[INSERT LOGO]
Prospectus -- May 1, 1995
as amended October 24,
1995
TEMPLETON VARIABLE PRODUCTS SERIES FUND
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Templeton Variable Products Series Fund (the 'Trust') is an open-end,
diversified management investment company currently consisting of five separate
series (the 'Funds'), each with its own investment objective and policies.
Shares of the Funds are currently sold only to insurance company separate
accounts ('Separate Accounts') to serve as the investment vehicle for Variable
Annuity Contracts (the 'Contracts'). The Separate Accounts invest in shares of
one or more of the Funds of the Trust in accordance with allocation instructions
received from owners of the Contracts. Such allocation rights are described
further in the accompanying Prospectus for the Separate Accounts. Certain Funds
are not available as an investment vehicle for all Contracts. This Prospectus
sets forth concisely information about the Trust that a prospective investor
ought to know before investing.
The five Funds of the Trust are as follows:
TEMPLETON MONEY MARKET FUND
TEMPLETON BOND FUND
TEMPLETON STOCK FUND
TEMPLETON ASSET ALLOCATION FUND
TEMPLETON INTERNATIONAL FUND
AN INVESTMENT IN TEMPLETON MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
A STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995, AS AMENDED SEPTEMBER
29, 1995, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED IN ITS ENTIRETY BY REFERENCE IN AND MADE A PART OF THIS
PROSPECTUS. THIS STATEMENT IS AVAILABLE WITHOUT CHARGE UPON REQUEST TO
FRANKLIN TEMPLETON DISTRIBUTORS, INC., P.O. BOX 33030, ST. PETERSBURG,
FLORIDA 33733-8030 OR BY CALLING THE FUND INFORMATION DEPARTMENT AT 1-800-
774-5001 OR 813-823-8712.
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SHARES OF THE FUNDS ARE AVAILABLE EXCLUSIVELY TO INSURANCE COMPANY SEPARATE
ACCOUNTS AS AN INVESTMENT VEHICLE FOR VARIABLE INSURANCE CONTRACTS. THIS
PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OFFERING THE
VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
T-1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SYNOPSIS....................................................................................................... T-3
FINANCIAL HIGHLIGHTS...................................................................................................... T-5
INVESTMENT OBJECTIVES AND POLICIES........................................................................................ T-9
Templeton Money Market Fund........................................................................................... T-9
Templeton Bond Fund...................................................................................................T-10
Templeton Stock Fund..................................................................................................T-10
Templeton Asset Allocation Fund.......................................................................................T-10
Templeton International Fund..........................................................................................T-11
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES.......................................................................T-11
RISK FACTORS..............................................................................................................T-15
PURCHASE OF SHARES........................................................................................................T-16
NET ASSET VALUE...........................................................................................................T-16
REDEMPTION OF SHARES......................................................................................................T-17
EXCHANGES.................................................................................................................T-17
MANAGEMENT OF THE TRUST...................................................................................................T-17
BROKERAGE COMMISSIONS.....................................................................................................T-19
DIVIDENDS AND DISTRIBUTIONS...............................................................................................T-19
FEDERAL INCOME TAX STATUS.................................................................................................T-19
OTHER INFORMATION.........................................................................................................T-20
</TABLE>
T-2
<PAGE>
PROSPECTUS SYNOPSIS
THE TRUST
Templeton Variable Products Series Fund (the 'Trust') is an open-end,
diversified management investment company organized as a business trust under
the laws of Massachusetts. An Agreement and Declaration of Trust dated February
25, 1988 (the 'Declaration of Trust') authorizes the Shares of the Trust to be
divided into two or more series related to separate portfolios of investments.
The Trust currently consists of five series (the 'Funds'), each with its own
investment objective and policies. The Funds of the Trust are: Templeton Money
Market Fund, Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund, and Templeton International Fund. There can be no assurance
that any particular Fund's investment objective will be attained. The Board of
Trustees may establish additional Funds at any time.
The Trust was organized primarily as an investment vehicle for use in
connection with variable annuity contracts and variable life insurance policies
('variable contracts') offered by one or more life insurance companies. Shares
of each Fund may be offered to separate accounts established by insurance
companies to serve as the underlying investment vehicle for both variable
annuity and life insurance contracts. Shares of the Funds are not offered
directly to the general public.
The various Funds may be used independently or in combination. Shareholders
may exchange Shares of a Fund for Shares of one or more of the other Funds. (See
'Exchanges.') Owners of variable contracts should consult the Prospectus for the
applicable contract on allocation or transfer of cash value under the contract
to a separate account or divisions thereof that invest in the Trust.
The rights of a separate account as Shareholder should be distinguished from
the rights of an owner of a variable contract, which are described in the
accompanying Prospectus for the variable contracts. As long as Shares of the
Fund are sold only to insurance company separate accounts, the term
'Shareholder' or 'Shareholders' in this Prospectus refers to the separate
accounts.
INVESTMENT OBJECTIVES
The investment objectives of each of the Funds are as follows:
TEMPLETON MONEY MARKET FUND seeks current income, stability of
principal, and liquidity by investing in money market instruments with
maturities not exceeding 397 days, consisting primarily of short-term
U.S. Government securities, certificates of deposit, time deposits,
bankers' acceptances, commercial paper, and repurchase agreements.
TEMPLETON BOND FUND seeks high current income through a flexible policy
of investing primarily in debt securities of companies, governments and
government agencies of various nations throughout the world, and in debt
securities which are convertible into common stock of such companies.
The debt securities selected may be rated in any category by Standard &
Poor's Corporation ('S&P') or Moody's Investors Service, Inc.
('Moody's'), as well as securities which are unrated by any rating
agency.
TEMPLETON STOCK FUND pursues an investment objective of capital growth
through a policy of investing primarily in common stocks issued by
companies, large and small, in various nations throughout the world.
TEMPLETON ASSET ALLOCATION FUND seeks a high level of total return
through a flexible policy of investing in stocks of companies in any
nation, debt obligations of companies and governments of any nation, and
in money market instruments. Changes in the asset mix will be adjusted
in an attempt to capitalize on total return potential produced by
changing economic conditions throughout the world.
TEMPLETON INTERNATIONAL FUND seeks long-term capital growth through a
flexible policy of investing in stocks and debt obligations of companies
and governments outside the United States. Any income realized will be
incidental.
Further information regarding the investment practices of each Fund is set
forth under 'Investment Objectives and Policies' in this Prospectus.
MANAGEMENT OF THE TRUST
The investment manager of Templeton Stock Fund, Templeton Asset Allocation Fund
and Templeton International Fund is Templeton Investment Counsel, Inc. ('TICI').
The investment manager of Templeton Bond Fund and Templeton Money Market Fund is
Templeton Global Bond Managers ('TGBM'), a division of TICI. TICI, including the
TGBM division, (the 'Investment Managers') is a Florida corporation with offices
at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091. Subject to the
overall supervision of the Board of Trustees of the Trust, the Investment
Managers manage the investment and reinvestment of the Funds' assets. For its
services, Templeton Money Market Fund pays TGBM a maximum amount of 0.35% and
Templeton Bond, Stock, Asset Allocation, and International Funds pay TGBM or
TICI a maximum amount of 0.50% of the average daily net assets of each Fund.
Templeton Funds Annuity Company provides certain administrative facilities and
services for the Trust. (See 'Management of the Trust.')
