Templeton Developing Markets Fund
Prospectus
Prospectus - February 16, 1996, as amended May 1, 1996
Templeton Variable Products Series Fund
Templeton Developing Markets Fund
Templeton Developing Markets 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. The Fund seeks long-term
capital appreciation by investing in securities of issuers of countries having
developing markets. The Fund is subject to the heightened foreign securities
investment risks that accompany foreign developing markets and an investment
in the Fund may be considered speculative. See "Risk Factors".
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.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. 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, Inc., P.O. Box 33030,
St. Petersburg, Florida 33733-8030 or by calling the Fund Information
Department at 1-800/DIAL BEN.
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
variable insurance contract. Both prospectuses should be read carefully and
retained for future reference.
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, INLCUDING THE POSSIBLE
LOSS OF CAPITAL.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES 3p
INVESTMENT TECHNIQUES 5p
RISK FACTORS 9p
PURCHASE OF SHARES 12p
NET ASSET VALUE 13p
REDEMPTION OF SHARES 14p
EXCHANGES 15p
MANAGEMENT OF THE TRUST 16p
BROKERAGE COMMISSIONS 18p
DIVIDENDS AND DISTRIBUTIONS 19p
FEDERAL INCOME TAX STATUS 20p
OTHER INFORMATION 21p
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation. The Fund
seeks to achieve this objective by investing primarily in equity securities of
issuers in countries having developing markets. It is currently expected that
under normal conditions at least 65% of the Fund's total assets will be invested
in developing market equity securities. The Fund and its investment manager,
Templeton Asset Management Ltd. (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.
The Fund considers countries having developing markets to be all countries
that are generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly referred
to as the World Bank) or the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by
their authorities as developing. Currently, the countries not included in this
category include Ireland, Spain, New Zealand, Australia, the United Kingdom,
Italy, the Netherlands, Belgium, Austria, France, Canada, Germany, Denmark,
the United States, Sweden, Finland, Norway, Japan, Iceland, Luxembourg and
Switzerland. In addition, as used in this Prospectus, developing market equity
securities means (i) equity securities of companies the principal securities
trading market for which is a developing market country, as defined above, (ii)
equity securities, traded in any market, of companies that derive 50% or
more of their total revenue from either goods or services produced in
such developing market countries or sales made in such developing market
countries or (iii) equity securities of companies organized under the laws of,
and with a principal office in, a developing market country. "Equity
securities," as used in this Prospectus, refers to common stock, preferred
stock, warrants or rights to subscribe to or purchase such securities and
sponsored or unsponsored American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), and Global Depositary Receipts ("GDRs")
(collectively, "Depositary Receipts").Determinations as to eligibility will be
made by the Investment Manager based on publicly available information and
inquiries made to the companies. (See "Risk Factors" for a discussion of the
nature of information publicly available for non-U.S. companies.) The Fund
will at all times, except during defensive periods, maintain investments
in at least three countries having developing markets.
The Fund seeks to benefit from economic and other developments in
developing markets. The investment objective of the Fund reflects the belief
that investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain countries having developing markets. This trend may
be facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly the emerging market countries (such as Malaysia,
Mexico and Thailand) which may be in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries, although having relatively mature developing markets,
may also be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental intervention
in economic affairs.
For capital appreciation, the Fund may invest up to 35% of its total assets in
debt securities (defined as bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits, bankers' acceptances and structured
investments) which are rated at least C by Moody's Investors Service, Inc.
("Moody's") or C by Standard & Poor's Corporation ("S&P") or unrated debt
securities deemed to be of comparable quality by the Investment Manager. See
"Risk Factors." As an operating policy, which may be changed by the Board of
Trustees, the Fund will not invest more than 5% of its total assets in debt
securities rated lower than Baa by Moody's or BBB by S&P. Certain debt
securities can provide the potential for capital appreciation based on various
factors such as changes in interest rates, economic and market conditions,
improvement in an issuer's ability to repay principal and pay interest, and
ratings upgrades. Additionally, convertible bonds offer the potential for
capital appreciation through the conversion feature, which enables the holder of
the bond to benefit from increases in the market price of the securities into
which they are convertible. For a description of debt securities ratings, see
the Appendix to the SAI.
The Fund may also lend its portfolio securities and
borrow money for investment purposes (i.e., "leverage" its portfolio). In
addition, the Fund may enter into transactions in options on securities,
securities indices and foreign currencies, forward foreign currency contracts,
and futures contracts and related options. When deemed appropriate by the
Investment Manager, the Fund may invest cash balances in repurchase agreements
and other money market investments to maintain liquidity in an amount to meet
expenses or for day-to-day operating purposes. These investment techniques are
described below and under the heading "Investment Objective and Policies" in the
SAI.
