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TEMPLETON VARIABLE PRODUCTS SERIES FUND PROSPECTUS -- May 1, 1996
Templeton Asset Allocation Fund
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Templeton Asset Allocation Fund (the "Fund") is a diversified series of Templeton
Variable Products Series Fund (the "Trust"), an open-end, management investment
company. Shares of the Fund are currently sold only to insurance company
separate accounts ("Separate Accounts") to serve as the investment vehicle
for both variable annuity and variable life insurance contracts (the
"Contracts"). The Separate Accounts invest in shares of the Fund in accordance
with allocation instructions received from owners of the Contracts. Such
allocation rights are described further in the accompanying prospectus for
the Separate Accounts. Certain series of the Trust are not available as an
investment vehicle for all Contracts. A purchaser of a Contract should refer
to the prospectus for his or her Contract or policy for information as to
INVESTMENT which series of the Trust are available for investment. This Prospectus sets
OBJECTIVE AND forth concisely information about the Fund that a prospective investor ought
POLICIES to know before investing.
SHARES OF THE FUND ARE AVAILABLE EXCLUSIVELY TO INSURANCE COMPANY SEPARATE
ACCOUNTS AS AN INVESTMENT VEHICLE FOR VARIABLE INSURANCE CONTRACTS. THIS
PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OFFERING THE
PURCHASE VARIABLE INSURANCE CONTRACT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND
OF SHARES RETAINED FOR FUTURE REFERENCE.
A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED MAY 1, 1996, HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED IN
ITS ENTIRETY BY REFERENCE IN AND MADE A PART OF THIS PROSPECTUS. THE SAI
IS AVAILABLE WITHOUT CHARGE UPON REQUEST TO FRANKLIN TEMPLETON DISTRIBUTORS,
PROSPECTUS INC., P.O. BOX 33030, ST. PETERSBURG, FLORIDA 33733-8030 OR BY CALLING THE
INFORMATION FUND INFORMATION DEPARTMENT AT 1-800-774-5001 OR 1-813-823-8712.
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TABLE OF CONTENTS PAGE
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FINANCIAL HIGHLIGHTS .................. T-2
INVESTMENT OBJECTIVE AND POLICIES .... T-2
DESCRIPTION OF SECURITIES
AND INVESTMENT TECHNIQUES ............. T-3
RISK FACTORS .......................... T-6
PURCHASE OF SHARES .................... T-8
NET ASSET VALUE ....................... T-8
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REDEMPTION OF SHARES ............ T-8
EXCHANGES ....................... T-8
MANAGEMENT OF THE TRUST ......... T-9
BROKERAGE COMMISSIONS ........... T-10
DIVIDENDS AND DISTRIBUTIONS .... T-10
FEDERAL INCOME TAX STATUS ...... T-10
OTHER INFORMATION ............... T-11
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SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF CAPITAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED
The following table of financial highlights has been audited by McGladrey &
Pullen, LLP, independent certified public accountants, for the periods indicated
in their report which is incorporated by reference and which appears in the
Fund's 1995 Annual Report to Shareholders. This statement should be read in
conjunction with the other financial statements and notes thereto included in
the Fund's 1995 Annual Report to Shareholders, which contains further
information about the Fund's performance, and which is available to shareholders
upon request and without charge.
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YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991 1990 1989 1988*
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PER SHARE OPERATING PERFORMANCE (for
a share outstanding throughout the
year)
NET ASSET VALUE,
BEGINNING OF YEAR.................. $ 15.69 $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $ 10.28 $10.00
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Income from investment operations:
Net investment income.............. .57 .44 .42 .39 .40 .34 .25 .07
Net realized and unrealized
gain (loss)...................... 2.87 (.92) 3.03 .66 2.38 (1.23) 1.11 .21
-------- -------- -------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS.................... 3.44 (.48) 3.45 1.05 2.78 (.89) 1.36 .28
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Distributions:
Dividends from net
investment income................ (.41) (.31) (.35) (.41) (.38) (.25) (.02) --
Distributions from
net realized gains............... -- (.07) (.04) -- -- (.03) -- --
-------- -------- -------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS.............. (.41) (.38) (.39) (.41) (.38) (.28) (.02) --
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Change in net asset value
for the year....................... 3.03 (.86) 3.06 .64 2.40 (1.17) 1.34 .28
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NET ASSET VALUE,
END OF YEAR........................ $ 18.72 $ 15.69 $ 16.55 $ 13.49 $ 12.85 $ 10.45 $ 11.62 $10.28
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TOTAL RETURN......................... 22.48% (2.96)% 26.12% 8.42% 27.05% (7.80)% 13.25% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year (000).................. $406,123 $288,172 $183,360 $79,242 $35,821 $22,702 $13,150 $ 388
Ratio of expenses to average
net assets......................... .66% .75% .77% .80% .89% 1.03% 1.41% 14.92%**
Ratio of expenses, net of
reimbursement, to average
net assets......................... .66% .75% .77% .80% .89% 1.00% 1.00% 1.50%**
Ratio of net investment income to
average net assets................. 3.73% 4.02% 4.16% 4.47% 3.99% 4.56% 4.81% 2.86%**
Portfolio turnover rate.............. 43.02% 51.36% 81.50% 120.53% 76.65% 8.46% 10.68% --
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* Period from August 31, 1988 (commencement of operations) to
December 31, 1988.