T-3
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PURCHASE OF SHARES
The Shares may be purchased only by separate accounts of insurance companies
which issue variable annuity or life insurance contracts. (See 'Purchase of
Shares.')
REDEMPTIONS AND EXCHANGES
Shares of each Fund may be redeemed without cost at the net asset value per
share of the Fund next determined after receipt of the redemption request.
Shares of any Fund may be exchanged for Shares of any other Fund on the
basis of relative net asset values. (See 'Exchanges.')
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of net realized
capital gains will be distributed as described under 'Dividends and
Distributions.' All such distributions will normally be automatically reinvested
without charge in additional Shares of the same Fund, unless a Shareholder
requests that they be paid in cash.
SPECIAL CHARACTERISTICS
Templeton Bond, Stock, Asset Allocation, and International Funds have an
unlimited right to purchase securities in any foreign country and Templeton
Stock and Asset Allocation Funds may purchase and sell stock index futures
contracts. Templeton Bond Fund may purchase and sell bond index futures
contracts. Templeton Bond and Asset Allocation Funds may also purchase and sell
financial futures, foreign currency futures contracts and forward foreign
currency exchange contracts. Each Fund may invest in repurchase agreements,
purchase securities on a 'when-issued' basis, and lend its portfolio securities.
Each of these techniques may involve risk, as discussed more fully under
'Description of Securities and Investment Techniques' and 'Risk Factors.'
TRANSFER AGENT AND CUSTODIAN
The Trust serves as its own transfer and dividend disbursing agent. The Chase
Manhattan Bank, N.A. serves as Custodian of each Fund's securities and cash.
T-4
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FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
The following table of financial highlights has been audited by McGladrey &
Pullen, LLP, independent certified public accountants, for the periods indicated
in their report which is incorporated by reference and which appears in the
Trust's 1994 Annual Report to Shareholders. This statement should be read in
conjunction with the other financial statements and notes thereto included in
the Trust's 1994 Annual Report to Shareholders, which contains further
information about the Funds' performance, and which is available to shareholders
upon request and without charge.
<TABLE>
<CAPTION>
Templeton Money Market Fund
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
<S> <C> <C> <C> <C> <C> <C> <C>
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PER SHARE OPERATING PERFORMANCE (for a share outstanding
throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... .03 .02 .03 .05 .07 .08 .02
- ----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS FROM NET INVESTMENT INCOME...................... (.03) (.02) (.03) (.05) (.07) (.08) (.02)
- ----------------------------------------------------------------------------------------------------------------------------
Change in net asset value for the year.................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF YEAR.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN /dagger/..................................... 3.48% 2.41% 3.10% 5.59% 7.51% 8.13% 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................... $33,090 $16,992 $21,454 $22,046 $17,982 $5,984 $ 679
Ratio of expenses to average net assets................... 0.71% .75% .69% .70% .84% 1.82% 12.95%**
Ratio of expenses, net of reimbursement,
to average net assets................................... 0.71% .75% .69% .70% .84% 1.00% 1.50%**
Ratio of net investment income to average
net assets.............................................. 3.56% 2.38% 3.02% 5.28% 7.19% 7.79% 5.83%**
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<FN>
* For the period August 31, 1988 (commencement of operations) to December 31, 1988.
** Annualized.
/dagger/ Total return figures do not include charges applied under the Contracts. Inclusion of such charges would reduce the total
return figures for all periods shown.
</FN>
</TABLE>
T-5
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<TABLE>
<CAPTION>
Templeton Bond Fund
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YEAR ENDED DECEMBER 31,
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1994 1993 1992 1991 1990 1989 1988*
<S> <C> <C> <C> <C> <C> <C> <C>
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PER SHARE OPERATING PERFORMANCE (for a share outstanding
throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR........................ $ 12.15 $ 10.91 $ 10.99 $10.35 $10.32 $10.19 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income................................... .71 .60 .58 .61 .60 .83 .20
Net realized and unrealized gain (loss)................. (1.28) .65 .03 1.02 .05 (.07) (.01)
------- ------- ------- ------- ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS...................... (.57) 1.25 .61 1.63 .65 .76 .19
- ----------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income.................... (.55) (.005) (.57) (.64) (.62) (.63) --
Distributions from net realized gains................... (.17) (.005) (.12) (.35) -- -- --
------- ------- ------- ------- ------- ------ ------
TOTAL DISTRIBUTIONS................................... (.72) (.01) (.69) (.99) (.62) (.63) --
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Change in net asset value for the year.................... (1.29) 1.24 (.08) .64 .03 .13 .19
------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF YEAR.............................. $ 10.86 $ 12.15 $ 10.91 $10.99 $10.35 $10.32 $10.19
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TOTAL RETURN /dagger/.................................... (4.88)% 11.46% 5.53% 15.86% 6.33% 7.65% 1.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........................... $29,343 $29,347 $15,674 $8,142 $4,076 $2,349 $ 254
Ratio of expenses to average net assets................... 0.90% .83% 1.00% 1.06% 1.56% 3.67% 15.44%**
Ratio of expenses, net of reimbursement,
to average net assets................................... 0.90% .83% 1.00% 1.00% 1.00% 1.00% 1.50%**
Ratio of net investment income to average
net assets.............................................. 6.80% 6.50% 6.93% 7.63% 7.65% 8.12% 5.94%**
Portfolio turnover rate................................... 203.91% 170.33% 147.77% 551.45% 107.58% 48.87% --
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<FN>
* For the period August 31, 1988 (commencement of operations) to December 31, 1988.
** Annualized.
/dagger/ Total return figures do not include charges applied under the Contracts. Inclusion of such charges would reduce the total
return figures for all periods shown.
</FN>
</TABLE>
T-6
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<TABLE>
<CAPTION>
Templeton Stock Fund
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
<S> <C> <C> <C> <C> <C> <C> <C>
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PER SHARE OPERATING PERFORMANCE (for a share
outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR................. $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $ 10.25 $10.00
- --------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income............................ .26 .23 .25 .27 .32 .18 .18
Net realized and unrealized
gain (loss).................................... (.64) 4.23 .64 2.49 (1.57) 1.34 .071
-------- -------- -------- -------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS.................................. (.38) 4.46 .89 2.76 (1.25) 1.52 .25
- --------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net
investment income.............................. (.21) (.25) (.28) (.33) (.19) (.02) --
Distributions from net realized gains............ -- (.01) -- -- (.02) -- --
-------- -------- -------- -------- ------- ------- ------
TOTAL DISTRIBUTIONS............................ (.21) (.26) (.28) (.33) (.21) (.02) --
- --------------------------------------------------------------------------------------------------------------------------
Change in net asset value for the year............. (.59) 4.20 .61 2.43 (1.46) 1.50 .25
-------- -------- -------- -------- ------- ------- ------
NET ASSET VALUE END OF YEAR........................ $ 16.94 $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $10.25
- --------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN /dagger/............................. (2.20)% 34.00% 7.12% 27.93% (10.23)% 14.85% 2.50%
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000)....................... $378,849 $298,392 $166,219 $116,943 $74,264 $49,787 $3,037
Ratio of expenses to average net assets............ .73% .73% .75% .82% .85% 1.08% 4.39%**
Ratio of expenses, net of reimbursement,
to average net assets............................ .73% .73% .75% .82% .85% .99% 1.50%**
Ratio of net investment income to average
net assets....................................... 1.81% 1.88% 2.36% 2.82% 3.78% 3.63% 5.55%**
Portfolio turnover rate............................ 5.10% 4.88% 8.10% 41.24% 17.94% 5.27% --
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<FN>
* Period from August 31, 1988 (commencement of operations) to December 31, 1988.