When the Investment Manager believes that market conditions warrant, the
Fund may adopt a temporary defensive position and may invest without limit in
money market securities denominated in U.S. dollars or in the currency of any
foreign country. See "Investment Techniques Temporary Investments."
The Fund does not emphasize short-term trading profits and usually expects to
have an annual portfolio turnover rate not exceeding 50%. 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 are "fundamental policies" of the Trust, which means
that they may not be changed without a majority vote of Shareholders of the
Fund. With the exception of those restrictions specifically identified as
fundamental, all investment policies and practices described in this Prospectus
and in the Statement of Additional Information are not fundamental, meaning that
the Board of Trustees may change them without Shareholder approval.
INVESTMENT TECHNIQUES
The Fund is authorized to 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.
TEMPORARY INVESTMENTS
For temporary defensive
purposes, the Fund may invest up to 100% of its total assets in the following
money market securities, denominated in U.S. dollars or in the currency of any
foreign country, issued by entities organized in the United States or any
foreign country: short-term (less than twelve months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by the U.S. Government or the governments of foreign countries, their
agencies or instrumentalities; finance company and corporate commercial paper,
and other short-term corporate obligations, in each case rated Prime-1 by
Moody's or A or better by S&P or, if unrated, of comparable quality as
determined by the Investment Manager; obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; and repurchase
agreements with banks and broker-dealers with respect to such securities.
BORROWING
The Fund may borrow up to one-third of the value of its total assets
from banks to increase its holdings of portfolio securities. Under the 1940 Act,
the Fund 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 such liquidations of the Fund's holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may 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.
LOANS OF PORTFOLIO
Securities The Fund may lend to broker-dealers and 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 retain any 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 the collateral falls below the market
value of the borrowed securities.
OPTIONS ON SECURITIES OR INDICES
The Fund may write (i.e., sell) covered put and call options and purchase put
and call options on securities or securities indices that are traded on United
States and foreign exchanges or in the over-the-counter markets. An option on a
security is a contract that permits the purchaser of the option, in return for
the premium paid, the right to buy a specified security (in the case of a call
option) or to sell a specified security (in the case of a put option) from or to
the writer of the option at a designated price during the term of the option. An
option on a securities index permits the purchaser of the option, in return for
the premium paid, the right to receive from the seller cash equal to the
difference between the closing price of the index and the exercise price of the
option. The Fund may write a call or put option to generate income, and will do
so only if the option is "covered." This means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the call, or hold a call at the same or lower exercise price, for the
same exercise period, and on the same securities as the written call. A put is
covered if the Fund maintains liquid assets with a value at least equal to the
exercise price in a segregated account, or holds a put on the same underlying
securities at an equal or greater exercise price. The value of the underlying
securities on which options may be written at any one time will not exceed 15%
of the total assets of the Fund. The Fund will not purchase put or call options
if the aggregate premium paid for such options would exceed 5% of its total
assets at the time of purchase
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into a forward contract
with a term of greater than one year. 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 will generally enter into forward contracts only under two
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, 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 second
investment practice is generally referred to as "cross-hedging." The Fund has no
specific limitation on the percentage of assets it may commit to forward
contracts, except 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 ability to meet redemption requests. Although forward contracts will be used
primarily to protect the Fund from adverse currency movements, they also involve
the risk that anticipated currency movements will not be accurately predicted.
The Fund may purchase put and call options and write covered put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency-denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. Options on foreign currencies to be written or
purchased by the Fund are traded on U.S. and foreign exchanges or
over-the-counter.
CLOSED-END INVESTMENT COMPANIES
Some countries, such as South Korea, Chile and India, have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. Subject to the 1940 Act, the Fund may
invest in securities of closed-end investment companies. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires
shares of closed-end investment companies, Shareholders would bear both
their proportionate share of expenses of the Fund (including management and
advisory fees) and, indirectly, the expenses of such closed-end investment
companies.
FUTURES CONTRACTS
For hedging purposes only,
the Fund may buy and sell financial futures contracts, stock index futures
contracts, foreign currency futures contracts and options on any of the
foregoing. A financial futures contract is an agreement between two parties to
buy or sell a specified debt security at a set price on a future date. An index
futures contract is an agreement to take or make delivery of an amount of cash
based on the difference between the value of the index at the beginning and at
the end of the contract period. A futures contract on a foreign currency is an
agreement to buy or sell a specified amount of a currency for a set price on a
future date. When 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. In addition, when the Fund enters into a futures
contract, it will segregate assets or "cover" its position in accordance with
the 1940 Act. See "Investment Objective and Policies - Futures Contracts" in the
SAI. The Fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the Fund.