** Annualized.
Total return figures do not include charges applied under the
Contracts. Inclusion of such figures would reduce the total
return figures for all periods shown.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks a high level of total return through a flexible policy of
investing in the following market segments: stocks of companies in any nation,
debt securities of companies and governments of any nation, and money market
instruments. The mix of investments among these three market segments will be
adjusted in an attempt to capitalize on total return potential produced by
changing economic conditions throughout the world. The Fund and its investment
manager, Templeton Investment Counsel, Inc. ('TICI' or the 'Investment Manager')
may, from time to time, use various methods of selecting securities for the
Fund's portfolio, and may also employ and rely on independent or affiliated
sources of information and
T-2
ideas in connection with the management of the Fund's portfolio. There can be no
assurance that the Fund will achieve its investment objective.
There are no minimum or maximum percentages as to the amount of the Fund's
assets which may be invested in each of the market segments. Except as noted
below and under 'Investment Restrictions' in the SAI, the Fund's Investment
Manager has complete flexibility in determining the amount and nature of stock,
debt securities or money market instruments in which the Fund may invest.
The Fund seeks investment opportunities in all types of securities issued by
companies or governments of any nation. It has the flexibility to invest in
preferred stocks and certain debt securities, rated or unrated, such as
convertible bonds and bonds selling at a discount. The Fund may invest in
collateralized mortgage obligations and restricted securities, lend its
portfolio securities, and borrow money for investment purposes.
The Fund may purchase and sell financial futures contracts, stock index
futures contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in such transactions only if the
total contract value of the futures contracts does not exceed 20% of the Fund's
total assets. The Fund may also invest in forward foreign currency exchange
contracts and options on foreign currencies. (See 'Description of Securities and
Investment Techniques.')
The Fund is subject to investment restrictions that are described under the
heading 'Investment Restrictions' in the SAI. Those investment restrictions so
designated and the investment objective of the Fund are 'fundamental policies'
of the Fund, which means that they may not be changed without a majority vote of
Shareholders of the Fund. With the exception of the Fund's investment objective
and those restrictions specifically identified as fundamental, all investment
policies and practices described in this Prospectus and in the SAI are not
fundamental, meaning that the Board of Trustees may change them without
Shareholder approval.
Certain types of investments and investment techniques are described in
greater detail under 'Description of Securities and Investment Techniques' in
this Prospectus and in the SAI.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund is authorized to invest in securities and use the various investment
techniques described below. Although these strategies are regularly used by some
investment companies and other institutional investors in various markets, some
of these strategies cannot at the present time be used to a significant extent
by the Fund in some of the markets in which the Fund will invest and may not be
available for extensive use in the future.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities, which are obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. Some
U.S. Government securities, such as Treasury bills and bonds, which are direct
obligations of the U.S. Treasury, and Government National Mortgage Association
('GNMA') certificates, the principal and interest of which the Treasury
guarantees, are supported by the full faith and credit of the Treasury; others,
such as those of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others are
supported only by the credit of the instrumentality. GNMA certificates represent
part ownership of a pool of mortgage loans on which interest and principal
payments are guaranteed by the Treasury. Principal is repaid monthly over the
term of the loan. Expected payments may be delayed due to the delays in
registering newly traded certificates. The mortgage loans will be subject to
normal principal amortization and may be prepaid prior to maturity. Reinvestment
of prepayments may occur at higher or lower rates than the original yield on the
certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS ('CMOS')
The Fund may invest in CMOs, which are fixed-income securities collateralized by
pools of mortgage loans created by commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
issuers in the United States. In effect, CMOs 'pass-through' the monthly
payments made by individual borrowers on their mortgage loans. Timely payment of
interest and principal (but not the market value) of these pools is supported by
various forms of insurance or guarantees issued by U.S. Government agencies,
private issuers, and mortgage poolers; however, the obligation itself is not
guaranteed. If the collateral securing the obligations is insufficient to make
payment on the obligation, a holder could sustain a loss. In addition, the Fund
may buy CMOs without insurance or guarantees if, in the opinion of the
Investment Manager, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt securities
when interest rates rise, but when interest rates decline, they may not increase
as much as other debt securities, due to the prepayment feature.