** Annualized.
/dagger/ Total return figures do not include charges applied under the Contracts. Inclusion of such charges would reduce the total
return figures for all periods shown.
</FN>
</TABLE>
T-7
<PAGE>
<TABLE>
<CAPTION>
Templeton Asset Allocation Fund
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988*
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (for a share
outstanding throughout the year)
NET ASSET VALUE, BEGINNING OF YEAR.................... $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $ 10.28 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income............................... .44 .42 .39 .40 .34 .25 .07
Net realized and unrealized gain (loss)............. (.92) 3.03 .66 2.38 (1.23) 1.11 .21
-------- -------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS.................. (.48) 3.45 1.05 2.78 (.89) 1.36 .28
- ---------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income................ (.31) (.35) (.41) (.38) (.25) (.02) --
Distributions from net realized gains............... (.07) (.04) -- -- (.03) -- --
-------- -------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS............................... (.38) (.39) (.41) (.38) (.28) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Change in net asset value for the year................ (.86) 3.06 .64 2.40 (1.17) 1.34 .28
-------- -------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF YEAR.......................... $ 15.69 $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $10.28
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN /dagger/................................ (2.96)% 26.12% 8.42% 27.05% (7.80)% 13.25% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000)......................... $288,172 $183,360 $79,242 $35,821 $22,702 $13,150 $ 388
Ratio of expenses to average net assets............... .75% .77% .80% .89% 1.03% 1.41% 14.92%**
Ratio of expenses, net of reimbursement,
to average net assets............................... .75% .77% .80% .89% 1.00% 1.00% 1.50%**
Ratio of net investment income to average
net assets.......................................... 4.02% 4.16% 4.47% 3.99% 4.56% 4.81% 2.86%**
Portfolio turnover rate............................... 51.36% 81.50% 120.53% 76.65% 8.46% 10.68% --
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<FN>
* Period from August 31, 1988 (commencement of operations) to December 31, 1988.
** Annualized.
/dagger/ Total return figures do not include charges applied under the Contracts. Inclusion of such figures would reduce the total
return figures for all periods shown.
</FN>
</TABLE>
T-8
<PAGE>
<TABLE>
<CAPTION>
Templeton International Fund
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
NET ASSET VALUE, BEGINNING OF PERIOD........................................................ $ 13.83 $ 9.39 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income..................................................................... .12 .10 .06
Net realized and unrealized gain (loss)................................................... (.42) 4.34 (.67)
-------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS........................................................ (.30) 4.44 (.61)
- ----------------------------------------------------------------------------------------------------------------------------
Distributions:
Dividends from net investment income...................................................... (.08) -- --
Distributions from net realized gain...................................................... (.23) -- --
-------- ------- ------
TOTAL DISTRIBUTIONS..................................................................... (.31) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Change in net asset value for the year...................................................... (.61) 4.44 (.61)
-------- ------- ------
NET ASSET VALUE, END OF YEAR................................................................ $ 13.22 $ 13.83 $ 9.39
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN /dagger/...................................................................... (2.22)% 47.28% (6.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............................................................. $150,090 $43,877 $7,050
Ratio of expenses to average net assets..................................................... .83% .95% 1.40%**
Ratio of expenses, net of reimbursement, to average net assets.............................. .83% .95% 1.00%**
Ratio of net investment income to average net assets........................................ 1.89% 1.62% 1.76%**
Portfolio turnover rate..................................................................... 6.32% 15.65% 4.50%
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
* Period from May 1, 1992 (commencement of operations) to December 31, 1992.
** Annualized.
/dagger/ Total return figures do not include charges applied under the Contracts. Inclusion of such figures would reduce the total
return figures for all periods shown.
</FN>
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers five Funds with different investment objectives that are
described below. There can be no assurance that any of the Funds will achieve
its investment objective.
The Funds are subject to investment restrictions that are described under
the heading 'Investment Restrictions' in the Statement of Additional
Information. Those investment restrictions so designated and the investment
objective of each Fund are 'fundamental policies' of the Trust, which means that
they may not be changed without a majority vote of Shareholders of the affected
Fund. With the exception of investment objectives and those restrictions
specifically identified as fundamental, all investment policies and practices
described in this Prospectus and in the Statement of Additional Information are
not fundamental, meaning that the Board of Trustees may change them without
Shareholder approval.
Certain types of investments and investment techniques are described in
greater detail under 'Description of Securities and Investment Techniques' in
this Prospectus and also in the Statement of Additional Information.
TEMPLETON MONEY MARKET FUND
The investment objective of Templeton Money Market Fund is current income,
stability of principal, and liquidity, which it seeks to achieve by investing in
money market instruments with maturities not exceeding 397 days, consisting
primarily of short term U.S. Government securities, certificates of deposit,
time deposits, bankers' acceptances, commercial paper, and repurchase agreements
with banks or broker-dealers with respect to these securities. As a fundamental
policy, the Fund invests at least 80% of its total assets in these securities.
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.
In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest in
T-9
<PAGE>
U.S. Government securities or repurchase agreements that are fully
collateralized by U.S. Government securities without any such limitation, and
(ii) the limitation with respect to puts does not apply to unconditional puts if
no more than 10% of the Fund's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000.
Templeton Money Market Fund intends to use its best efforts to maintain its
net asset value at $1.00 per Share, although there can be no assurance that this
will be achieved. The Fund values all of its portfolio securities using the
amortized cost method, which involves valuing a security at cost on the date of
acquisition and thereafter assuming a constant accretion of discount or
amortization of premium. See 'Purchase and Redemption of Shares; Net Asset
Value' in the Statement of Additional Information for a description of certain
conditions and procedures followed by the Fund in connection with amortized cost
valuation.
Commercial paper must be issued by domestic corporations or foreign
corporations affiliated with domestic corporations and must meet the quality
standards described under 'Description of Securities and Investment Techniques.'
The Fund may also enter into repurchase agreements, invest in short term
corporate debt obligations, purchase securities on a 'when-issued' basis, lend
its portfolio securities, and borrow money for emergency purposes. The Fund will
not invest more than 10% of its assets in time deposits maturing in more than
seven days which do not have secondary trading markets and which are subject to
early withdrawal penalties. (See 'Description of Securities and Investment
Techniques.')
TEMPLETON BOND FUND
The investment objective of Templeton Bond Fund is high current income. The Fund
seeks to achieve its objective through a flexible policy of investing primarily
in debt securities of companies, governments and government agencies of various
nations throughout the world, and in debt securities which are convertible into
common stock of such companies. In pursuit of its investment objective, the Fund
will invest at least 65% of its assets in bonds and debentures of such issuers.
The Fund may invest in debt securities rated in any category by Standard &
Poor's Corporation ('S&P') or Moody's Investors Service, Inc. ('Moody's') and
securities which are unrated by any rating agency. See 'Risk Factors' and the
Appendix in the Statement of Additional Information for a description of the S&P
and Moody's ratings.
The average maturity of debt securities in the Fund's portfolio will
fluctuate depending upon TGBM's judgment as to future interest rate changes.
