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TEMPLETON VARIABLE PRODUCTS SERIES FUND PROSPECTUS -- May 1, 1996
Templeton Money Market Fund
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Templeton Money Market 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 his or her Contract or policy for
INVESTMENT information as to which series of the Trust are available for investment.
OBJECTIVE AND This Prospectus sets forth concisely information about the Fund that a
POLICIES prospective investor ought to know before investing.
AN INVESTMENT IN TEMPLETON MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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. THIS 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
PURCHASE OF SHARES .................... T-4
NET ASSET VALUE ....................... T-5
REDEMPTION OF SHARES .................. T-5
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EXCHANGES ....................... T-5
MANAGEMENT OF THE TRUST ......... T-5
BROKERAGE COMMISSIONS ........... T-6
DIVIDENDS AND DISTRIBUTIONS .... T-6
FEDERAL INCOME TAX STATUS ...... T-6
OTHER INFORMATION ............... T-7
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SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY. 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 Funds' 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....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
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NET INVESTMENT INCOME..................... .05 .03 .02 .03 .05 .07 .08 .02
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DIVIDENDS FROM NET
INVESTMENT INCOME....................... (.05) (.03) (.02) (.03) (.05) (.07) (.08) (.02)
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Change in net asset value
for the year............................ -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE,
END OF YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
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TOTAL RETURN.............................. 5.35% 3.48% 2.41% 3.10% 5.59% 7.51% 8.13% 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........... $20,723 $33,090 $16,992 $21,454 $22,046 $17,982 $5,984 $ 679
Ratio of expenses to average
net assets.............................. .63% 0.71% .75% .69% .70% .84% 1.82% 12.95%**
Ratio of expenses, net of reimbursement,
to average
net assets.............................. .63% 0.71% .75% .69% .70% .84% 1.00% 1.50%**
Ratio of net investment income to
average net assets...................... 5.29% 3.56% 2.38% 3.02% 5.28% 7.19% 7.79% 5.83%**
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* For the period 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 investment objective of the Fund is current income, stability of principal,
and liquidity, which it seeks to achieve by investing in money market
instruments with maturities not exceeding 397 days, consisting primarily of
short term U.S. Government securities, certificates of deposit, time deposits,
bankers' acceptances, commercial paper, and repurchase agreements with banks or
broker-dealers with respect to these securities. As a fundamental policy, the
Fund invests at least 80% of its total assets in these securities. There can be
no assurance that the investment objective of the Fund will be attained.
The Fund intends to use its best efforts to maintain its net asset value at
$1.00 per Share, although there can be no assurance that this will be achieved.
The Fund values all of its portfolio securities using the amortized cost method,
which involves valuing a security at cost on the date of acquisition and
thereafter assuming a constant accretion of discount or amortization of premium.
See 'Purchase, Redemption and Pricing of Shares' in the SAI for a description of
certain conditions and procedures followed by the Fund in connection with
amortized cost valuation. Certain of those conditions and procedures are
summarized below.
In accordance with Rule 2a-7, the Fund is required to (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase
only instruments having remaining maturities of 397 days or less; and (iii)
invest only in U.S. dollar denominated securities determined in accordance with
procedures established by the Board of Trustees to present minimal credit risks
and which are rated in one of the two highest rating categories for debt
obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board of
Trustees). If a security is unrated, it must be of
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comparable quality as determined in accordance with procedures established by
the Board of Trustees, including approval or ratification of the security by the
Board except in the case of U.S. Government securities.
In addition, the Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts issued by, a single issuer, except that (i) the Fund may
invest in U.S. Government securities or repurchase agreements that are fully
collateralized by U.S. Government securities without any such limitation, and
(ii) the limitation with respect to puts does not apply to unconditional puts if
no more than 10% of the Fund's total assets is invested in securities issued or
guaranteed by the issuer of the unconditional put. Investments in rated
securities not rated in the highest category by at least two rating
organizations (or one rating organization if the instrument was rated by only
one such organization), and unrated securities not determined by the Board of
Trustees to be comparable to those rated in the highest category, will be
limited to 5% of the Fund's total assets, with the investment in any one such
issuer being limited to no more than the greater of 1% of the Fund's total
assets or $1,000,000.