T-3
BANK OBLIGATIONS
The Fund may invest in certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. The Fund may invest in
dollar-denominated certificates of deposit of foreign and domestic banks having
total assets in excess of $1 billion. The Fund may also invest in certificates
of deposit of federally insured savings and loan associations having total
assets in excess of $1 billion. The Fund may hold cash and time deposits with
banks in the currency of any major nation.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Investments in commercial paper are
limited to obligations rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ('Moody's') or A-1 or A-2 by Standard & Poor's Corporation ('S&P') or, if
not rated by Moody's or S&P, issued by companies having an outstanding debt
issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the Appendix
in the SAI for a description of these ratings.
DEBT SECURITIES
Debt securities in which the Fund may invest consistent with its investment
objective and policies may include many types of debt obligations of both
domestic and foreign issuers such as bonds, debentures, notes, commercial paper,
structured investments and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in the Fund's net asset value.
The Fund may invest in medium and lower quality debt securities that are
rated between BBB and as low as CC by S&P, and between Baa and as low as Ca by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. As an operating policy, which may be changed by the
Board of Trustees without shareholder approval, the Fund will not invest more
than 5% of its total assets in debt securities rated below BBB by S&P or Baa by
Moody's. Bonds rated BB or lower, commonly referred to as 'junk bonds,' are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and may be in
default. The Board may consider a change in this operating policy if, in its
judgment, economic conditions change such that a higher level of investment in
high risk, lower quality debt securities would be consistent with the interests
of the Fund and its Shareholders. Regardless of rating levels, all debt
securities considered for purchase (whether rated or unrated) will be carefully
analyzed by the Fund's Investment Manager to insure, to the extent possible,
that the planned investment is sound. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. The Fund may, from time to time, purchase
defaulted debt securities if, in the opinion of the Investment Manager, the
issuer may resume interest payments in the near future. The Fund will not invest
more than 10% of its total assets in defaulted debt securities.
Debt securities with similar maturities may have different yields, depending
upon several factors, including the relative financial condition of the issuers.
For example, higher yields are generally available from securities in the lower
rating categories of S&P or Moody's. However, the values of lower rated
securities generally fluctuate more than those of higher rated securities. As a
result, lower rated securities involve greater risk of loss of income and
principal than higher rated securities. A full discussion of the risks of
investing in lower quality debt securities is contained under the caption 'Risk
Factors' in the SAI. For a description of debt securities ratings, see the
Appendix to the SAI.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When the Fund acquires a security
from a bank or a registered broker-dealer, it may simultaneously enter into a
repurchase agreement, wherein the seller agrees to repurchase the security at a
specified time and price. The repurchase price is in excess of the purchase
price by an amount which reflects an agreed upon rate of return, which is not
tied to the coupon rate on the underlying security. The term of such an
agreement is generally quite short, possibly overnight or for a few days,
although it may extend over a number of months (up to one year) from the date of
delivery. Repurchase agreements will be fully collateralized. However, if the
seller should default on its obligation to repurchase the underlying security,
the Fund may experience delay or difficulty in exercising its rights to realize
upon the security and might incur a loss if the value of the security should
decline, as well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 30% of the value of its net assets to increase its
holdings of portfolio securities. Under the 1940 Act, the Fund may borrow from
banks only, and is required to maintain continuous asset coverage of 300% with
respect to such borrowings and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest and other costs
(which may include commitment fees
T-4
and/or the cost of maintaining minimum average balances) which may or may not
exceed the income received from the securities purchased with borrowed funds.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a 'when-issued' basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. In the event that
the borrower defaults on its obligation to return borrowed securities, because
of insolvency or otherwise, the Fund could experience delays and costs in
gaining access to the collateral and could suffer a loss to the extent that the
value of collateral falls below the market value of the borrowed securities.