Debt securities in which the Fund may also invest include various corporate debt
obligations, commercial paper, certificates of deposit, bankers' acceptances,
and repurchase agreements with respect to these securities.
Templeton Bond Fund may also buy and sell financial futures contracts, bond
index futures contracts, and foreign currency futures contracts. The Fund may
purchase and sell any of these futures contracts for hedging purposes only and
not for speculation. It may engage in such transactions only if the total
contract value of the futures contracts does not exceed 20% of the Fund's total
assets. In addition, the Fund may invest in forward foreign currency exchange
contracts, options on foreign currencies, 'when-issued' securities and
collateralized mortgage obligations, lend its portfolio securities, and borrow
money for investment purposes (i.e., 'leverage' its portfolio). These investment
techniques are discussed under 'Description of Securities and Investment
Techniques.'
TEMPLETON STOCK FUND
Templeton Stock Fund pursues an investment objective of capital growth through a
policy of investing primarily in common stocks issued by companies, large and
small, in various nations throughout the world. In the pursuit of its investment
objective, the Fund will normally maintain at least 65% of its assets in common
and preferred stocks. The Fund may also invest in securities convertible into
common stocks rated in any category by S&P or Moody's and securities which are
unrated by any rating agency. See the Appendix in the Statement of Additional
Information for a description of the S&P and Moody's ratings. Current income
will usually be a less significant factor in selecting investments for the Fund.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a 'when-issued' basis, invest in restricted securities,
such as private placements, and borrow money for investment purposes. (See
'Description of Securities and Investment Techniques.')
The Fund may also purchase and sell stock index futures contracts for
hedging purposes only and not for speculation. It may engage in such
transactions only if the total contract value of the futures contracts does not
exceed 20% of the Fund's total assets. (See 'Description of Securities and
Investment Techniques.')
TEMPLETON ASSET ALLOCATION FUND
Templeton Asset Allocation Fund seeks a high level of total return through a
flexible policy of investing in the following market segments: stocks of
companies in any nation, debt securities of companies and governments of any
nation, and money market instruments such as those in which Templeton Money
Market Fund may invest. The mix of investments
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among these three market segments will be adjusted in an attempt to capitalize
on total return potential produced by changing economic conditions throughout
the world.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under 'Investment Restrictions' in the Statement of Additional
Information, TICI has complete flexibility in determining the amount and nature
of stock, debt securities, or money market instruments in which the Fund may
invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in
collateralized mortgage obligations and restricted securities, lend its
portfolio securities, and borrow money for investment purposes.
The Fund may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in such transactions only if the
total contract value of the futures contracts does not exceed 20% of the Fund's
total assets. The Fund may also invest in forward foreign currency exchange
contracts and options on foreign currencies. (See 'Description of Securities and
Investment Techniques.')
TEMPLETON INTERNATIONAL FUND
Templeton International Fund seeks long-term capital growth through a flexible
policy of investing in stocks and debt obligations of companies and governments
outside the United States. In pursuit of its investment objective, the Fund will
invest at least 65% of its assets in securities of issuers in at least three
countries outside the United States. Any income realized will be incidental.
Although the Fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities such as convertible bonds which are
rated in any category by S&P or Moody's or which are unrated by any rating
agency. See the Appendix in the Statement of Additional Information for a
description of the S&P and Moody's ratings.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bank time deposits in the currency of
any nation, bankers' acceptances, U.S. Government securities, corporate debt
obligations, and repurchase agreements with respect to these securities. The
Fund may also enter into firm commitment agreements, purchase securities on a
'when-issued' basis, invest in restricted securities, such as private
placements, and borrow money for investment purposes. (See 'Description of
Securities and Investment Techniques.')
The Fund may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in such transactions only if the
total contract value of the futures contracts does not exceed 20% of the Fund's
total assets. (See 'Description of Securities and Investment Techniques.')
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
('GNMA') certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. Each Fund may invest in
GNMA certificates, which are securities representing part ownership of a pool of
mortgage loans on which interest and principal payments are guaranteed by the
Treasury. Principal is repaid monthly over the term of the loan. Expected
payments may be delayed due to the delays in registering newly traded
certificates. The mortgage loans will be subject to normal principal
amortization and may be prepaid prior to maturity. Reinvestment of prepayments
may occur at higher or lower rates than the original yield on the certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ('CMOS')
Templeton Bond and Asset Allocation Funds may invest in CMOs, which are
fixed-income securities collateralized by pools of mortgage loans created by
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other issuers in the U.S. In effect, CMOs
'pass-through' the monthly payments made by individual borrowers on their
mortgage loans. Timely payment of interest and principal (but not the market
value) of these pools is supported by various forms of insurance or guarantees
issued by U.S. Government agencies, private issuers, and mortgage poolers;
however, the obligation itself is not guaranteed. If the collateral securing the
obligations is insufficient to make payment on the obligation, a holder could
sustain a loss. In addition, Templeton Bond and Asset Allocation Funds may buy
CMOs without insurance or guarantees if, in the opinion of the Investment
Managers, the sponsor is creditworthy. The
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ratings of the CMOs will be consistent with the ratings criteria of each of the
Funds. Prepayments of the mortgages included in the mortgage pool may influence
the yield of the CMO. Prepayments usually increase when interest rates are
decreasing, thereby decreasing the life of the pool. Reinvestment of prepayments
may be at a lower rate than that on the original CMO. As a result, the value of
CMOs decrease like other debt securities when interest rates rise, but when
interest rates decline, they may not increase as much as other debt securities,
due to the prepayment feature.
BANK OBLIGATIONS
Each Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. All Funds except Templeton Asset
Allocation Fund may invest in bankers' acceptances, which are negotiable drafts
or bills of exchange normally drawn by an importer or exporter to pay for
specific merchandise and which are 'accepted' by a bank, meaning, in effect,
that the bank unconditionally agrees to pay the face value of the instrument on
maturity. Each Fund may invest in dollar-denominated certificates of deposit and
bankers' acceptances of foreign and domestic banks having total assets in excess
of $1 billion. Each Fund may also invest in certificates of deposit of federally
insured savings and loan associations having total assets in excess of $1
billion. Templeton Asset Allocation and International Funds may hold cash and
time deposits with banks in the currency of any major nation.
COMMERCIAL PAPER
Each Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the Statement of Additional Information for a description of these
ratings.
DEBT SECURITIES
Debt securities in which a Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
and obligations issued or guaranteed by governments or government agencies or
instrumentalities. The market value of debt securities generally varies in
response to changes in interest rates and the financial condition of each
issuer. During periods of declining interest rates, the value of debt securities
generally increases. Conversely, during periods of rising interest rates, the
value of such securities generally declines. These changes in market value will
be reflected in a Fund's net asset value.
As an operating policy, which may be changed by the Board of Trustees
without shareholder approval, Templeton Stock, Asset Allocation and
International Funds will not invest more than 5% of each Fund's total assets in
debt securities rated below BBB by S&P or Baa by Moody's. Templeton Bond and
Asset Allocation Funds may invest in medium and lower quality debt securities
that are rated between BBB and as low as CC by S&P, and between Baa and as low
as Ca by Moody's or, if unrated, are of equivalent investment quality as
determined by the Investment Manager. Bonds rated BB or lower are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issues of bonds rated Ca may often be in default. The Board may consider a
change in this operating policy if, in its judgment, economic conditions change
such that a higher level of investment in high risk, lower quality debt
securities would be consistent with the interests of the Fund and its
Shareholders. High risk, lower quality debt securities, commonly referred to as
'junk bonds,' are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal and may be
in default. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by a Fund's
Investment Manager to insure, to the extent possible, that the planned
investment is sound. For temporary defensive purposes, Templeton Stock and
International Funds may invest in short-term corporate debt obligations
similarly rated. Unrated debt securities are not necessarily of lower quality
than rated securities but they may not be attractive to as many buyers.
