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TEMPLETON VARIABLE PRODUCTS SERIES FUND PROSPECTUS -- May 1, 1996
Templeton Stock Fund
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Templeton Stock 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 and other series of the
Trust in accordance with allocation instructions received from owners of
the Contracts. Such allocation rights are described further in the accompanying
prospectus for the Separate Accounts. Certain 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
INVESTMENT as to which series of the Trust are available for investment. This Prospectus
OBJECTIVE AND sets forth concisely information about the Fund that a prospective investor
POLICIES ought 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-5
PURCHASE OF SHARES .................... T-6
NET ASSET VALUE ....................... T-7
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REDEMPTION OF SHARES ............ T-7
EXCHANGES ....................... T-7
MANAGEMENT OF THE TRUST ......... T-7
BROKERAGE COMMISSIONS ........... T-9
DIVIDENDS AND DISTRIBUTIONS .... T-9
FEDERAL INCOME TAX STATUS ...... T-9
OTHER INFORMATION ............... T-10
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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............... $ 16.94 $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $ 10.25 $10.00
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Income from investment operations:
Net investment income .40 .26 .23 .25 .27 .32 .18 .18
Net realized and unrealized
gain (loss)................... 3.80 (.64) 4.23 .64 2.49 (1.57) 1.34 .071
-------- -------- -------- -------- -------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS................. 4.20 (.38) 4.46 .89 2.76 (1.25) 1.52 .25
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Distributions:
Dividends from net
investment income............. (.27) (.21) (.25) (.28) (.33) (.19) (.02) --
Distributions from
net realized gains............ (.04) -- (.01) -- -- (.02) -- --
-------- -------- -------- -------- -------- ------- ------- ------
TOTAL DISTRIBUTIONS........... (.31) (.21) (.26) (.28) (.33) (.21) (.02) --
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Change in net asset value
for the year.................... 3.89 (.59) 4.20 .61 2.43 (1.46) 1.50 .25
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NET ASSET VALUE
END OF YEAR..................... $ 20.83 $ 16.94 $ 17.53 $ 13.33 $ 12.72 $ 10.29 $ 11.75 $10.25
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TOTAL RETURN...................... 25.24% (2.20)% 34.00% 7.12% 27.93% (10.23)% 14.85% 2.50%
RATIOS/SUPPLEMENTAL DATA
Net assets
end of year (000)............... $498,777 $378,849 $298,392 $166,219 $116,943 $74,264 $49,787 $3,037
Ratio of expenses to average net
assets.......................... .66% .73% .73% .75% .82% .85% 1.08% 4.39%**
Ratio of expenses, net of
reimbursement,
to average
net assets...................... .66% .73% .73% .75% .82% .85% .99% 1.50%**
Ratio of net investment income to
average
net assets...................... 2.18% 1.81% 1.88% 2.36% 2.82% 3.78% 3.63% 5.55%**
Portfolio turnover rate........... 33.93% 5.10% 4.88% 8.10% 41.24% 17.94% 5.27% --
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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 charges would reduce the total
return figures for all periods shown.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital growth through a policy of investing
primarily in common stocks issued by companies, large and small, in various
nations throughout the world. In the pursuit of its investment objective, the
Fund will normally maintain at least 65% of its assets in common and preferred
stocks. The Fund may also invest in securities convertible into common stocks
rated in any category by Standard & Poor's Corporation ('S&P') or Moody's
Investors
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Service, Inc. ('Moody's') and securities which are unrated by any rating agency.
See the Appendix in the Statement of Additional Information for a description of
the S&P and Moody's ratings. Current income will usually be a less significant
factor in selecting investments for the Fund. 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 ideas in connection with management of the
Fund's portfolio. There can be no assurance that the Fund will achieve its
investment objective.
For temporary defensive purposes, the Fund may invest without limit in
commercial paper, certificates of deposit, bankers' acceptances, U.S. Government
securities, corporate debt obligations, and repurchase agreements with respect
to these securities. The Fund may also enter into firm commitment agreements,
purchase securities on a 'when-issued' basis, invest in restricted securities,
such as private placements, borrow money for investment purposes and lend its
portfolio securities. (See 'Description of Securities and Investment
Techniques.')
The Fund may also purchase and sell stock index futures contracts for
hedging purposes only and not for speculation. It may engage in such
transactions only if the total contract value of the futures contracts does not
exceed 20% of the Fund's total assets. (See 'Description of Securities and
Investment Techniques.')
The Fund is subject to investment restrictions that are described under the
heading 'Investment Restrictions' in the Statement of Additional Information.
Those investment restrictions so designated and the investment objective of 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 also 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.