RESTRICTED SECURITIES
The Fund may invest in restricted securities, which are securities subject to
legal or contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a time when
sale would otherwise be desirable. No restricted securities and no securities
for which there is not a readily available market ('illiquid assets') will be
acquired by the Fund if such acquisition would cause the aggregate value of
illiquid assets and restricted securities to exceed 15% of the Fund's total
assets. Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined by the management and approved in good faith by the Board of
Trustees.
DEPOSITARY RECEIPTS
The Fund may purchase sponsored or unsponsored American Depositary Receipts
('ADRs'), European Depositary Receipts ('EDRs') and Global Depositary Receipts
('GDRs') (collectively, 'Depositary Receipts'). ADRs are Depositary Receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed below. For purposes of the
Fund's investment policies, the Fund's investments in Depositary Receipts will
be deemed to be investments in the underlying securities.
FUTURES CONTRACTS
For hedging purposes only, the Fund may buy and sell financial futures contracts
and foreign currency futures contracts. Also, for hedging purposes only, the
Fund may purchase and sell stock index futures contracts. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
T-5
When the Fund enters into a futures contract, it must make an initial
deposit, known as 'initial margin,' as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as 'variation margin,' to cover any additional obligation it may have
under the contract. The Fund may not commit more than 5% of its total assets to
initial margin deposits on futures contracts. 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES.
The 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. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to 'lock in' the U.S.
dollar price of the security or, when the Investment Manager believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. This later investment
practice is generally referred to as 'cross-hedging.' The Fund has no specific
limitation on the percentage of assets they may commit to forward contracts,
except that the Fund will not enter into a forward contract if the amount of
assets set aside to cover the contract would impede portfolio management or the
Fund's ability to meet redemption requests. The Fund may also purchase and write
put and call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
RISK FACTORS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund; nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets, as well. A
decline in the stock market of any country in which the Fund is invested in
equity securities may also be reflected in declines in the price of the Shares
of the Fund. Changes in prevailing rates of interest in any of the countries in
which the Fund is invested in fixed income securities will likely affect the
value of such holdings and thus the value of Fund Shares. Increased rates of
interest which frequently accompany inflation and/or a growing economy are
likely to have a negative effect on the value of the Fund's Shares. In addition,
changes in currency valuations will affect the price of the Shares of the Fund.
History reflects both decreases and increases in stock markets and interest
rates in individual countries and throughout the world, and in currency
valuations, and these may reoccur unpredictably in the future. Additionally,
investment decisions made by the Investment Manager will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
The Fund is authorized to purchase securities in any foreign country,
developed or underdeveloped. An investor should consider carefully the risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. These risks are often heightened for investments in developing
markets, including certain Eastern European countries. See 'Investment
Objectives and Policies--Risk Factors' in the SAI. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and dividends) or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), foreign investment controls on daily
stock movements, default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations. Also, some countries may withhold
portions of interest and dividends at the source. In addition, in many countries
there is less publicly available information about issuers than is available in
reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to United States companies. Further, the Fund may encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies, and obtain judgments in foreign courts. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
Brokerage commissions, custodial services and other costs relating to
investment in foreign countries are generally more expensive than in the United
States. Foreign securities markets also have different clearance and settlement
procedures, and
T-6
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security of, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Russia's system
of share registration and custody creates certain risks of loss (including the
risk of total loss) that are not normally associated with investments in other
securities markets. These risks and other risks associated with the Russian
securites market are discussed more fully in the SAI under the caption
"Investment Objectives and Policies-Risk Factors" and investors should read
this section in detail. As a non-fundamental policy, the Fund will limit
investments in Russian companies to 5% of its total assets.
In many foreign countries there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the United States. There is an increase risk,
therefore, of uninsured loss due to lost, stolen or counterfeit stock
certificates. In addition, the foreign securities markets of many of the
countries in which the Fund may invest may also be smaller, less liquid, and
subject to greater price volatility than those in the United States. The Fund
may invest in Eastern European countries, which involves special risks that are
described under 'Investment Objectives and Policies--Risk Factors' in the SAI.
Prior governmental approval of foreign investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations may also be imposed by the
charters of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may continue
to be adversely affected by trade barriers, exchange controls, managed
adjustment in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade.
The Fund will usually effect currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange (to cover service charges) will be
incurred when the Fund converts assets from one currency to another.