Templeton Bond and Asset Allocation Funds may, from time to time, purchase
defaulted debt securities if, in the opinion of the Investment Managers, the
issuer may resume interest payments in the near future. Neither of these Funds
will invest more than 10% of its total assets in defaulted debt securities.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption 'Risk
Factors.'
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. When a Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite
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short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. Repurchase
agreements will be fully collateralized. However, if the seller should default
on its obligation to repurchase the underlying security, a Fund may experience
delay or difficulty in exercising its rights to realize upon the security and
might incur a loss if the value of the security should decline, as well as incur
disposition costs in liquidating the security. Securities subject to repurchase
agreements will be held in a segregated account. The Investment Managers will
monitor the value of the collateral to ensure it always equals or exceeds the
repurchase price.
BORROWING
Templeton Money Market Fund may borrow up to 5% of its total assets for
temporary or emergency purposes. In addition, Templeton Bond, Stock, Asset
Allocation, and International Funds may borrow up to 30% of the value of their
net assets to increase their holdings of portfolio securities. Under the 1940
Act, the Funds may borrow from banks only, and are required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if disadvantageous from an investment standpoint. Leveraging by means of
borrowing will exaggerate the effect of any increase or decrease in the value of
portfolio securities on a Fund's net asset value, and money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances) which may or may not exceed
the income received from the securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a 'when-issued' basis. New issues of
certain debt securities are often offered on a when-issued basis, that is, the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, a Fund will not accrue any income
on these securities prior to delivery. A Fund will maintain in a segregated
account with its Custodian an amount of cash or high quality debt securities
equal (on a daily marked-to-market basis) to the amount of its commitment to
purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
Each Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. A Fund may terminate the loans at any time and obtain the return of the
securities loaned within five business days. A Fund will continue to receive any
interest or dividends paid on the loaned securities and will continue to have
voting rights with respect to the securities. It should be noted that in
connection with the lending of its portfolio securities, the Funds are exposed
to the risk of delay in recovery of the securities loaned or possible loss of
rights in the collateral should the borrower become insolvent. In determining
whether to lend securities, the Investment Managers will consider all relevant
facts and circumstances including the creditworthiness of the borrower.
RESTRICTED SECURITIES
Templeton Stock, Asset Allocation, and International Funds may invest in
restricted securities, which are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when sale would
otherwise be desirable. No restricted securities and no securities for which
there is not a readily available market ('illiquid assets') will be acquired by
the Funds if such acquisition would cause the aggregate value of illiquid assets
and restricted securities to exceed 10% of the Fund's total assets. Restricted
securities may be sold only in privately negotiated transactions or in a public
offering with respect to which a registration statement is in effect under the
Securities Act of 1933. Where registration is required, the Funds may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Funds may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Funds might obtain a less favorable price than prevailed when it decided to
sell. Restricted securities will be priced at fair value as determined by the
management and approved in good faith by the Board of Trustees.
FOREIGN SECURITIES
Templeton Bond, Stock, Asset Allocation, and International Funds have an
unlimited right to purchase securities in any foreign country, developed or
underdeveloped, if they are listed on an exchange, as well as a limited right to
purchase such securities if they are unlisted. (See 'Risk Factors.') Templeton
Money Market Fund may invest in dollar-denominated obligations of foreign
branches of domestic banks ('Eurodollar obligations') and dollar-denominated
obligations of domestic branches of foreign banks ('Yankee obligations').
DEPOSITARY RECEIPTS
Templeton Bond, Stock, Asset Allocation and International Funds may purchase
sponsored or unsponsored American Depositary Receipts ('ADRs'), European
Depositary Receipts ('EDRs') and Global Depositary Receipts ('GDRs')
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(collectively, 'Depositary Receipts'). ADRs are Depositary Receipts typically
issued by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs and GDRs are typically issued
by foreign banks or trust companies, although they also may be issued by U.S.
banks or trust companies, and evidence ownership of underlying securities issued
by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the U.S. securities market
and Depositary Receipts in bearer form are designed for use in securities
markets outside the United States. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of each
Fund's investment policies, a Fund's investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
EURODOLLAR AND YANKEE OBLIGATIONS
Templeton Money Market Fund may invest in dollar-denominated obligations of
foreign branches of domestic banks ('Eurodollar obligations') and
dollar-denominated obligations of domestic branches of foreign banks ('Yankee
obligations'). These investments may involve risks that are different in some
r
espects from investments in obligations of domestic branches of domestic banks.
Such investment risks may include future political and economic developments,
the possible imposition of withholding taxes on interest income payable on the
Eurodollar and Yankee obligations held by the Fund, possible seizure or
nationalization, and the possible establishment of exchange controls or the
adoption of other foreign government laws and restrictions applicable to the
payment of Eurodollar and Yankee obligations which might adversely affect the
payment of principal and interest.
FUTURES CONTRACTS
For hedging purposes only, Templeton Bond, Asset Allocation, and International
Funds may buy and sell financial futures contracts and foreign currency futures
contracts. Also, for hedging purposes only, 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. A
financial futures contract is an agreement between two parties to buy or sell a
specified debt security at a set price on a future date. An index futures
contract is an agreement to take or make delivery of an amount of cash based on
the difference between the value of the index at the beginning and at the end of
the contract period. A futures contract on a foreign currency is an agreement to
buy or sell a specified amount of a currency for a set price on a future date.
When a Fund enters into a futures contract, it must make an initial deposit,
known as 'initial margin,' as a partial guarantee of its performance under the
contract. As the value of the security, index or currency fluctuates, either
party to the contract is required to make additional margin payments, known as
'variation margin,' to cover any additional obligation it may have under the
contract. A Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. In addition, a 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
Templeton Bond Fund and Templeton Asset Allocation Fund may enter into forward
foreign currency exchange contracts ('forward contracts') to attempt to minimize
the risk to a 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 or, 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 former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. This later investment practice is generally referred to as
'cross-hedging.' The Funds have no specific limitation on the percentage of
assets they may commit to foreign contracts, except that a Fund will not enter
into a forward contract if the amount of assets set aside to cover the contract
would impede portfolio management or the Fund's ability to meet redemption
requests. A Fund may also purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired.
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RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds; nor can
there be any assurance that the Funds' investment objectives will be attained.
As with any investment in securities, the value of, and income from, an
investment in the Funds can decrease as well as increase, depending on a variety
of factors which may affect the values and income generated by the Funds'
portfolio securities, including general economic conditions and market factors.
In addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Funds will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which a Fund is invested may also
be reflected in declines in the price of the Shares of the Fund. Changes in
interest rates will affect the value of a Fund's portfolio and thus its share
price. Increased rates of interest which frequently accompany inflation and/or a
growing economy are likely to have a negative effect on the value of a Fund's
Shares. Changes in currency valuations will also affect the price of the Shares
of a Fund. History reflects both decreases and increases in worldwide stock
markets, the prevailing rate of interest, and currency valuations, and these may
reoccur unpredictably in the future. Additionally, investment decisions made by
the Investment Managers will not always be profitable or prove to have been
correct. The Funds are not intended as a complete investment program.