Commercial paper must be issued by domestic corporations or foreign
corporations affiliated with domestic corporations and must meet the quality
standards described under 'Description of Securities and Investment Techniques.'
The Fund may also enter into repurchase agreements, invest in short term
corporate debt obligations, purchase securities on a 'when-issued' basis, lend
its portfolio securities, and borrow money for emergency purposes. The Fund will
not invest more than 10% of its assets in time deposits maturing in more than
seven days which do not have secondary trading markets and which are subject to
early withdrawal penalties. (See 'Description of Securities and Investment
Techniques.')
The Fund is subject to investment restrictions that are described under the
heading 'Investment Restrictions' in the SAI. Those investment restrictions so
designated and the investment objective of the Fund are 'fundamental policies'
of the Fund, which means that they may not be changed without a majority vote of
Shareholders of the Fund. With the exception of the Fund's investment objectives
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 Investors Service,
Inc. ('Moody's') or A-1 or A-2 by Standard & Poor's Corporation ('S&P') or, if
not rated by Moody's or S&P, issued by companies having an outstanding debt
issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P. See the Appendix
in the SAI for a description of these ratings.
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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. Under the Investment Company Act of 1940 (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 should decline, as
well as incur disposition costs in liquidating the security.
BORROWING
The Fund may borrow up to 5% of its total assets for temporary or emergency
purposes. 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.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a 'when-issued' basis. New issues of certain
debt securities are often offered on a when-issued basis, meaning that the
payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment, but delivery and payment for the securities normally takes
place after the date of the commitment to purchase. The value of when-issued
securities may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. However, the Fund will not accrue any
income on these securities prior to delivery. The Fund will maintain in a
segregated account with its Custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend to broker-dealers or U.S. banks portfolio securities with an
aggregate market value of up to one-third of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S. Government
securities, or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to have voting rights with respect to the securities. It should be
noted that in connection with the lending of its portfolio securities, the Fund
is exposed to the risk of delay in recovery of the securities loaned or possible
loss of rights in the collateral should the borrower become insolvent. In
determining whether to lend securities, the Investment Manager will consider all
relevant facts and circumstances including the creditworthiness of the borrower.
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.
EURODOLLAR AND YANKEE OBLIGATIONS
The Fund may invest in dollar-denominated obligations of foreign branches of
domestic banks ('Eurodollar obligations') and dollar-denominated obligations of
domestic branches of foreign banks ('Yankee obligations'). These investments may
involve risks that are different in some respects from investments in
obligations of domestic branches of domestic banks. Such investment risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the Eurodollar and Yankee
obligations held by the Fund, possible seizure or nationalization, and the
possible establishment of exchange controls or the adoption of other foreign
government laws and restrictions applicable to the payment of Eurodollar and
Yankee obligations which might adversely affect the payment of principal and
interest.
PURCHASE OF SHARES
Shares of the Fund are offered on a continuous basis at the net asset value only
to separate accounts of insurance companies to serve as the underlying
investment vehicle for both variable annuity and variable life insurance
contracts. Individuals may not purchase shares directly from the Fund. Please
read the prospectus of the insurance company Separate Account for more
information on the purchase of Fund Shares.
In the event that the Trust serves as investment vehicle for both variable
annuity and variable life insurance contracts, or for both variable life
insurance contracts of an insurer and other variable contracts of an
unaffiliated insurer, the Trust's Board of Trustees will monitor events in order
to identify any material conflicts between variable annuity contract owners and
variable life policy owners and/or between separate accounts of different
insurers, as the case may be, and will
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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 Fund uses the amortized cost method to determine the value of its
portfolio securities. This method involves valuing a security at cost and then
assuming a constant accretion of discount or premium over the period until
maturity, regardless of the impact of fluctuating interest rates on the market
value of the security. The Fund intends to use its best efforts to maintain its
net asset value at $1.00 per Share, although there can be no assurance that this
will be achieved. See 'Purchase, Redemption and Pricing of Shares' in the SAI
for a description of certain conditions and procedures followed by the Fund in
connection with amortized cost valuation.