The Fund is authorized to invest in medium quality or high-risk, lower
quality debt securities that are rated between BBB and as low as CC by S&P, and
between Baa and as low as Ca by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. As an operating
policy, which may be changed by the Board of Trustees without Shareholder
approval, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Baa by Moody's. The Board may consider
a change in this operating policy if, in its judgment, economic conditions
change such that a higher level of investment in high-risk, lower quality debt
securities would be consistent with the interests of the Fund and its
Shareholders. See 'Investment Objectives and Policies--Debt Securities' in the
SAI for descriptions of debt securities rated BBB by S&P and Baa by Moody's.
High-risk, lower quality debt securities commonly referred to as 'junk bonds,'
are regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and may be in default. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. Regardless of rating levels, all debt securities
considered for purchase (whether rated or unrated) will be carefully analyzed by
the Investment Manager to insure, to the extent possible, that the planned
investment is sound. The Fund may, from time to time, purchase defaulted debt
securities if, in the opinion of the Investment Manager, the issuer may resume
interest payments in the near future. As a fundamental policy, the Fund will not
invest more than 10% of its total assets (at the time of purchase) in defaulted
debt securities, which may be illiquid.
Successful use of forward contracts, options and futures contracts are
subject to special risk considerations and transaction costs. A liquid secondary
market for forward contracts, options and futures contracts may not be available
when a position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
contract or option is based and movements in the securities or currency in the
Fund's portfolio or the currencies in which they are denominated. Successful use
of forward contracts, options and futures contracts is further dependent on the
ability of the Fund's Investment Manager to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities or stock
indices is subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
There are further risk factors, including possible losses through the
holding of securities in domestic and foreign custodian banks and depositories,
described elsewhere in the Prospectus and in the SAI.
T-7
PURCHASE OF SHARES
Shares of the Fund are offered on a continuous basis at net asset value only to
separate accounts of insurance companies to serve as the underlying investment
vehicle for both variable annuity and variable life insurance contracts.
Individuals may not purchase shares directly from the Fund. Please read the
prospectus of the insurance company Separate Account for more information on the
purchase of Fund Shares.
In the event that the Trust serves as investment vehicle for both variable
annuity and variable life insurance contracts, or for both variable life
insurance contracts of an insurer and other variable contracts of an
unaffiliated insurer, the Trust's Board of Trustees will monitor events in order
to identify any material conflicts between variable annuity contract owners and
variable life policy owners and/or between separate accounts of different
insurers, as the case may be, and will determine what action, if any, should be
taken in the event of such a conflict. Although the Trust does not currently
foresee any disadvantages to contract owners, an irreconcilable material
conflict may conceivably arise between contract owners of different separate
accounts investing in the Trust due to differences in tax treatment, the
management of investments, or other considerations.
NET ASSET VALUE
The net asset value of the Shares of the Fund is determined as of the scheduled
closing time of the New York Stock Exchange ('NYSE') (generally 4:00 p.m., New
York time) on each day the NYSE is open for trading. The net asset value is
computed by dividing the value of the Fund's securities plus any cash and other
assets (including accrued interest and dividends receivable) less all
liabilities (including accrued expenses) by the number of shares outstanding,
adjusted to the nearest whole cent. A security listed or traded on a recognized
stock exchange or NASDAQ is valued at its last sale price on the principal
exchange on which the security is traded. The value of a foreign security is
determined in its national currency as of the close of trading on the foreign
exchange on which it is traded, or as of the scheduled closing time of the NYSE,
if that is earlier, and that value is then converted into its U.S. dollar
equivalent at foreign exchange rate in effect at noon, New York time, on the day
the value of the foreign security is determined. If no sale is reported at that
time, the mean between the current bid and asked price is used. Occasionally,
events which affect the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of the NYSE,
and will therefore not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at fair value as determined by
the management and approved in good faith by the Board of Trustees. All other
securities for which over-the-counter market quotations are readily available
are valued at the mean between the current bid and asked price. Securities for
which market quotations are not readily available and other assets are valued at
fair value as determined by the management and approved in good faith by the
Board of Trustees.
REDEMPTION OF SHARES
The Trust will redeem all full and fractional Shares presented for redemption on
any business day. Redemptions are effected at the per Share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the insurance company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders. The Trust will redeem Shares of the Fund solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
Shareholder. In consideration of the best interests of the remaining
Shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
the Fund in lieu of cash. It is highly unlikely that Shares would ever be
redeemed in kind. If Shares are redeemed in kind, however, the redeeming
Shareholder should expect to incur transaction costs upon the disposition of the
securities received in the distribution.
Please refer to the prospectus of your insurance company's Separate Account
for information on how to redeem Shares of the Fund.