Templeton Bond, Stock, Asset Allocation, and International Funds have an
unlimited right to purchase securities in any foreign country, developed or
underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. There
is the possibility of expropriation, nationalization or confiscatory taxation,
taxation of income earned in foreign nations (including withholding taxes) or
other taxes imposed with respect to investments in foreign nations, 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 foreign nations. Also, some countries
may withhold portions of interest and dividends at the source. These
considerations generally are more of a concern in developing countries, where
the possibility of political instability (including revolution) and dependence
on foreign economic assistance may be greater than in developed countries.
Investments in companies domiciled in developing countries therefore may be
subject to potentially higher risks than investments in developed countries.
In many countries there is less publicly available information about issuers
than is available in reports about companies in the United States. Foreign
companies are not generally subject to uniform accounting and auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to United States companies. It may be more
difficult to pursue legal remedies and obtain judgments in foreign courts.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the United States, are likely to be higher. Foreign
securities markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Funds are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. In many foreign
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The foreign securities markets of any of the countries in which a
Fund may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the United States. Certain Funds may invest in Eastern
European countries, which involves special risks that are described under
'Investment Objectives and Policies--Risk Factors' in the SAI.
Although they may offer higher yields than do higher rated securities, low
rated and unrated securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated securities are traded are more limited than those in which
higher rated securities are traded. The existence of limited markets for
particular securities may diminish a Fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for a Fund to obtain accurate market
quotations for the purpose of valuing the Fund's portfolio. Market quotations
are generally available on many low rated or unrated securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of debt securities that are low rated securities may
be more complex than for issuers of higher rated securities, and the ability of
a Fund to achieve its investment objective may, to the extent of investment in
low rated securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
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Low rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated securities prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of low rated securities
defaults, a Fund may incur additional expenses to seek recovery. The low rated
bond market is relatively new, and many of the outstanding low rated bonds have
not endured a major business recession.
The Funds will usually effect currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign exchange market.
However, some price spread on currency exchange (to cover service charges) will
be incurred when a Fund converts assets from one currency to another.
Successful use of forward contracts, options and futures contracts are
subject to special risk considerations and transaction costs. A liquid secondary
market for forward contracts, options and futures contracts may not be available
when a position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in a
Fund's portfolio. Successful use of forward contracts, options and futures
contracts is further dependent on the ability of a Fund's Investment Manager to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct.
PURCHASE OF SHARES
Shares of the Funds are offered on a continuous basis at the respective net
asset value of each Fund only to separate accounts of insurance companies to
serve as the underlying investment vehicle for both variable annuity and
variable life insurance contracts. Individuals may not purchase shares directly
from the Funds. Please read the prospectus of the insurance company Separate
Account for more information on the purchase of Fund Shares.
In the event that the Trust serves as investment vehicle for both variable
annuity and variable life insurance contracts, or for both variable life
insurance contracts of an insurer and other variable contracts of an
unaffiliated insurer, the Trust's Board of Trustees will monitor events in order
to identify any material conflicts between variable annuity contract owners and
variable life policy owners and/or between separate accounts of different
insurers, as the case may be, and will determine what action, if any, should be
taken in the event of such a conflict. Although the Trust does not currently
foresee any disadvantages to contract owners, an irreconcilable material
conflict may conceivably arise between contract owners of different separate
accounts investing in the Trust due to differences in tax treatment, the
management of investments, or other considerations.
NET ASSET VALUE
The net asset value of the Shares of each Fund is determined as of the scheduled
closing time of the New York Stock Exchange (NYSE) (generally 4:00 p.m., New
York time) on each day the NYSE is open for trading. The net asset value of the
Shares of Templeton Bond, Stock, Asset Allocation, and International Funds is
computed by dividing the value of the Fund's securities plus any cash and other
assets (including accrued interest and dividends receivable) less all
liabilities (including accrued expenses) by the number of shares outstanding,
adjusted to the nearest whole cent. A security listed or traded on a recognized
stock exchange or NASDAQ is valued at its last sale price on the principal
exchange on which the security is traded. The value of a foreign security is
determined in its national currency as of the close of trading on the foreign
exchange on which it is traded, or as of the scheduled closing time of the NYSE
(generally 4:00 p.m., New York time), if that is earlier, and that value is then
converted into its U.S. dollar equivalent at foreign exchange rates in effect at
noon, New York time, on the day the value of the foreign security is determined.
If no sale is reported at that time, the mean between the current bid and asked
price is used. Occasionally, events which affect the values of such securities
and such exchanges rates may occur between the times at which they are
determined and the close of the NYSE, and will therefore not be reflected in the
computation of each Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at fair value as determined by the management and approved in good faith
by the Board of Trustees. All other securities for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked price. Securities for which market quotations are not readily
available and other assets are valued at fair value as determined by the
management and approved in good faith by the Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every New York business day. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. Each Fund calculates net
asset value per Share, and therefore effects sales and redemptions of its
Shares, as of the close of the NYSE once on each day on which the NYSE is open.
Such calculation does not take place contemporaneously with the determination of
the prices of many of the portfolio securities used in such
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calculation and if events occur which materially affect the value of these
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Trustees.
Templeton Money Market Fund uses the amortized cost method to determine the
value of its portfolio securities. This method involves valuing a security at
cost and then assuming a constant accretion of discount or premium over the
period until maturity, regardless of the impact of fluctuating interest rates on
the market value of the security. The Fund intends to use its best efforts to
maintain its net asset value at $1.00 per Share, although there can be no
assurance that this will be achieved. See 'Purchase and Redemption of Shares;
Net Asset Value' in the Statement of Additional Information for a description of
certain conditions and procedures followed by the Fund in connection with
amortized cost valuation.
REDEMPTION OF SHARES
The Trust will redeem all full and fractional Shares presented for redemption on
any business day. Redemptions are effected at the per Share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the insurance company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders. The Trust will redeem Shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
Shareholder. In consideration of the best interests of the remaining
Shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
the Fund in lieu of cash. It is highly unlikely that Shares would ever be
redeemed in kind. If Shares are redeemed in kind, however, the redeeming
Shareholder should expect to incur transaction costs upon the disposition of the
securities received in the distribution.
Please refer to the prospectus of your insurance company's Separate Account
for information on how to redeem from each Fund.
EXCHANGES
Shares of any one Fund may be exchanged for Shares of any other Fund available
as an investment option in a Separate Account. Exchanges are treated as a
redemption of Shares of one Fund and a purchase of Shares of the other Fund and
are effected at the respective net asset value per Share of each Fund on the
date of the exchange. Please refer to the prospectus of your insurance company's
Separate Account for more information concerning exchanges.
MANAGEMENT OF THE TRUST
The Trust is managed by its Board of Trustees and all powers of the Trust are
exercised by or under authority of the Board. Information relating to the
Trustees and Officers is set forth under the heading 'Management of the Trust'
in the Statement of Additional Information.
INVESTMENT MANAGERS
The Investment Manager of Templeton Stock Fund, Templeton Asset Allocation Fund
and Templeton International Fund is Templeton Investment Counsel, Inc. ('TICI').
