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