EXCHANGES
Shares of the Fund may be exchanged for shares of any other fund available as an
investment option in a Separate Account. Exchanges are treated as a redemption
of shares of one fund and a purchase of shares of the other fund and are
effected at the respective net asset value per share of each fund on the date of
the exchange. Please refer to the prospectus of your insurance company's
Separate Account for more information concerning exchanges.
T-8
MANAGEMENT OF THE TRUST
The Trust is managed by its Board of Trustees and all powers of the Trust are
exercised by or under authority of the Board. Information relating to the
Trustees and officers is set forth under the heading 'Management of the Trust'
in the SAI.
INVESTMENT MANAGERS
The Investment Manager of the Fund is Templeton Investment Counsel, Inc.
('TICI'). TICI is a Florida corporation with offices at Broward Financial
Centre, Fort Lauderdale, Florida 33394-3091. The Investment Manager manages the
investment and reinvestment of the Fund's assets. TICI is an indirect wholly
owned subsidiary of Franklin Resources, Inc. ('Franklin'). Through its
subsidiaries, Franklin is engaged in various aspects of the financial services
industry. The Investment Manager and its affiliates serve as advisers for a wide
variety of public investment mutual funds and private clients in many nations.
The Templeton organization has been investing globally over the past 56 years
and, with its affiliates, provides investment management and advisory services
to a worldwide client base, including over 4.3 million mutual fund shareholders,
foundations, endowments, employee benefit plans and individuals. The Investment
Manager and its affiliates have approximately 4,100 employees in the United
States, Australia, Scotland, Germany, Hong Kong, Luxembourg, Bahamas, Singapore,
Canada, Russia, France, Poland, Italy, India, Vietnam, South America and South
Africa.
The Investment Manager uses a disciplined, long-term approach to value
oriented global and international investing. It has an extensive global network
of investment research sources. Securities are selected for the Fund's portfolio
on the basis of fundamental company-by-company analysis. Many different
selection methods are used for different funds and clients and these methods are
changed and improved by the Investment Manager's research on superior selection
methods.
The Investment Manager performs similar services for other funds and
accounts and there may be times when the actions taken with respect to the
Fund's portfolio will differ from those taken by the Investment Manager on
behalf of other funds and accounts. Neither the Investment Manager and its
affiliates, its officers, directors or employees, nor the officers and Trustees
of the Trust are prohibited from investing in securities held by the Fund or
other funds and accounts which are managed or administered by the Investment
Manager to the extent such transactions comply with the Trust's Code of Ethics.
Please see 'Investment Management and Other Services--Investment Management
Agreements,' in the SAI for further information on securities transactions and a
summary of the Trust's Code of Ethics.
The Investment Manager does not furnish any other services or facilities for
the Fund, although such expenses are paid by some investment advisers of other
investment companies. As compensation for these services, the Fund pays its
Investment Manager a monthly fee equal on an annual basis to .50% of its average
daily net assets during the year.
The lead portfolio manager of the fixed income portion of the Fund since
1993 is Thomas Latta, Vice President of Templeton Global Bond Managers ('TGBM'),
a division of TICI. Mr. Latta joined the Templeton organization in 1991. He is
the senior portfolio manager for developed markets fixed income and has research
responsibilities for the core European markets. Mr. Latta is also responsible
for internal fixed income systems development. Mr. Latta began working in the
securities industry in 1981. His experience includes seven years with Merrill
Lynch where he was part of an investment team to the Saudi Arabian Monetary
Authority in Riyadh, Saudi Arabia. While at Merrill Lynch, Mr. Latta also acted
as an advisor to investment managers concerning the modeling and application of
interest rate strategies in fixed income portfolios. Neil Devlin and Tom
Wilkinson exercise secondary portfolio management responsibilities with respect
to the fixed income portion of the Fund. Mr. Devlin, Executive Vice President of
TGBM, joined the Templeton organization in 1987. Prior to that time, he was a
portfolio manager and bond analyst with Constitutional Capital Management of
Boston, where he managed a portion of the Bank of New England's pension money, a
number of trust and corporate pension accounts, and began and managed a
mortgage-backed securities fund for the Bank. Before that, Mr. Devlin was a bond
trader and research analyst for the Bank of New England. Mr. Wilkinson, Vice
President of TGBM, joined the Templeton organization in 1985 and is the senior
portfolio manager for Franklin Templeton's emerging markets fixed income group
with research responsibilities covering East Asia.
