to
Shareholders dated December 31, 1994 are incorporated herein by reference.
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APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa by Moody's Investors Service Inc.
("Moody's") are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with a Aaa group, they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat greater than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, thereby, not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
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B: Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the security over
any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such
securities may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of
bonds are regarded as having extremely poor prospects of ever
attaining any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the
issue or issuer.
4. The issue was privately placed, in which case the
rating is not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
ratings classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
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STANDARD & POOR'S CORPORATION
AAA: Debt rated "AAA" by Standard & Poor's Corporation
("S&P") has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the higher rated
issues only in a small degree.
A: Debt rated "A" has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the highest rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BBB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of this
obligation. "BB" indicates that the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
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CCC: Debt rated "CCC" has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have to capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt
subordinated to senior debt that is assigned an actual or implied
"CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating "CI" is reserved for income bonds on which
no interest is being paid.
D: Debt rated "D" is in payment default. The "D" rating is used when
interest payments are not made on the date due even if the applicable grace
periods has not expired, unless S&P believe that such payments will be made
during such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S INVESTORS SERVICE
aaa: considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and
asset protection will remain relatively well maintained in the
foreseeable future.
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a: considered to be an upper-medium-grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and
aa classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: considered to be medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length
of time.
ba: considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks
in this class.
b: generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be
small.
caa: likely to be in arrears on dividend payments. This
rating designation does not purport to indicate the future status
of payments.
ca: speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payments.
c: lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S CORPORATION
"AAA": This is the highest rating that may be assigned by
S&P to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
"AA": A preferred stock issue rated "AA" also qualifies as a
high-quality fixed-income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated "AAA."
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"A": An issue rated "A" is backed by a sound capacity to pay
the preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions.
"BBB": An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make payments
for preferred stock in this category than for issues in the "A" category.
"BB", "B", "CCC": Preferred stock rated "BB", "B", and "CCC" are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CC": The rating "CC" is reserved for a preferred stock
issue in arrears on dividends or sinking fund payments but that
is currently paying.
"C": The preferred stock rated "C" is a non-paying issue.
"D": A preferred stock rated "D" is a non-paying issue with
the issuer in default on debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or Minus(-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months.
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Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well-established
industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories ranging from "A" for the highest quality
obligations to "D" for the lowest. The four categories are as follows:
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A: Commercial paper rated "A" is regarded as having the
greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety.
A-1: Commercial paper rated "A-1" is regarded as having a very
strong degree of safety regarding timely payment. A "+"
designation is applied to those issues rated "A- 1" which
possess an overwhelming degree of safety.
A-2: Commercial paper rated "A-2" is regarded as having a strong
capacity for timely payment; however, the relative degree of
safety is not as high as for issues designated "A-1".
A-3: Commercial paper rated "A-3" is regarded as having a
satisfactory capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B: Commercial paper rated "B" is regarded as having only
an adequate capacity for timely payment and such
capacity may be damaged by changing conditions or
short-term adversities.
C: Commercial paper rated "C" is regarded as having a
doubtful capacity for repayment.
D: Commercial paper rated "D" is for a payment default. The "D"
rating is used when interest payments or principal payments
are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments
will be made during such grace period.
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