REPURCHASE AGREEMENTS
For temporary defensive purposes and for cash management purposes, the Fund may
enter into repurchase agreements with U.S. banks and broker-dealers. Under a
repurchase agreement the Fund acquires a security from a U.S. bank or a
registered broker-dealer who simultaneously 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. Under the 1940 Act,
repurchase agreements are considered to be loans collateralized by the
underlying security and therefore 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 declines,
as well as incur disposition costs in liquidating the security.
DEPOSITARY RECEIPTS
ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
United States corporation. Generally, Depositary Receipts in registered form are
designed for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the United States.
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. Depositary Receipts
may be issued pursuant to sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
form of Depositary Receipts. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Depositary Receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the Fund's investment policies,
the Fund's investments in Depositary Receipts will be deemed to be investments
in the underlying securities.
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 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.
FOREIGN INVESTMENTS
The Fund has the right to purchase securities in any foreign country, developed
or underdeveloped. An investor should consider carefully the risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. 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. 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. Also, some countries may
withhold portions of interest and dividends at the source. These considerations
generally are more of a concern in developing countries, where the possibility
of political instability (including revolution) and dependence on foreign
economic assistance may be greater than in developed countries. Investments in
companies domiciled in developing countries therefore may be subject to
potentially higher risks than investments in developed countries.
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 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 any 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.
HIGH-RISK DEBT SECURITIES
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 C by S&P,
and between Baa and as low as C by Moody's or, if unrated, are of equivalent
investment quality as determined by the Investment Manager. (See Appendix to
SAI for a description of debt securities ratings.) 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.
FOREIGN CURRENCY EXCHANGE
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.
LEVERAGE
Leveraging by means of borrowing may 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.
FUTURES CONTRACTS AND RELATED OPTIONS
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. Successful use of forward
contracts, options and futures contracts is further dependent on the ability of
the 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.
PURCHASE OF SHARES
Shares of the Fund are offered on a continuous basis at the 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 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
(generally 4:00 p.m., New York time), if that is earlier, and that value is then
converted into its U.S. dollar equivalent at foreign exchange rates in effect at
noon, New York time, on the day the value of the foreign security is determined.
If no sale is reported at that time, the mean between the current bid and asked
price is used. Occasionally, events which affect the values of such securities
and such exchanges rates may occur between the times at which they are
determined and the close of the NYSE, and will therefore not be reflected in the
computation of 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.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading in
European or Far Eastern securities generally, or in a particular country or
countries, may not take place on every New York business day. Furthermore,
trading takes place in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated. The Fund calculates net asset value per Share, and therefore
effects sales and redemptions of its Shares, as of the close of the NYSE
once on each day on which the NYSE is open. Such calculation does not take place
contemporaneously with the determination of the prices of many of the portfolio
securities used in such calculation and if events occur which materially affect
the value of these foreign securities, they will be valued at fair market value
as determined by the management and approved in good faith by the Board of
Trustees.
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 from 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 Templeton Developing Markets Fund is Templeton Asset
Management Ltd. - Hong Kong Branch, a Singapore corporation with offices at Two
Exchange Square, Hong Kong. The Investment Manager manages the investment and
reinvestment of the Fund's assets. The Investment Manager 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 52 years and, with its affiliates, provides investment management and
advisory services to a worldwide client base, including over 4.3 million
mutual fund shareholders, foundations, endowments, employee benefit plans and
individuals. The Investment Manager and its affiliates have approximately
4,100 employees in the United States, Australia, Scotland, Germany,
Hong Kong, Luxembourg, Bahamas, Singapore, Canada and Russia.
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 Agreement," 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 1.25% of its average daily net assets during the year. The fee paid by
the Fund is higher than the advisory fees paid by most other U.S. investment
companies primarily because investing in equity securities in developing
markets, which are not widely followed by professional analysts, requires the
Investment Manager to invest additional time and incur added expense in
developing specialized resources, including research facilities. The Fund's
Investment Manager has agreed in advance to reduce its fee to the extent
necessary to limit the total expenses (excluding interest, taxes, brokerage
commissions and extraordinary expenses) of the Fund to an annual rate of 1.70%
of the Fund's average daily net assets until May 1, 1997. If such fee reduction
is insufficient to limit the Fund's total expenses to 1.70% of average daily net
assets, the Fund's Business Manager has agreed to reduce its fee and, to the
extent necessary, assume other Fund expenses, so as to so limit the Fund's total
expenses. The Fund also pays its own operating expenses, including: (1) its pro
rata portion of the fees and expenses of the Trust's disinterested Trustees; (2)
interest expenses; (3) taxes and governmental fees; (4) brokerage commissions
and other expenses incurred in acquiring or disposing of portfolio securities;
(5) the expenses of registering and qualifying its Shares for sale with the SEC;
(6) expenses of its independent public accountants and legal counsel; (7)
insurance premiums; (8) fees and expenses of the Custodian and any related
services; (9) expenses of obtaining quotations of portfolio securities and of
pricing Shares; (10) its pro rata portion of the expenses of maintaining the
Trust's legal existence and of Shareholders meetings; (11) expenses of
preparation and distribution to existing Shareholders of periodic reports, proxy
materials and prospectuses; and (12) fees and expenses of membership in industry
organizations.