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 bankers'
acceptances, which are negotiable drafts or bills of exchange normally drawn by
an importer or exporter to pay for specific merchandise and which are 'accepted'
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. The Fund may invest in
dollar-denominated certificates of deposit and bankers' acceptances of foreign
and domestic banks having total assets in excess of $1 billion. The Fund may
also invest in certificates of deposit of federally insured savings and loan
associations having total assets in excess of $1 billion.
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 or A-1 or A-2 by S&P
or, if not rated by Moody's or S&P, issued by companies having an outstanding
debt issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the
Appendix in the SAI for a description of these ratings.
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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 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 to generate
income. 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.
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corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary Receipts may
be issued pursuant to sponsored or unsponsored programs. In sponsored programs,
an issuer has made arrangements to have its securities traded in the form of
Depositary Receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities underlying
unsponsored programs and there may not be a correlation between such information
and the market value of the Depositary Receipts. Depositary Receipts also
involve the risks of other investments in foreign securities, as discussed
below. For purposes of each Fund's investment policies, the Fund's investments
in Depositary Receipts will be deemed to be investments in the underlying
securities.
FUTURES CONTRACTS
Also, for hedging purposes only, the Fund may purchase and sell stock index
futures contracts. 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.
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.
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 currency valuations will affect the price of the Shares
of the Fund. History reflects both decreases and increases in stock markets, the
prevailing rate of interest, and currency valuations, and these may reoccur
unpredictably in the future. Additionally, investment decisions made by the
Investment 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. 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. 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 in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities
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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 or, 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 increased 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 also may 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
adjustments 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 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.
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.
Successful use of stock index futures contracts is subject to special risk
considerations and transaction costs. A liquid secondary market for futures
contracts may not be available when a position is sought to be closed.
Successful use of futures contracts is further dependent on the ability of the
Fund's Investment Manager to correctly predict movements in the securities
markets and no assurance can be given that its judgment will be correct.
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.
PURCHASE OF SHARES
Shares of the Fund are offered on a continuous basis at the respective net asset
value of the Fund only to separate accounts of insurance companies to serve as
the underlying investment vehicle for both variable annuity and variable life
insurance contracts. Individuals may not purchase shares directly from the 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
T-6
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, 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.
MANAGEMENT OF THE TRUST
The Trust is managed by its Board of Trustees and all powers of the Trust are
exercised by or under authority of the Board. Information relating to the
Trustees and Officers is set forth under the heading 'Management of the Trust'
in the Statement of Additional Information.
INVESTMENT MANAGER
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.
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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 the
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 for the Fund since 1995 is Mark R. Beveridge. Mr.
Beveridge, Vice President of TICI, joined the Templeton organization in 1985. He
has responsibility for the industrial component appliances/household durables
industries, and has market coverage of Argentina, Denmark and Thailand. Prior to
joining the Templeton organization, Mr. Beveridge was a principal with a
financial accounting software firm based in Miami, Florida. He has a Bachelors
Degree in Business Administration with emphasis in finance from the University
of Miami. Lauretta A. Reeves, Vice President of TICI, and Howard J. Leonard,
Senior Vice President of TICI, exercise secondary portfolio management
responsibilities. Ms. Reeves joined the Templeton organization in 1987 as an
equity trader and moved into the research group in 1989. She has research
responsibility for the chemical, medical supply and European banking sectors, as
well as the coverage of the Phillipines market. Prior to joining the Templeton
organization, Ms. Reeves was manager of equity trading for First Equity
Corporation of Florida, a regional brokerage firm. Previously, she worked in
similar positions with two other brokerage houses. She received her Masters in
Business Administration from Nova University and a B.A. in Business
Administration with high honors from Florida International University. Mr.
Leonard has research responsibilities for the global forest products, money
management and airline industries, and coverage of Indonesia, Switzerland,
Brazil and India. Prior to joining the Templeton organization in 1989, Mr.
Leonard was director of investment research at First Pennsylvania Bank, where he
was responsible for equity and fixed income research activities and its proxy
voting service for large pension plan sponsors. He also previously worked at
Provident National Bank as a security analyst. Mr. Leonard holds a B.B.A. in
Finance and Economics from Temple University.
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.
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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 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.
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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, a Statement of Additional Information may be obtained without
charge upon request to Franklin Templeton Distributors, Inc., P.O. Box 33030,
St. Petersburg, Florida, 33733-8030 -- toll free telephone (800) 774-5001 or
(813) 823-8712.
PERFORMANCE INFORMATION
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.
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 Statement of
Additional Information.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports (containing
financial statements audited by independent auditors and additional information
regarding the 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.
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