REDEMPTION OF SHARES
The Trust will redeem all full and fractional Shares presented for redemption on
any business day. Redemptions are effected at the per Share net asset value next
determined after receipt of proper notice of the redemption. Redemption proceeds
normally will be paid to the insurance company within seven days following
receipt of instructions in proper form. The right of redemption may be suspended
by the Trust when the NYSE is closed (other than customary weekend and holiday
closings) or for any period during which trading thereon is restricted because
an emergency exists, as determined by the Securities and Exchange Commission,
making disposal of portfolio securities or valuation of net assets not
reasonably practicable, and whenever the Securities and Exchange Commission has
by order permitted such suspension or postponement for the protection of
shareholders. The Trust will redeem Shares of 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 SAI.
INVESTMENT MANAGER
The Investment Manager of the Fund is Templeton Global Bond Managers, a division
of Templeton Investment Counsel, Inc. ('TICI'). TICI is a Florida corporation
with offices at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091.
The Investment Manager manages the investment and reinvestment of the Fund's
assets. TICI is an indirect wholly owned subsidiary of Franklin Resources, Inc.
('Franklin'). Through its subsidiaries, Franklin is engaged in various aspects
of the financial services industry. The Investment Manager and its affiliates
serve as advisers for a wide variety of public investment mutual funds and
private clients in many nations. The Templeton organization has been investing
globally over the past 56 years and, with its affiliates, provides investment
management and advisory services to a worldwide client base, including over 4.3
million mutual fund shareholders, foundations, endowments, employee benefit
plans and individuals. The Investment Manager and its affiliates have
approximately 4,100 employees in the United States, Australia, Scotland,
Germany, Hong Kong, Luxembourg, Bahamas, Singapore, Canada, Russia, France,
Poland, Italy, India, Vietnam, South America and South Africa.
The Investment Manager has an extensive global network of investment
research sources. 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.
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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 fee equal on an annual basis to .35% of its average daily
net assets during the year.
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 .63% of the
Fund's average daily net assets.
DISTRIBUTOR
Shares of the Trust are distributed through Franklin Templeton Distributors,
Inc., P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll free telephone
(800) 292-9293.
BROKERAGE COMMISSIONS
The Trust's brokerage policies are described under the heading 'Brokerage
Allocation' in the SAI. The Trust's brokerage policies provide that the receipt
of research services from a broker is a factor which may be taken into account
in allocating securities transactions as long as the prices and execution
provided by the broker equal the best available within the scope of the Trust's
brokerage policies.
DIVIDENDS AND DISTRIBUTIONS
The Fund's net investment income (consisting principally of interest accrued or
discount earned less amortization of premium and estimated expenses) is declared
as a dividend daily, including weekends and holidays, immediately prior to the
determination of net asset value, and is paid monthly. 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.
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
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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.
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 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.
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For more information on the Trust and the Fund, an SAI may be obtained
without charge upon request to Franklin Templeton Distributors, Inc., P.O. Box
33030, St. Petersburg, Florida, 33733-8030 -- toll free telephone (800) 774-5001
or (813) 823-8712.
PERFORMANCE INFORMATION
The Fund may include its yield and effective yield and 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 offer its
Shares.
The Fund calculates current yield by annualizing the dividend for the most
recent seven-day period and dividing by the net asset value on the last day of
the period for which yield is presented. The Fund's effective yield is
calculated similarly but assumes that income earned from the investment is
reinvested. The Fund's effective yield will be slightly higher than its yield
because of the compounding effect of this assumed reinvestment. Quotations of
average annual total return for the Fund will be expressed in terms of the
average annual compounded rate of return on a hypothetical investment in the
Fund over a period of 1, 5 and 10 years (or up to the life of the Fund), will
reflect the deduction of a proportional share of Fund expenses (on an annual
basis), and will assume that all dividends and distributions are reinvested when
paid. Total return may be expressed in terms of the cumulative value of an
investment in the Fund at the end of a defined period of time. Quotations of
yield or total return for the Fund will not take into account charges and
deductions against any separate account to which the Fund's Shares are sold or
charges and deductions against variable insurance contracts, although comparable
performance information for a separate account will take such charges into
account. For a description of the methods used to determine total return for the
Fund, see 'Performance Information' in the SAI.
STATEMENTS AND REPORTS
The Trust's fiscal year ends on December 31. Annual reports (containing
financial statements audited by independent auditors and additional information
regarding the Fund's performance) and semi-annual reports (containing unaudited
financial statements) are sent to Shareholders each year. Additional copies may
be obtained, without charge, upon request to the Business Manager.
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