Dr. J. Mark Mobius, Managing Director of the Investment Manager, is the
principal portfolio manager of the Fund. Prior to joining the Templeton
organization in 1987, Dr. Mobius was president of the International Investment
Trust Company Limited (investment manager of Taiwan, R.O.C. Fund) (1986-1987)
and a director of Vickers da Costa, Hong Kong (an international securities firm)
(1983-1986). Dr. Mobius began working in Vickers da Costa's Hong Kong office in
1980 and moved to Taiwan in 1983 to open the firm's office there and to direct
operations in India, Indonesia, Thailand, the Philippines, and Korea. Before
joining Vickers da Costa, Dr. Mobius operated his own consulting firm in Hong
Kong from 1970 until 1980. Prior to 1970, Dr. Mobius was a research scientist
for Monsanto Overseas Enterprises Company in Hong Kong and the American
Institute for research in Korea and Thailand. Dr. Mobius holds Bachelors and
Masters degrees from Boston University and received his Ph.D. in economics and
political science in 1964 from Massachusetts Institute of Technology. Messrs.
Allan Lam and Tom Wu, Vice Presidents of the Investment Manager, will exercise
secondary portfolio management responsibilities with respect to the Fund. Mr.
Lam holds a BA in accounting from Rutgers University. Prior to joining the
Templeton organization in 1987, Mr. Lam worked as an auditor with two
international accounting firms in Hong Kong: Deloitte Haskins & Sells CPA and
KPMG Peat Marwick CPA. Mr. Wu holds a Bachelor of Social Sciences degree in
economics from the University of Hong Kong and an MBA in finance from the
University of Oregon. Prior to joining the Templeton organization in 1987, Mr.
Wu worked as an investment analyst, specializing in Hong Kong companies, with
Vickers da Costa.
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 Statement of Additional Information.
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.
DISTRIBUTOR
Shares of the Trust are distributed through Franklin Templeton Distributors,
Inc., P.O. Box 33030, St.Petersburg, Florida 33733-8030, toll free telephone
(800) 292-9293.
BROKERAGE COMMISSIONS
The Trust's brokerage policies are described under the heading "Brokerage
Allocation" in the Statement of Additional Information. The Trust's brokerage
policies provide that the receipt of research services from a broker is a factor
which may be taken into account in allocating securities transactions as long as
the prices and execution provided by the broker equal the best available within
the scope of the Trust's brokerage policies.
DIVIDENDS AND DISTRIBUTIONS
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"). The Fund so qualifying
generally will not be subject to federal income taxes on amounts distributed to
Shareholders. In order to qualify as a regulated investment company, 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 Statement of Additional Information 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 Funds underlying the Separate
Account.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 25, 1988
and currently consists of 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 Variable Contract for more information regarding the pass-through of
these voting rights.
Massachusetts business trust law does not require the Trust
to hold annual shareholder meetings, although special meetings may be called for
the Fund, or for the Trust as a whole, for purposes such as electing or removing
Trustees, changing fundamental policies or approving an investment management
contract. In addition, the Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer than
a majority of the Trustees have been elected by the Shareholders of the Trust.
In addition, the holders of not less than two-thirds of the outstanding Shares
or other voting interests of the Trust may remove a person serving as Trustee
either by declaration in writing or at a meeting called for such purpose. The
Trustees are required to call a meeting for the purpose of considering the
removal of a person serving as trustee, if requested in writing to do so by the
holders of not less than 10% of the outstanding Shares or other voting interests
of the Trust. The Trust is required to assist in Shareholders' communications.
In accordance with current laws, an insurance company issuing a variable life
insurance or annuity contract that participates in the Trust will request voting
instructions from contract owners and will vote Shares or other voting interests
in the separate account in proportion to the voting instructions received.
For
more information on the Trust, the 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 the maximum initial sales charge and deduction of a proportional
share of Fund expenses (on an annual basis), and will assume that all dividends
and distributions are reinvested when paid. Total return may be expressed in
terms of the cumulative value of an investment in 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) will be sent to Shareholders each year. Additional
copies may be obtained, without charge, upon request to the Business Manager.