The lead portfolio manager for the equity portion of the Fund since 1995 is
Gary Clemons, Vice President of TICI. He is a research analyst with
responsibility for the financial services and telecommunications industry, as
well as country coverage of Argentina and Sweden. Prior to joining the Templeton
organization in 1993, Mr. Clemons worked as a research analyst for Structured
Asset Management in New York, a subsidiary of Templeton International, where his
duties included management of a small capitalization fund. He holds an M.B.A.
with an emphasis on finance/investment banking from the University of Wisconsin
and a B.S. from the University of Nevada-Reno. Peter Nori and James Chaney
exercise secondary portfolio management responsibilities for the equity portion
of the Fund. Mr. Nori, Vice President of the Investment Manager, is a research
analyst whose current responsibilities include covering data
processing/software, textile and apparel stocks. Mr. Nori completed Franklin's
management training program before moving into portfolio research in 1990 as an
equity analyst and co-portfolio manager of the Franklin Convertible Securities
Fund. He holds a B.S. degree in Finance and an M.B.A. with an emphasis in
finance from the University of San Francisco. Mr. Chaney, Senior Vice President
of TICI, has global research responsibility for merchandising, regional banks
and environmental companies. Prior to joining the Templeton organization in
1991, Mr. Chaney spent six years with GE Investments, where he was vice
president of international equities. He also has seven years experience as an
international consulting engineer and project manager. Mr. Chaney holds an
M.B.A.
T-9
with high honors from Columbia University, an M.S. in Engineering from
Northeastern University and a B.S. in Engineering from the University of
Massachusetts-Amherst.
Further information concerning the Investment Manager, including the
services it renders and its selection of brokers to execute portfolio
transactions, is included under the heading 'Investment Management and Other
Services' in the SAI.
BUSINESS MANAGER
Templeton Funds Annuity Company, P.O. Box 33030, St. Petersburg, Florida
33733-8030, telephone (800) 774-5001 or (813) 823-8712, provides certain
administrative facilities and services for the Trust, including payment of
salaries of officers, preparation and maintenance of books and records, daily
pricing of the Fund's investment portfolio, preparation of tax reports,
preparation of financial reports, and monitoring compliance with regulatory
requirements. For its services, the Business Manager receives a fee equivalent
on an annual basis to 0.15% of the combined average daily net assets of the Fund
and other funds of the Trust, reduced to 0.135% of such assets in excess of
$200,000,000, to 0.10% of such assets in excess of $700,000,000, and to 0.075%
of such assets in excess of $1,200,000,000.
EXPENSES
During the fiscal year ended December 31, 1995, expenses amounted to .66% of the
Fund's average daily net assets.
DISTRIBUTOR
Shares of the Trust are distributed through Franklin Templeton Distributors,
Inc., P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll free telephone
(800) 292-9293.
BROKERAGE COMMISSIONS
The Trust's brokerage policies are described under the heading 'Brokerage
Allocation' in the SAI. The Trust's brokerage policies provide that the receipt
of research services from a broker is a factor which may be taken into account
in allocating securities transactions as long as the prices and execution
provided by the broker equal the best available within the scope of the Trust's
brokerage policies.
DIVIDENDS AND DISTRIBUTIONS
The Fund normally intends to pay annual dividends representing substantially all
of its net investment income and to distribute annually any net realized capital
gains.
Any distributions made by the Fund will be automatically reinvested in
additional Shares of the Fund, unless an election is made on behalf of a
Shareholder to receive distributions in cash. Dividends or distributions by the
Fund will reduce the per share net asset value by the per share amount so paid.
FEDERAL INCOME TAX STATUS
The Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code (the 'Code'). If the Fund so
qualifies, it generally will not be subject to federal income taxes on amounts
distributed to Shareholders. In order to qualify as a regulated investment
company, the Fund must, among other things, meet certain source of income
requirements. In addition, the Fund must diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
Amounts not distributed by the Fund on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. See the SAI for more information about this tax and its applicability to
the Fund.
Distributions of any net investment income and of any net realized
short-term capital gains in excess of net realized long-term capital losses are
treated as ordinary income for tax purposes in the hands of the Shareholder (the
Separate Account). The excess of any net long-term capital gains over net
short-term capital losses will, to the extent distributed and designated by the
Fund as a capital gain dividend, be treated as long-term capital gains in the
hands of the Separate Account regardless of the length of time the Separate
Account may have held the Shares. Any distributions that are not from the Fund's
investment company taxable income or net capital gain may be characterized as a
return of capital to shareholders or, in some cases, as capital gain. Reference
is made to the prospectus for the applicable Contract for information regarding
the federal income tax treatment of distributions to an owner of a Contract.