The Investment Manager of Templeton Bond Fund and Templeton Money Market Fund is
Templeton Global Bond Managers, a division of TICI. TICI is a Florida
corporation with offices at Broward Financial Centre, Fort Lauderdale, Florida
33394-3091. The Investment Managers manage the investment and reinvestment of
the Fund's assets. TICI is an indirect wholly owned subsidiary of Franklin
Resources, Inc. ('Franklin'). Through its subsidiaries, Franklin is engaged in
various aspects of the financial services industry. The Investment Managers and
their affiliates serve as advisers for a wide variety of public investment
mutual funds and private clients in many nations. The Templeton organization has
been investing globally over the past 52 years and, with its affiliates,
provides investment management and advisory services to a worldwide client base,
including over 4.3 million mutual fund shareholders, foundations, endowments,
employee benefit plans and individuals. The Investment Managers and their
affiliates have approximately 4,100 employees in ten different countries,
including the United States, Australia, Scotland, Germany, Hong Kong,
Luxembourg, Bahamas, Singapore, Canada and Russia.
The Investment Managers use a disciplined, long-term approach to value
oriented global and international investing. They have an extensive global
network of investment research sources. Securities are selected for each Fund's
portfolio on the basis of fundamental company-by-company analysis. Many
different selection methods are used for different funds and clients and these
methods are changed and improved by the Investment Managers' research on
superior selection methods.
The Investment Managers do not furnish any other services or facilities for
the Funds, although such expenses are paid by some investment advisers of other
investment companies. As compensation for these services, each Fund pays its
respective Investment Manager a fee which, during the most recent fiscal year,
represented the following percentage of its
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average daily net assets: Templeton Money Market Fund, 0.35%; Templeton Bond
Fund, 0.50%; Templeton Stock Fund, 0.50%; Templeton Asset Allocation Fund,
0.50%; and Templeton International Fund, 0.50%.
Currently, the lead portfolio manager of Templeton Bond Fund and the fixed
income portion of the Templeton Asset Allocation Fund is Thomas Latta, Vice
President of TGBM. Mr. Latta joined the Templeton organization in 1991. He is
the senior portfolio manager for developed markets fixed income and has research
responsibilities for the core European markets. Mr. Latta is also responsible
for internal fixed income systems development. Mr. Latta began working in the
securities industry in 1981. His experience includes seven years with Merrill
Lynch where he was part of an investment team to the Saudi Arabian Monetary
Authority in Riyadh, Saudi Arabia. While at Merrill Lynch, Mr. Latta also acted
as an advisor to investment managers concerning the modeling and application of
interest rate strategies in fixed income portfolios. Neil Devlin and Tom
Wilkinson exercise secondary portfolio management responsibilities with respect
to Bond Fund and the fixed income portion of the Asset Allocation Fund. Mr.
Devlin, Executive Vice President of Templeton Global Bond Managers division of
the Investment Manager, joined the Templeton organization in 1987. Prior to that
time, he was a portfolio manager and bond analyst with Constitutional Capital
Management of Boston, where he managed a portion of the Bank of New England's
pension money, a number of trust and corporate pension accounts, and began and
managed a mortgage-backed securities fund for the Bank. Before that, Mr. Devlin
was a bond trader and research analyst for the Bank of New England. Mr.
Wilkinson, Vice President of TGBM, joined the Templeton organization in 1985 and
is the senior portfolio manager for Franklin Templeton's emerging markets fixed
income group with research responsibilities covering East Asia.
The lead portfolio manager for Templeton Stock Fund is Mark R. Beveridge.
Mr. Beveridge, Vice President of TICI, joined the Templeton organization in
1985. He has responsiblity for the industrial component and Latin American
bank industries and has market coverage of Thailand, Philippines and the Andean
Pact nations. Prior to joining the Templeton organization, Mr. Beveridge was a
principal with a financial accounting software firm based in Miami, Florida. He
has a Bachelors Degree in Business Administration with emphasis in finance from
the University of Miami. Lauretta A. Reeves, Vice President of TICI, and Howard
J. Leonard, Senior Vice President of TICI, exercise secondary portfolio manage-
ment responsibilities. Ms. Reeves joined the Templeton organization in 1987 as
an equity trader and moved into the research group in 1989. She has research
responsibility for the chemical, medical supply and European and Asian banking
sectors, as well as the coverage of the Begian market. Prior to joining the
Templeton organizaion, Ms. Reeves was manager of equity trading for first Equity
Corporation of Florida, a regional brokerage firm. Previously, she worked in
similar positions with two other brokerage houses. She received her Masters in
Business Administration from Nova University and a B.A. in Business Adminis-
tration with high honors from Florida International University. Mr. Leonard has
reserach responsibilities for the global forest products, money management and
airline industries and coverage of Indonesia, Switzerland, Brazil and India.
Prior to joining the Templeton organization in 1989, Mr. Leonard was director of
investment research at First Pennsylvania Bank, where he was responsible for
equity and fixed income research activities and its proxy voting service for
large pension plan sponsors. He also previously worked at Provident National
Bank as a security analyst. Mr. Leonard hold a B.B.A. in Finance and
Economics from Temple University.
The lead portfolio manager for the Templeton International Fund is Lauretta
A. Reeves. Peter Nori and Gary Motyl exercise secondary portfolio management
responsibility. Mr. Nori is a research analyst whose current responsibilities
include covering data processing/software, textile and apparel stocks. Mr. Nori
completed Franklin's management training program before moving into portfolio
research in 1990 as an equity analyst and co-portfolio manager of the Franklin
Convertible Securities Fund. He holds a B.S. degree in Finance and an M.B.A with
an emphasis in finance from the University of San Francisco. Mr. Motyl has been
a security analyst and portfolio manager with TICI since 1981. His research
responsibilities include the global automobile industry. Prior to joining the
Templeton organization, Mr. Motyl worked from 1974-1979 as a 1981 with Landmark
First National Bank. He holds a B.S. in Finance from Lehigh University and an
M.B.A. from Pace University.
The lead portfolio manager for the equity portion of the Templeton Asset
Allocation Fund is Gary Clemons, Vice President of TICI. He is a research
analyst with responsiblity for the financial services and telecommunications
industry, as well as country coverage of Argentina and Sweden. Prior to joining
the Templeton organization in 1993. Mr. Clemons worked as a research analyst for
Structured Asset Management in New York, a subsidiary of Templeton International
where his duties included management of a small capitalizaiton fund. He holds an
M.B.A. with an emphasis on finance/investment banking from the University of
Wisconsin and a B.S. from the University of Nevada-Reno. Peter Nori and James
Chaney exercise secondary portfolio management responsibilities for the equity
portion of the Templeton Asset Allocation Fund. Mr. Chaney, Senior Vice Pres-
ident of TICI, has global researach responsibility for merchandising,
regional banks and environmental companies. Prior to joining the Templeton
organization in 1991, Mr. Chaney spent six years with GE Investments, where
he was vice president of international equities. He also has seven years
experience as an international consulting engineer and project manager. Mr.
Chaney holds an M.B.A. with high honors from Columbia University, an M.S. in
Engineering from Northeastern University and a B.S. in Engineering from the
University of Massachusetts-Amherst.
Further information concerning the Investment Managers, including the
services they render and their selection of brokers to execute portfolio
transactions, is included under the heading 'Investment Management and Other
Services' in the Statement of Additional Information.