To comply with regulations under Section 817(h) of the Code the Fund is
required to diversify its investments so that on the last day of each quarter of
a calendar year no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three
T-10
investments, and no more than 90% is represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For this purpose, in the case of U.S. Government securities, each U.S.
Government agency or instrumentality is treated as a separate issuer. Any
securities issued, guaranteed, or insured (to the extent so guaranteed or
insured) by the U.S. Government or an instrumentality of the U.S. Government are
treated as a U.S. Government security for this purpose.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in such pronouncements or when, if
at all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Fund will be able to operate as currently described in the
Prospectus, or that the Trust will not have to change the Fund's investment
objective or investment policies. While the Fund's investment objective is
fundamental and may be changed only by a vote of a majority of its outstanding
Shares, the Trustees have reserved the right to modify the investment policies
of the Fund as necessary to prevent any such prospective rules and regulations
from causing the contract owners to be considered the owners of the Shares of
the Fund underlying the Separate Account.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of six separately managed Funds. The Board of Trustees
may establish additional funds in the future. The capitalization of the Trust
consists solely of an unlimited number of Shares of beneficial interest with a
par value of $0.01 each. When issued, Shares of the Trust are fully paid,
non-assessable by the Trust and freely transferable.
Unlike the stockholder of a corporation, Shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Trust for acts or obligations of the Trust, which
are binding only on the assets and property of the Trust. The Declaration of
Trust provides for indemnification out of Trust property for all loss and
expense of any Shareholder held personally liable for the obligations of the
Trust. The risk of a Shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations and thus should be considered remote.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each Share of the
Fund will be given one vote, unless a different allocation of voting rights is
required under applicable law for a mutual fund that is an investment medium for
variable life insurance or annuity contracts. In accordance with current
applicable law, the Separate Account, as Shareholder of the Trust, is required
to vote the Shares of the Trust at any regular and special meeting of the
Shareholders of the Trust in accordance with instructions received from owners
of the variable contracts. See the prospectus for the Separate Account for more
information regarding the pass-through of these voting rights.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for a specific
fund of the Trust, or for the Trust as a whole, for purposes such as electing or
removing Trustees, changing fundamental policies or approving an investment
management contract. In addition, the Trust will be required to hold a meeting
to elect Trustees to fill any existing vacancies on the Board if, at any time,
fewer than a majority of the Trustees have been elected by the Shareholders of
the Trust. In addition, the holders of not less than two-thirds of the
outstanding Shares or other voting interests of the Trust may remove a person
serving as Trustee either by declaration in writing or at a meeting called for
such purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in writing
to do so by the holders of not less than 10% of the outstanding Shares or other
voting interests of the Trust. The Trust is required to assist in Shareholders'
communications. In accordance with current laws, an insurance company issuing a
variable life insurance or annuity contract that participates in the Trust will
request voting instructions from contract owners and will vote Shares or other
voting interests in the separate account in proportion to the voting
instructions received.
For more information on the Trust, the Fund, and its investment activity and
concurrent risks, an SAI may be obtained without charge upon request to Franklin
Templeton Distributors, Inc., P.O. Box 33030, St. Petersburg, Florida,
33733-8030 -- toll free telephone (800) 774-5001 or (813) 823-8712.
PERFORMANCE INFORMATION
The Fund may include its total return in advertisements or reports to
Shareholders or prospective investors. Performance information for the Fund will
not be advertised unless accompanied by comparable performance information for a
separate account to which the Fund offers its Shares.
T-11
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over a period of 1, 5 and 10 years (or up to the life of
the Fund), will reflect the deduction of a proportional share of Fund expenses
(on an annual basis), and will assume that all dividends and distributions are
reinvested when paid. Total return may be expressed in terms of the cumulative
value of an investment in the Fund at the end of a defined period of time.
Quotations of yield or total return for the Fund will not take into account
charges and deductions against any separate account to which the Fund's Shares
are sold or charges and deductions against variable insurance contracts,
although comparable performance information for a separate account will take
such charges into account. For a description of the methods used to determine
total return for the Fund, see 'Performance Information' in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports (containing
financial statements audited by independent auditors and additional information
regarding the Fund's performance) and semi-annual reports (containing unaudited
financial statements) are sent to Shareholders each year. Additional copies may
be obtained, without charge, upon request to the Business Manager.
T-12