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BUSINESS MANAGER
Templeton Funds Annuity Company, P.O. Box 33030, St. Petersburg, Florida
33733-8030, telephone (800) 774-5001 or (813) 823-8712, provides certain
administrative facilities and services for the Trust, including payment of
salaries of officers, preparation and maintenance of books and records, daily
pricing of each Fund's investment portfolio, preparation of tax reports,
preparation of financial reports, and monitoring compliance with regulatory
requirements. For its services, the Business Manager receives a fee equivalent
on an annual basis to 0.15% of the combined average daily net assets of the
Funds, reduced to 0.135% of such assets in excess of $200,000,000, to 0.10% of
such assets in excess of $700,000,000, and to 0.075% of such assets in excess of
$1,200,000,000.
EXPENSES
During the fiscal year ended December 31, 1994, expenses amounted to the
following percentage of each Fund's average daily net assets: Templeton Money
Market Fund, 0.71%; Templeton Bond Fund, 0.90%; Templeton Stock Fund, 0.73%;
Templeton Asset Allocation Fund, 0.75%; and Templeton International Fund, 0.83%.
DISTRIBUTOR
Shares of the Trust are distributed through Franklin Templeton Distributors,
Inc., P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll free telephone
(800) 292-9293.
BROKERAGE COMMISSIONS
The Trust's brokerage policies are described under the heading 'Brokerage
Allocation' in the Statement of Additional Information. The Trust's brokerage
policies provide that the receipt of research services from a broker is a factor
which may be taken into account in allocating securities transactions as long as
the prices and execution provided by the broker equal the best available within
the scope of the Trust's brokerage policies.
DIVIDENDS AND DISTRIBUTIONS
Templeton Money Market Fund's net investment income (consisting principally of
interest accrued or discount earned less amortization of premium and estimated
expenses) is declared as a dividend daily, including weekends and holidays,
immediately prior to the determination of net asset value, and is paid monthly.
Templeton Bond, Stock, Asset Allocation, and International Funds normally intend
to pay annual dividends representing substantially all of their net investment
income and to distribute annually any net realized capital gains.
Any distributions made by any Fund will be automatically reinvested in
additional Shares of that Fund, unless an election is made on behalf of a
Shareholder to receive distributions in cash. Dividends or distributions by a
Fund other than Templeton Money Market Fund will reduce the per share net asset
value by the per share amount so paid.
FEDERAL INCOME TAX STATUS
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the 'Code'). A Fund so qualifying
generally will not be subject to federal income taxes on amounts distributed to
Shareholders. In order to qualify as a regulated investment company, a Fund
must, among other things, meet certain source of income requirements. In
addition, each Fund must diversify its holdings so that, at the end of each
quarter of the taxable year, (a) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. Government securities, the securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies).
Amounts not distributed by a Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the Statement of Additional Information for more information about this
tax and its applicability to the Funds.
Distributions of any net investment income and of any net realized
short-term capital gains in excess of net realized long-term capital losses are
treated as ordinary income for tax purposes in the hands of the Shareholder (the
Separate Account). The excess of any net long-term capital gains over net
short-term capital losses will, to the extent distributed and designated by a
Fund as a capital gain dividend, be treated as long-term capital gains in the
hands of the Separate Account regardless of the length of time the Separate
Account may have held the Shares. Any distributions that are not from a Fund's
investment company taxable income or net capital gain may be characterized as a
return of capital to shareholders or, in some cases, as capital gain. Reference
is made to the Prospectus for the applicable Contract for information regarding
the federal income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code each Fund is
required to diversify its investments so that on the last day of each quarter of
a calendar year no more than 55% of the value of its assets is represented by
any one
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investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For this purpose, in the case of U.S.
Government securities, each U.S. Government agency or instrumentality is treated
as a separate issuer. Any securities issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an instrumentality of
the U.S. Government are treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in such pronouncements or when, if
at all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Funds will be able to operate as currently described in the
Prospectus, or that the Trust will not have to change any Fund's investment
objective or investment policies. While each Fund's investment objective is
fundamental and may be changed only by a vote of a majority of its outstanding
Shares, the Trustees have reserved the right to modify the investment policies
of the Funds as necessary to prevent any such prospective rules and regulations
from causing the contract owners to be considered the owners of the Shares of
the Funds underlying the Separate Account.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of five separately managed Funds. The Board of Trustees
may establish additional Funds in the future. The capitalization of the Trust
consists solely of an unlimited number of Shares of beneficial interest with
a par value of $0.01 each. When issued, Shares of the Trust are fully paid,
non-assessable by the Trust and freely transferable.
Unlike the stockholder of a corporation, 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 are
binding only on the assets and property of the Trust. The Declaration of 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.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each Share of each
Fund will be given one vote, unless a different allocation of voting rights is
required under applicable law for a mutual fund that is an investment medium for
variable life insurance or annuity contracts. In accordance with current
applicable law, the Separate Account, as Shareholder of the Trust, is required
to vote the Shares of the Trust at any regular and special meeting of the
Shareholders of the Trust in accordance with instructions received from owners
of the variable contracts. See the Prospectus for the Variable Contract for more
information regarding the pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
Fund, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving an investment management
contract. In addition, the Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer than
a majority of the Trustees have been elected by the Shareholders of the Trust.
In addition, the holders of not less than two-thirds of the outstanding Shares
or other voting interests of the Trust may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as trustee, if requested in writing to do so by the
holders of not less than 10% of the outstanding Shares or other voting interests
of the Trust. The Trust is required to assist in Shareholders' communications.
In accordance with current laws, an insurance company issuing a variable life
insurance or annuity contract that participates in the Trust will request voting
instructions from contract owners and will vote Shares or other voting interests
in the separate account in proportion to the voting instructions received.
For more information on the Trust, the Funds, and their investment activity
and concurrent risks, a Statement of Additional Information may be obtained
without charge upon request to Franklin Templeton Distributors, Inc., P.O. Box
33030, St. Petersburg, Florida, 33733-8030 -- toll free telephone (800) 774-5001
or (813) 823-8712.
PERFORMANCE INFORMATION
Templeton Money Market Fund may include its yield and effective yield in
advertisements or reports to Shareholders or prospective investors, and each
Fund may include its total return in advertisements or reports to Shareholders
or prospective
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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.
Templeton Money Market Fund calculates current yield by annualizing the
dividend for the most recent seven-day period and dividing by the net asset
value on the last day of the period for which yield is presented. Templeton
Money Market Fund's effective yield is calculated similarly but assumes that
income earned from the investment is reinvested. The Fund's effective yield will
be slightly higher than its yield because of the compounding effect of this
assumed reinvestment. Quotations of average annual total return for each Fund
will be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Fund over a period of 1, 5 and 10 years (or up to
the life of the Fund), will reflect the deduction of the maximum initial sales
charge and deduction of a proportional share of Fund expenses (on an annual
basis), and will assume that all dividends and distributions are reinvested when
paid. Total return may be expressed in terms of the cumulative value of an
investment in a Fund at the end of a defined period of time. Quotations of yield
or total return for the Funds 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. For a
description of the methods used to determine total return for the Funds, see
'Performance Information' in the Statement of Additional Information.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports (containing
financial statements audited by independent auditors and additional information
regarding the Funds' performance) and semi-annual reports (containing unaudited
financial statements) are sent to Shareholders each year. Additional copies may
be obtained, without charge, upon request to the Business Manager.
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